In the world of business, maintaining control over cash disbursements is a critical aspect of financial management. By implementing strong internal control measures, organizations can safeguard their assets and ensure the accuracy and reliability of their accounting records. In this article, we will explore the key principles of internal control, their applications to cash disbursements, and the importance of effective cash management.
Table of Contents
Identify the Principles of Internal Control
Internal control encompasses a range of methods and measures adopted by businesses to safeguard their assets and enhance the accuracy of their accounting records. These principles play a crucial role in preventing employee theft, errors, and irregularities in the accounting process.
Establishment of Responsibility
One key principle of internal control is the assignment of specific individuals with responsibility for particular tasks. Control is most effective when only one person is responsible for a given task, including the authorization and approval of transactions.
Segregation of Duties
To minimize the risk of errors and irregularities, it is essential to separate related activities and assign them to different individuals. This includes separating record-keeping responsibilities from the physical custody of assets.
Documentation Procedures
Documents provide vital evidence of transactions and events. It is important to use prenumbered documents and promptly forward source documents to the accounting department for timely recording.
Physical, Mechanical, and Electronic Controls
Physical controls, such as safes and locked storage cabinets, are crucial for safeguarding assets. Mechanical and electronic controls, such as pass key access and alarms, enhance the accuracy and reliability of accounting records.
Independent Internal Verification
Regular review, comparison, and reconciliation of data by independent employees help ensure the effectiveness of internal control measures. Discrepancies or exceptions should be reported to management for appropriate corrective action.
Other Controls
Additional controls such as bonding employees who handle cash and rotating employee duties can further strengthen internal control.
Explain the Applications of Internal Control to Cash Disbursements
Cash disbursements involve the payment of expenses, liabilities, and asset purchases. Effective internal control over cash disbursements is achieved by using checks rather than cash, minimizing the risk of unauthorized payments.
Establishment of Responsibility
To maintain control, only designated personnel should be authorized to sign checks, ensuring that there is clear accountability for disbursements.
Segregation of Duties
Different individuals should be responsible for approving and making payments, while check signers should not be involved in recording disbursements.
Documentation Procedures
The use of prenumbered checks and accurate record-keeping is crucial to maintain control over cash disbursements.
Physical, Mechanical, and Electronic Controls
Storing blank checks in secure locations, using indelible ink for check amounts, and limiting access to cash are essential in preventing unauthorized disbursements.
Independent Internal Verification
Regularly comparing checks to invoices and reconciling bank statements can help identify discrepancies and ensure the accuracy of cash disbursements.
Other Controls
Stamping invoices as “PAID” and conducting background checks on employees are additional measures that can contribute to effective control over cash disbursements.
Discuss the Basic Principles of Cash Management
Cash management is vital for maintaining a healthy financial position. By following these five basic principles, organizations can optimize their cash resources:
Increase the speed of collection on receivables
Ensuring prompt collection of payments from customers improves cash flow and allows for more efficient use of funds. Offering cash discounts for early payment can incentivize customers to pay more quickly.
Keep inventory levels low
Maintaining large inventories ties up cash and warehouse space. By reducing inventory levels, companies can conserve cash and improve overall financial efficiency.
Delay payment of liabilities
Utilizing the full payment period while avoiding late payments helps manage cash outflows effectively. However, it is crucial to pay liabilities in a timely manner to maintain good credit ratings.
Plan the timing of major expenditures
Timing major expenses to coincide with periods of excess cash, such as during off-seasons, improves the company’s chances of obtaining outside financing and avoids unnecessary strain on cash flow.
Invest idle cash
Cash on hand should be invested to generate returns. Liquid and risk-free investments are preferred, ensuring that excess cash is not left idle.
Explain the Reporting of Cash
Cash is a crucial asset for companies, and its reporting is essential in financial statements. Cash is typically listed first in the current assets section of the balance sheet. Some companies report “Cash and cash equivalents,” which includes highly liquid and readily convertible short-term investments.
If a company has cash that is restricted for a specific purpose, such as debt repayment, it should be reported separately as “restricted cash” on the balance sheet.
Cash is also reported in the statement of cash flows, which shows the sources and uses of cash during a specific period.
Identify the Primary Elements of a Cash Budget
Planning for cash needs is a critical aspect of financial management. A cash budget provides a forecast of anticipated cash flows over a one- to two-year period. It consists of three primary sections:
Cash Receipts Section
This section includes expected cash inflows from various sources, such as cash sales, collections from credit sales, interest, dividends, and proceeds from investments or asset sales.
Cash Disbursements Section
Here, anticipated cash outflows are detailed, including payments for materials, labor, manufacturing overhead, selling and administrative expenses, taxes, dividends, investments, and asset purchases.
Financing Section
This section focuses on expected borrowings, repayments, and interest expenses.
Data for the cash budget is obtained from other budgets and management-provided information. By carefully analyzing these elements, businesses can effectively plan and manage their cash resources.
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