Control of Cash

Summary :

This chapter describes the necessity for and features of internal control, defines cash, and identifies procedures for controlling cash receipts and disbursements. It covers preparing a bank reconciliation, using a petty cash fund, and analyzing results with the quick ratio, a measure of short-term liquidity.

Internal control over cash

Because cash is the asset most easily misused, businesses rely on internal control procedures, such as separating the duties of handling cash from recording it, to safeguard both receipts and disbursements. The chapter describes what management seeks to achieve through effective control of cash, and the specific procedures used for both incoming customer payments and outgoing payments to suppliers and employees.

The bank reconciliation

A bank reconciliation compares a company's own cash records to the bank statement and explains any differences, such as outstanding checks or deposits still in transit, arriving at one true, reconciled cash balance. The chapter works through preparing this reconciliation step by step and the journal entries needed for items it reveals, such as bank service fees the company had not yet recorded.

Petty cash and the quick ratio

A petty cash fund is a small, controlled amount of cash kept on hand for minor expenses that would be impractical to pay by check, and the chapter explains how it is established, used, and periodically replenished. It also introduces the quick ratio, which measures a company's ability to meet short-term obligations using only its most liquid assets, cash chief among them.