Counter Receipts

Illustration 7-5 provides a flowchart of the processing steps and internal controls procedures.  At the end of the cashier's shift, the money in the cash drawer is reconciled to the cash register tape.  The cash register accumulates the daily cash transactions.  Any differences between the cash count and the register tape are recorded in the Cash Over and Short account.  The account is an income statement item and it is reported as miscellaneous expense.   Significant amounts recorded the account should be investigated.

 

After you have review Illustration 7-5 and the discussion regarding the handling of cash receipts, identify the cash receipts recorded by your employer organization.  Question:  What are some examples of how the three principles of controls (segregation of record-keeping from physical custody, documentation, and independent internal verification) in regards to cash receipts that have been implemented by your employer organization?

 

Over-the-Counter Receipts

In retail businesses, control of over-the-counter receipts centers on cash registers that are visible to customers. A cash sale is entered in a cash register with the amount clearly visible to the customer. This activity prevents the cashier from entering a lower amount and pocketing the difference. The customer receives an itemized cash register receipt slip and is expected to count the change received. (One weakness at Stephanie's Gourmet Coffee and More in the Feature Story is that customers were only given a receipt if they requested it.) The cash register's tape is locked in the register until a supervisor removes it. This tape accumulates the daily transactions and totals. Alternatively, cash registers called point-of-sale terminals are often networked with the company's computers for direct recording in its records.

At the end of the clerk's shift, the clerk counts the cash and sends the cash and the count to the cashier. The cashier counts the cash, prepares a deposit slip, and deposits the cash at the bank. The cashier also sends a duplicate of the deposit slip to the accounting department to indicate cash received. The supervisor removes the cash register tape and sends it to the accounting department (in a non-point-of-sale system) as the basis for a journal entry to record the cash received. The tape is compared to the deposit slip for any discrepancies. Illustration  7-5  summarizes this process.

Illustration 7-5    Control of over-the-counter receipts

This system for handling cash receipts uses an important internal control principle—segregation of record-keeping from physical custody. The supervisor has access to the cash register tape, but not to the cash. The clerk and the cashier have access to the cash, but notto the register tape. In addition, the cash register tape provides documentation and enables independent internal verification with the deposit slip. Use of these three principles of internal control (segregation of record-keeping from physical custody, documentation, and independent internal verification) provides an effective system of internal control. Any attempt at fraudulent activity should be detected unless there is collusion among the employees.

In some instances, the amount deposited at the bank will not agree with the cash recorded in the accounting records based on the cash register tape. These differences often result because the clerk hands incorrect change back to the retail customer. In this case, the difference between the actual cash and the amount reported on the cash register tape is reported in a Cash Over and Short account. For example, suppose that the cash register tape indicated sales of $6,956.20 but the amount of cash was only $6,946.10. A cash shortfall of $10.10 exists. To account for this cash shortfall and related cash, the company makes the following entry.

Cash 6,946.10   Cash Over and Short 10.10   Sales Revenue   6,956.20 (To record cash shortfall)

Cash Over and Short is an income statement item. It is reported as miscellaneous expense when there is a cash shortfall, and as miscellaneous revenue when there is an overage. Clearly, the amount should be small. Any material amounts in this account should be investigated.

Helpful Hint  Flowcharts such as this one enhance the understanding of the flow of documents, the processing steps, and the internal control procedures.

Mail Receipts

All mail receipts should be opened in the presence of at least two mail clerks. These receipts are generally in the form of checks. A mail clerk should endorse each check “For Deposit Only.” This restrictive endorsement reduces the likelihood that someone could divert the check to personal use. Banks will not give an individual cash when presented with a check that has this type of endorsement.

The mail clerks prepare, in triplicate, a list of the checks received each day. This list shows the name of the check issuer, the purpose of the payment, and the amount of the check. Each mail clerk signs the list to establish responsibility for the data. The original copy of the list, along with the checks, is then sent to the cashier's department. A copy of the list is sent to the accounting department for recording in the accounting records. The clerks also keep a copy.

This process provides excellent internal control for the company. By employing two clerks, the chance of fraud is reduced. Each clerk knows he or she is being observed by the other clerk(s). To engage in fraud, they would have to collude. The customers who submit payments also provide control because they will contact the company with a complaint if they are not properly credited for payment. Because the cashier has access to cash but not the records, and the accounting department has access to records but not cash, neither can engage in undetected fraud.

  CONTROL OVER CASH RECEIPTS

L. R. Cortez is concerned about the control over cash receipts in his fast-food restaurant, Big Cheese. The restaurant has two cash registers. At no time do more than two employees take customer orders and enter sales. Work shifts for employees range from 4 to 8 hours. Cortez asks your help in installing a good system of internal control over cash receipts. Action Plan •   Differentiate among the internal control principles of (1) establishment of responsibility, (2) physical controls, and (3) independent internal verification. •   Design an effective system of internal control over cash receipts.

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