In: Accounting
Justin Skortis has hired you to be the book Skortis Landscaping, LLC. As the sole bookkeeper for the company, you are responsible for recording all the transactions that occur (cash, accounts payable and accounts receivable). In larger companies, theses tasks are often divided up amongst many different individuals.
In an essay format of at least 150 words, using COMPLETE SENTENCES AND PROPER GRAMMAR, please answer the following questions:
Since cash is the most liquid of all assets, a business cannot survive and prosper if it does not have adequate control over its cash. Cash is the asset that has the greatest chance of embezzlement and this is why we must ensure that we have strong internal controls build around the cash process. Since many business transactions involve cash, it is a vital factor in the operation of a business. Of all the company’s assets, cash is the most easily mishandled either through error or fraud. To control and manage its cash, a company should:
· Account for all cash transactions accurately so that correct information is available regarding cash flows and balances.
· Make certain that enough cash is available to pay bills as they come due.
· Avoid holding too much idle cash because excess cash could be invested to generate income, such as interest.
· Prevent loss of cash due to theft or fraud.
· Maintaining proper control on cash dealings.
The need to control cash is clearly evident and has many aspects. Without the proper timing of cash flows and the protection of idle cash, a business cannot survive.
Companies protect their assets by
1) segregating employee duties,
2) assigning specific duties to each employee,
3) rotating employee job assignments,
4) using mechanical devices etc.
While same employee fulfils the role of a cashier along with the role of accounts receivable clerk or accounts payable clerk, chance of misappropriation is very high. As the same person is having access to books of accounts and physical cash vault, at any time, he may manipulate the books and thus a vulnerable environment is created. In order to avoid this, it is the common industry practice to have different personnel at the role of cashier and accounts clerk. Normally, a person who handles the cash is not given access to the books of accounts in order to restrict any manipulation and fraud.
When Deposits, Invoice and bill payments are entered by the same person, he may tend to alter the books. Misappropriation of Cash may include embezzlement of cash, recording cash sales as credit sales, writing off good debts as bad debts, showing unnecessary return inwards, duplication of payment vouchers etc. Hence it is always better to have different persons in the role of Cashier and accounts management.
In larger entities, segregation of duty among various persons is practically possible as they have much better resources to accommodate multiple staff and provide salaries accordingly. But in case of smaller entity, where limited human resources are employed, it may not be possible to employ multiple staffs to different job roles. Although it is advisable to have segregation of duty among different persons, lack of expertise of person to deal with accounts, time and cost constraints may not permit the smaller entity to employ different persons to each role.
In that case, to strengthen financial control with respect to cash, entity may undertake the following strategies such as:
· Automated bills/receipts/counterfoils serially numbered and dated without any redundancies
· Centralized issue of vouchers, receipts, etc.
· Surprise checks
· Compulsory leave to employee to ensure audits on his absence
· Proper surveillance system
· Daily reconciliation of physical cash balance
· Promote regular deposit of cash to bank account
· Keeping track of account ledgers, negative cash balances in any days etc.