Question

Skylar Daniels was recently promoted to Senior Auditor in the accounting department. One of his primary responsibilities is to assist with the training of the accounting interns that only had minimal accounting education/experience at this point in their careers. As part of the training curriculum, the interns are required to go through the month’s transactions and manually book them, rather than using the computerized accounting software. This is intended to give them a better understanding of the mechanics behind the system. During his review of one of the intern’s work, he discovered that an accountant was entering transactions without any supporting documentation. Another intern was erroneously reversing all of the entries related to cash, by debiting it for decreases and crediting it for increases. When asked why he was doing this, he mentioned that his personal checking account register showed a debit for decreases/withdrawals and a credit for increases/deposits. A third intern questioned the need to have two separate entries for every transaction, claiming that it duplicates the work for no apparent reason. “If we are paying a bill, why can’t we just show the cash decrease?”, he asked. Discuss the following: How would you respond to the first intern regarding the need for supporting documentation? How would you respond to the second intern regarding the increases and decreases to cash? Is he correct? How would you respond to the third intern regarding the need for multiple entries for each transaction? Your answers to (a), (b), and (c) should be different from your classmates.

Answer 1

(a) Supporting documentation is an absolute must for every journal entry. Supporting documents such as purchase orders, cash memos, expense memos, credit notes, etc. form the basis of a complete accounting system with proper controls. Absence of supporting documentation leads to lack of audit control and haphazard accounting. Good supporting documentation enables anyone looking at the accounts (new accountants, auditors, managers etc.) to immediately and clearly understand the transaction.

(b)

a personal checking account is copy of your account with the bank. From the bank's perspective, any deposit of cash into the account is a credit, and any withdrawal is a debit (as a deposit increases the bank's cash balance and a withdrawal decreases the bank's cash balance). However, for a company cash account, a decrease in cash is a credit in the cash account and an increase in cash is a debit in the cash account. Applying the logic of bank checking account to the company's cash account is fundamentally wrong

(c)

Modern accounting is based on the double-entry system, where every transaction is recorded in at least two accounts, with the total debit and credit amounts always being equal. For every transaction, there is a two-sided value-in and value-out. For example, with a purchase of asset, asset account is to be increased and cash account decreased. For every expense, expense account is increased and cash account decreased.

This enables a system where errors can be easily spotted, accuracy is increased, and frauds can be investigated.