It is the beginning and the end of the accounting business cycle (cash-inventory-sales-cash) and the lifeblood of the business organism. It is the function of management to ensure that sufficient cash is available to meet the needs of the enterprise. A sound cash flow is the basis for a financially healthy enterprise. Nearly all the transactions that are recorded involve a flow of cash either to the enterprise (a receipt) or from the enterprise (a payment). The cash flow generated by some transactions is not immediate, but will take place at a later stage, for example stock bought on credit.
Cash may be defined as any legal medium of exchange that is immediately negotiable and free of restrictions. It includes coins, notes, cheques, postal orders, savings deposits and bank deposits. An essential requirement is that it must be immediately available as legal tender; therefore, loans to employees, postage stamps and fixed period deposits cannot be regarded as ‘cash’ for accounting balance sheet purposes since they are subject to conversion before they are available as cash.
Because cash is the most liquid asset, it is the most easily misused. Therefore, every enterprise must have an effective internal accounting control system for cash. In smaller enterprises, the owner or manager usually exercises personal control over all cash transactions. In larger enterprises, however, it is impossible for one person to exercise individual control; therefore, the accounting system of the enterprise must be designed to include adequate control measures over cash flow. The design of this accounting system should include control totals at various points against which the accuracy of a series of items can be tested.
A sound cash accounting control system should meet the following requirements: Employee’ duties and functions must be separated to ensure that those persons who receive, pay out or handle cash in any way are not involved in the recording function. This prevents a person from misappropriating funds and concealing the fact by forging entries in the accounting books. The functions of the employees must be divided in such a way that, an error by one employee will be revealed by another employee. This means that the collusion of a least two employees is necessary if funds are to be embezzled.
Cash receipts must be recorded in such a way that the actual cash received can be checked against an independent daily record. Therefore, a source document must be prepared as soon as cash is received. The source document should show the amount, the date of receipt, the reason for the receipt and, where applicable, the person who made the payment. Examples of this type of accounting source document are receipts, cash sales slips, invoices and control and audit rolls used in cash registers.
All cash received must be banked daily and no payments should be made from the receipts. This ensures that cash is safe overnight and bank deposit slips serve as a control total for cash received.
All payments except petty cash payments must be made by cheque. Cheques must be countersigned and supported by a properly controlled and authorised source document that serves as proof of payment. The functions of the employees handling cheques must be separated from those of the employees recording the transactions.
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source http://blog.bigfinancial.co.uk/the-nature-and-importance-of-cash/
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