Accounting: The Language of Business (Part 38)

Accounting is a hot domain with the number of accounting majors up nationwide. I think the recent scandals have brought a new level of attention to the accounting profession as gatekeepers and custodians of social interest.Paul Browne

Cash (Part B)

by

Charles Lamson

Internal Control of Cash Payments

Internal control of cash payments should provide reasonable assurance that payments are made for only authorized transactions. In addition, controls should ensure that cash is used efficiently. For example, controls should ensure that all available discounts, such as purchase and trade accounts, are taken.

In a small business, an owner/manager may sign all checks, based upon personal knowledge of goods and services purchased. In a large business, however, checks are often prepared by employees who do not have such a complete knowledge of the transactions. In a large business, for example, the duties of purchasing goods, inspecting the goods received, and verifying the invoices are usually performed by different employees. These duties must be coordinated to ensure that checks for proper amounts are issued to creditors. One system used for this purpose is the voucher system.

Basic Features of the Voucher System

A voucher system is a set of procedures for authorizing and recording liabilities and cash payments. A voucher system normally uses (1) vouchers, (2) a file for unpaid vouchers, and (3) a file for paid vouchers. Generally, a voucher is any document that serves as proof of authority to pay cash. For example, an invoice properly approved for payment should be considered a voucher. In many businesses, however, a voucher is a special form for recording relevant data about a liability and the details of its payment. An example of such a form is shown in Exhibit 2.

EXHIBIT 2 Voucher

Each voucher includes the creditors invoice number and the amount and terms of the invoice. The accounts used in recording the purchase (or transaction) are listed in the account distribution.

A voucher is normally prepared in the accounting department, after all necessary supporting documents have been received. For example, when a voucher is prepared for the purchase of goods, the voucher should be supported by the supplier's invoice, a purchase order, and a receiving report. In preparing the voucher, an accounts payable clerk verifies the quantity, price, and mathematical accuracy of the supporting documents. This provides assurance that the payment is for goods that were properly ordered and received.

After a voucher is prepared, the voucher and its supporting documents are given to the proper official for approval. After it has been approved, the voucher is returned to the accounting department, where it is recorded in the accounts. It is then filed in an unpaid voucher file by its due date so that all available purchase discounts are taken.

On its due date, the voucher is removed from the unpaid voucher file. The date, the number, and the amount of the check written in payment are listed on the back of the voucher. The payment of the voucher is recorded in the same manner as the payment of an account payable.

After payment, vouchers are marked "Paid" and are usually filed in numerical order in a paid voucher file. They are then readily available for examination by employees needing information about past payment.

A voucher system may be either manual or computerized. In a computerized system, properly approved supporting documents (such as purchase orders and receiving reports) would be entered directly into computer files. At the due date, the checks would be automatically generated and mailed to creditors. At that time, the voucher would be automatically transferred to a paid voucher file. In some cases, payments may be made electronically rather than by check. 

Electronic Funds Transfer

With rapidly changing technology, new systems are being devised to more efficiently record and transfer cash among companies. Such systems often use electronic funds transfer (EFT). In an EFT system, computers rather than paper (money, checks, etc.) are used to effect cash transactions. For example, a business may pay its employees by means of EFT. Under such a system, employees may authorize the deposit of their payroll checks directly into checking accounts. Each pay period, the business electronically transfers the employees' net pay to their checking accounts through the use of computer systems and telephone lines. Likewise, many companies are using EFT systems to pay their suppliers and other vendors. 

*WARREN, REEVE, & FESS, 2005, ACCOUNTING, 21ST ED., PP. 287-289*

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