Accounting for Internal Control

The concept and purpose of internal cash control

Internal control is a set of procedures designed to protect assets, ensure the accuracy of accounting records, and promote efficiency. For cash, common controls include segregating duties (the person who receives cash is not the one who records it), banking all receipts daily, and using a petty cash system for small expenses.

The main purpose is to prevent theft and misappropriation and to detect errors early. For example, if a cashier receives RM500 from sales but records only RM450, a good control such as checking the bank statement will reveal the difference when the balances fail to match.

The Petty Cash account and the imprest system

Petty cash is a small amount of cash given to a petty cashier to pay minor expenses such as stamps, taxi fares and stationery, so the main Cash Book is not cluttered with trivial entries. Under the imprest system, petty cash starts with a fixed float, and at the end of the period the amount spent is reimbursed so the balance returns to the original float.

Example: the imprest float is set at RM300. During the month, petty expenses total RM185. The reimbursement entry is Debit Petty Cash account RM185, Credit Cash Book (Bank) RM185, restoring the float to RM300 at the start of the next month. Those expenses are classified into their own accounts such as Debit Postage Expense and Debit Transport Expense.

Why the Cash Book balance differs from the bank statement balance

The bank column balance in the Cash Book is often not the same as the bank statement balance on the same date. This is not necessarily an error; it happens because the business and the bank record at different times, or because the bank makes entries the business does not yet know about.

Common causes include unpresented cheques (the business has credited the Cash Book but the payee has not cashed the cheque), deposits in transit (already debited in the Cash Book but not yet on the bank statement), bank charges, interest credited by the bank, direct payments and receipts through the bank such as standing orders, and dishonoured cheques. Understand these causes before preparing the reconciliation statement.

Updating the Cash Book before reconciliation

The correct first step is to update the Cash Book for items on the bank statement that the business has not yet recorded. These include bank charges, bank interest, dividends collected directly by the bank, standing orders and dishonoured cheques.

Example: the bank statement shows bank charges of RM30 and interest credited of RM20 not yet in the Cash Book. Update: Credit the Cash Book RM30 for charges (reducing the balance), Debit the Cash Book RM20 for interest (increasing the balance). This adjusted Cash Book balance is the starting point for the bank reconciliation statement.

Preparing the Bank Reconciliation Statement

After the Cash Book is updated, the bank reconciliation statement reconciles the updated Cash Book balance with the bank statement balance for timing items such as unpresented cheques and deposits in transit.

A sample format starts with the balance as per the updated Cash Book RM1,200. Add unpresented cheques RM300, deduct deposits in transit RM500, giving a balance as per the bank statement RM1,000. If the final figure matches the actual bank statement balance, the reconciliation is complete. Timing items are not entered into the Cash Book because they will match on their own once the bank processes the cheque or deposit.

Handling an overdraft balance

When a business has an overdraft, the bank balance is a credit balance in the Cash Book and shows the business owes the bank. The arithmetic of the reconciliation stays the same: bank statement balance = Cash Book balance + unpresented cheques - deposits in transit; the only difference is that the starting figure is an overdraft (credit) balance, so the sign must be tracked carefully.

Example: the overdraft balance per the updated Cash Book is RM800 (credit). Add unpresented cheques RM250 and deduct deposits in transit RM400: -800 + 250 - 400 = -950, an overdraft per the bank statement of RM950. In other words, an unpresented cheque reduces the overdraft while a deposit in transit increases it. Mistakes with signs and direction are the most common reason for lost marks in overdraft questions, so students must clearly label figures such as 'overdraft balance'.

The purpose and structure of the Cash Budget

A cash budget is a forecast of cash receipts and payments for a future period, usually month by month. Its purpose is to help the business plan, spot cash surpluses for investment, and identify shortages early so it can arrange a loan or overdraft.

Its basic structure is: opening cash balance, add total receipts, deduct total payments, giving the closing balance which becomes the opening balance of the next month. Remember that a cash budget records only actual cash flows, so non-cash items such as depreciation and bad debts are excluded.

Preparing and interpreting the Cash Budget

A simple example: opening balance in January RM2,000. Cash receipts from sales and debtors RM6,000; payments to creditors, wages and rent RM5,500. Closing balance for January = RM2,000 + RM6,000 - RM5,500 = RM2,500, which becomes the opening balance for February.

Be careful with the timing of debtor receipts and creditor payments, because this month's credit sales or purchases may only be received or paid the following month. Interpretation matters too: a negative closing balance signals a cash shortage that must be resolved through an overdraft or loan before the problem arises.

Another important use of the cash budget is management decision-making. If the budget shows a large surplus in a particular month, the business can plan asset purchases or investments; if it shows a deficit, it can reschedule payments or negotiate an overdraft earlier. Example: if the closing balance for March is forecast at negative RM1,500, a business such as Perniagaan Maju can arrange a RM2,000 overdraft facility before March so operations are not disrupted.