Discuss how the principles of internal control apply to cash receipts.
The principles of internal control apply to cash receipts because of the need to monitor and control it. Since cash receipts are one of the most important assets of a company, it is essential that there be policies and formal procedures to monitor and control it. Several principles of internal control are applicable to cash receipts such as assigning a person or persons responsible for the cash receipts and the maintenance of its records, making sure that the person/s assigned to the custody of cash receipts is different from those who keep the accounting records. Moreover, technological controls like cash registers, personal identification scanners are devices which should be used for cash receipts (Galbreath, et al, Chapter 8 - Cash and internal controls, 2013). Another principle of internal control which is necessary to be applied to cash receipts is the conduct of regular periodic and independent reviews of the procedures of handling cash receipts (Galbreath, et al, Chapter 8 - Cash and internal controls, 2013).
Discuss the purpose of a bank reconciliation.
The purpose of a bank reconciliation is to reconcile the bank’s records with the company’s records and see if there are any differences in the cash transactions. If a bank reconciliation is not done, the difference in the amount of cash that a company thinks it has on hand and the actual cash in the bank will not tracked down. This may result in bounced checks, overdrawn accounts, overdraft fees and below maintaining balance fees. Fraud detection is another reason why a bank reconciliation is important for a company because they will know whether checks issued by customers bounced or were altered.3.Explain the options a company has to convert its receivables to cash.
There are two ways a company can convert its receivables to cash. They can either sell their receivables or pledge it. They can sell their receivables to a bank or a financing company who charges a factoring fee for taking over the ownership of the receivables including the risk of bad debts (Galbreath, et al, 2013). On the other hand, if the company chooses to pledge its receivables, the receivables are used as collateral for a loan (Galbreath, et al, 2013). The ownership of the receivables is retained by the company but if it defaults, the lender will apply the proceeds from the receivables to the company’s loan.4. How are the direct write-off method and the allowance method applied in accounting for uncollectible accounts receivables?
In the direct write-off method, once the company realizes that it can no longer collect its receivable from a client, it will debit the Bad Debt Expense and credit Accounts Receivable of the client (Galbreath, et al, 2013). If for example after the write-off, the client pays the company, the write-off is reversed by debiting the Accounts Receivable and crediting the Bad Debt Expense. Next, to record the cash payment received, Cash is debited and Accounts Receivable is credited. On the other hand, in the allowance method, the total bad debts expected for the period is estimated based on past data (Galbreath, et al, 2013). An Allowance for Doubtful Accounts is subtracted from the Accounts Receivable account (Galbreath, et al, 2013). Therefore, once the company determines that the Accounts Receivable can no longer be collected, the Allowance for Doubtful Accounts will be debited and the Accounts Receivable will be credited (Galbreath, et al, 2013). If the customer decides to pay-off his debt later on, the write-off will be reversed.
Bragg, S. (2013, March 18). What is the purpose of a bank reconciliation? Retrieved from accounting tools.com: http://www.accountingtools.com/questions-and-answers/what-is-the-purpose-of-a-bank-reconciliation.html
Galbreath, S. C., Caldwell, C. W., Booker, J. A., & Rooney, C. J. (2013). Chapter 8 - Cash and internal controls. The McGraw-Hill Companies, Inc.
Galbreath, S. C., Caldwell, C. W., Booker, J. A., & Rooney, C. J. (2013). Chapter 9 - Accounting for Receivables. The McGraw-Hill Companies, Inc.