Cash is a company's most liquid asset, which means it can easily be used to acquire other assets, buy services, or satisfy obligations. For financial reporting purposes, cash includes currency and coin on hand, money orders and checks made payable to the company, and available balances in checking and savings accounts. Most companies report cash and cash equivalents together. Cash equivalents are highly liquid, short‐term investments that usually mature within three months of their purchase date. Examples of cash equivalents include U.S. treasury bills, money market funds, and commercial paper, which is short‐term corporate debt.
Cash is a liquid, portable, and desirable asset. Therefore, a company must have adequate controls to prevent theft or other misuses of cash. These control activities include segregation of duties, proper authorization, adequate documents and records, physical controls, and independent checks on performance.
- Segregation of duties. Cash is generally received at cash registers or through the mail. The employee who receives cash should be different from the employee who records cash receipts, and a third employee should be responsible for making cash deposits at the bank. Having different employees perform these tasks helps minimize the potential for theft.
- Proper authorization. Only certain people should be authorized to handle cash or make cash transactions on behalf of the company. In addition, all cash expenses should be authorized by responsible managers.
- Adequate documents and records. Company managers and others who are responsible for safeguarding a company's cash assets must have confidence in the accuracy and legitimacy of source documents that involve cash. Important documents such as checks, are prenumbered in sequential order to help managers ascertain the disposition of each document. This helps prevent transactions from being recorded twice or from not being recorded at all. In addition, documents should be forwarded to the accounting department soon after their creation so that recordkeeping can be handled professionally and efficiently. Allowing documents that describe cash transactions to go unrecorded for an unnecessarily long period of time increases the likelihood that fraudulent or inaccurate records will pass undetected through the accounting department.
- Physical controls. Cash on hand must be physically secure. This is accomplished in a variety of ways. Cash registers should contain only enough cash to handle customer transactions. When a cashier finishes a shift—or perhaps more frequently—excess cash should be moved from cash registers to a safe or another location that provides additional security. In addition, daily bank deposits are made so that excess cash does not remain on the premises. Blank checks, which can be used for forgery, are stored in locked, fireproof files.
- Independent checks on performance. Employees who handle cash or who record cash transactions must be prepared for independent checks on their performance. These checks should be done periodically and may be done without fore-warning. Having a supervisor verify the accuracy of a cashier's drawer on a daily basis is an example of this type of control.
- Other cash controls. Most companies bond individuals that handle cash. A company bonds an employee by paying a bonding company for insurance against theft by the employee. If the employee then steals, the bonding company reimburses the company. Companies may also rotate employees from one task to another. Embezzlement or serious mistakes may be uncovered when a new employee takes over a task. Although specific cash controls vary from one company to the next, all companies must implement effective cash controls.