Accounting Policies and Procedures Guide (1)

8/10/2019 Accounting Policies and Procedures Guide (1)

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Accounting Policies and Procedures Guide

2013 Edition


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Copyright2012 Bybee & Company, CPAs, PLLC

This book or parts thereof may not be reproduced in another document or manuscript in anyform without the permission of the publisher.


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Accounting Policies and Procedures Guide

Table of Contents

TAB DESCRIPTION PAGE

100 INTRODUCTION TO SMALL BUSINESS ACCOUNTING .................................................. 1-1

200 OVERVIEW OF THE ACCOUNTING PROCESS ............................................................... 2-1

300 PROCESSING SALES AND RECEIPTS ............................................................................ 3-1

400 PROCESSING PURCHASES AND PAYMENTS ............................................................... 4-1

500 PROCESSING PAYROLLS ............................................................................................... 5-1

600 MAKING ACCOUNTING ADJUSTMENTS ......................................................................... 6-1

700 MAINTAINING THE GENERAL LEDGER .......................................................................... 7-1

800 PREPARING FINANCIAL REPORTS ................................................................................ 8-1


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5/373TOC 1-1

Introduction to Small Business Accounting 1

Table of Contents

Section Description Page

100 INTRODUCTION .................................................................................................... 1-1

105 WHO ARE THE ACCOUNTING STAFF? ............................................................. 1-1

110 WHAT DOES THE GUIDECOVER? ....................................................................... 1-2

115 HOW SHOULD THE GUIDE BE USED? ................................................................. 1-3


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Introduction to Small Business Accounting

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Introduction to Small Business Accounting 1

o WHO ARE THE ACCOUNTING STAFF?

o WHAT DOES THE GUIDE COVER?

o HOW SHOULD THE GUIDE BE USED?

100 INTRODUCTION

100.01 Accounting staff are vital to the success of accounting departments of small to mid-sized companies. Yet, minimal guidance and few tools exist to help the typical staff personsperform their duties. In most cases, employees are forced to develop their skills by trial anderror and constant on-the-job training, otherwise referred to as the school of hard knocks. Thisapproach generally leads to periods of frustration before staff persons finally become proficientin their job.

100.02 This Guide provides the practical guidance to help fill this void. It provides how-to

guidance and numerous practice aids (workpapers, forms, and checklists) to help staff personsmaster the various accounting tasks in small to mid-sized companies. The Guide focuses notonly on the day-to-day processing of accounting transactions (such as sales and receipts,purchases and disbursements, and payroll) but also on monthly, quarterly, and annual taskssuch as general ledger closings.

100.03 This chapter introduces the Guide by answering the following three questions:

Who Are the Accounting Staff?

What Does the Guide Cover?

How Should the Guide Be Used?

105 WHO ARE THE ACCOUNTING STAFF?

105.01 In a small to mid-sized company, the accounting staff represents those personshandling the accounting departments day-to-day activities. The term generally encompassesall accounting department personnel below the controller level, including data entry personnel,accounting clerks, and degreed and nondegreed accountants. In companies with smallaccounting staffs, the controllers or head bookkeepers duties also frequently fall under theumbrella of the accounting staffs role.The accounting staff individuals are crucial to properlycarrying out the traditional accounting functions of the department.

110 WHAT DOES THE GUIDE COVER?

110.01 This Guidecovers the full range of the accounting staffs duties in the typical small tomid sized company. It provides guidance on how to process the day-to-day transactions, closethe general ledger, and prepare financial reports. The following presents an overview of eachof the chapters.


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Chapter 2: Overview of the Accounting Process.This chapter summarizes thekey elements of the accounting process. It discusses the types of sourcedocuments, the day-to-day transaction processing covered in Chapters 3 through5, and basic internal controls. This chapter is intended to give accounting staff abig picture of the accounting process before jumping into the more detaileddiscussion in the rest of the Guide.

Chapter 3: Processing Sales and Receipts.This chapter discusses the varioussteps required to process sales invoices and cash receipts. The cash receiptsdiscussion addresses processing of both mail receipts and over-the-counterreceipts. The chapter also covers various period-end activities, such as reconcilingthe bank accounts and the subsidiary ledger.

Chapter 4: Processing Purchases and Payments.This chapter providesdetailed guidance on processing vendor invoices, recording the invoices in theaccounting system, making the payments, and performing period-endreconciliation and cutoff procedures. The chapter addresses common problemareas, such as obtaining invoices from the various departments, obtaining

payment approvals, dealing with 1099 forms, and assigning proper general ledgeraccount codes.

Chapter 5: Processing Payrolls.This chapter begins by providing guidance onobtaining key payroll information and computing wages. It then covers the stepsrequired to process each periods payroll. The last three sections address specificmonthly, quarterly, and annual payroll activities (including filing payroll tax reports)that must be completed.

Chapter 6: Making Accounting Adjustments.The previous three chapters coverthe processing of day-to-day transactions. This chapter provides guidance onpreparing common period-end journal entries needed to put the accounting

records on a GAAP (generally accepted accounting principles) basis. It illustratesand explains the debits and credits relating to recording cost of sales, makingaccrual entries, adjusting asset valuations, recording depreciation expense, andvarious other entries.

Chapter 7: Maintaining the General Ledger.This chapter builds on the previousfour chapters. After day-to-day transactions (Chapters 3 through 5) and variousadjustments (Chapter 4) have been posted to the general ledger, accountingpersonnel are ready to complete the general ledger closeout. It shows how toprepare key general ledger supporting workpapers, review the general ledger, andprotect and store files and records.

Chapter 8: Preparing Financial Reports.This chapter provides guidance ongenerating the basic monthly financial statements and modifying the format andpresentation of the financial statements. It also shows how to prepare selectedother management reports, such as the owners weekly flash report and theweekly cash flow report.


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115 HOW SHOULD THE GUIDE BE USED?

115.01 ThisGuide contains in-depth guidance on all key aspects of the accounting department.Because of the breadth of the materials and level of detail, it will generally not be read fromcover to cover. Instead, it will most often be used on an as-needed basis as situations arise. Assuch, the Guide should be kept in an area within the accounting department that is visible andaccessible by all accounting staff. Some common expected uses for the Guide include the

following:

Addressing day-to-day questions.The Guide will frequently be used as areference tool to answer accounting staff questions as they arise. For example, theaccounts receivable staff person may need answers on how to handle exceptionsencountered while processing cash remittances or auditing the daily cash registerreport. The accounting manager may have questions on when and how to filevarious government reports, such as payroll tax returns and sales tax returns. Thedetailed table of contents in each chapter allows easy answers to accounting staffquestions.

Improving key functions.The Guide may also be used to improve key functions

within the accounting department. The staff person responsible for certainfunctions, such as processing vendor invoices or closing the general ledger, wouldsimply read the related chapter topic and compare the guidance with thecompanys existing procedures. Any proposed recommendations should then bebrought to the controllers attention.

Cross training the accounting staff.The controller may use the Guide to crosstrain staff to handle additional areas. This cross training will make it easier for staffto take scheduled or unscheduled time off since one or more other staff personscan help out temporarily.

Training new staff.The Guide may be used to help select and train staff that are

new to a particular function within the accounting department. The guidance willensure the staff person receives a proper foundation. Once the basic foundation isset, the new person will better understand why and how to carry out the companyspolicies and procedures in that area.

Learning new skills.Accounting staff sometimes become bored and complacentbecause they work year after year in a single area with little challenge oropportunities for improvement. The Guide can help those individuals expand theiraccounting skills to prepare them for handling new accounting opportunities withinthe company.

Each of the above uses for the Guide will eventually make the accounting staff as a whole more

knowledgeable and confident concerning the operations of all aspects of the accountingdepartment.


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11/373 TOC 2-1

Overview of the Accounting Process 2

Table of Contents


200 INTRODUCTION ................................................................................................... 2-1

205 TYPES OF FINANCIAL RECORDS ........................................................................ 2-1

.03 Source Documents ........................................................................................ 2-3

.04 Summary Journals ......................................................................................... 2-3

.08 Subsidiary Ledgers ........................................................................................ 2-4

.10 General Ledger .............................................................................................. 2-5

.13 Financial Statements ..................................................................................... 2-5

210 PRIMARY ACCOUNTING PROCESSES ............................................................... 2-5

.02 Sales, Accounts Receivable, and Cash Receipts ........................................... 2-6

.04 Purchasing, Accounts Payable, and Cash Disbursements ............................. 2-6

.06 Payrolls .......................................................................................................... 2-7

.08 Inventories and Cost of Sales ........................................................................ 2-8

.11 Fixed Assets and Depreciation....................................................................... 2-9

.13 General Ledger and Financial Statements ..................................................... 2-10

215 BASIC INTERNAL ACCOUNTING CONTROLS ..................................................... 2-11

.03 Segregation of Duties .................................................................................... 2-11

.06 Restricted Access .......................................................................................... 2-11

.08 Document Controls ........................................................................................ 2-12

.10 Processing Controls ....................................................................................... 2-12

.11 Reconciliation Controls .................................................................................. 2-13

220 BOOKKEEPING SKILLS EVALUATION ................................................................. 2-13

.04 Reference Checking ...................................................................................... 2-13

.06 Pre-employment Testing ................................................................................ 2-14

225 SUMMARY ............................................................................................................. 2-14


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Overview of the Accounting Process

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Overview of the Accounting Process 2

o TYPES OF FINANCIAL RECORDS

o PRIMARY ACCOUNTING PROCESSES

o BASIC INTERNAL ACCOUNTING CONTROLS

o BOOKKEEPING SKILLS EVALUATION

200 INTRODUCTION

200.01 Understanding the overall accounting process is often crucial to the success of anysmall business accounting function. For full-charge bookkeepers and accounting staff who workwith multiple accounting areas, getting a big picture understanding is essential. Even

accounting staff who work primarily in one or two areas, such as accounts receivable or

inventory, should have a basic idea of how their area interacts with others.

200.02 This chapter provides a broad overview of the small business accounting process. Thefollowing sections are covered:

Types of Financial Records. Section 205 briefly discusses the fivetypes of financial records (source documents, summary journals,subsidiary ledgers, general ledger, and financial statements) used inmost small businesses.

Primary Accounting Processes. Section 210 covers the sixaccounting processes found in most small businesses, consisting of (1)

purchasing, accounts payable, and cash disbursements; (2) sales,accounts receivable, and cash receipts; (3) payroll; (4) inventories and

costs of sales; (5) fixed assets and depreciation; and (6) general ledgerand financial statements.

Basic Internal Accounting Controls. Section 215 provides a briefoverview of the basic small business internal accounting controls.

Bookkeeping Skills Evaluation. Section 220 provides guidance to helpaccounting managers and supervisors evaluate basic bookkeeping skillsbefore making a hiring decision.

205 TYPES OF FINANCIAL RECORDS

205.01 The accounting system in each company is responsible for distilling the hundreds orthousands of monthly transactions into a manageable format (i.e., the month-end general ledgerand financial statements). The monthly financial transactions in most small businesses start withone or more source documents (such as invoices, cash receipts, and time cards), which are


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summarized throughout the month and posted to specified general ledger accounts. The endingmonthly general ledger balances are then used to generate the companys financial statements.

205.02 Exhibit 2-1 presents an inverted pyramid to show how the various source documentsand other financial records are processed throughout each period to produce the companysmonth-end financial information. The following paragraphs briefly discuss the types of financial

records shown in Exhibit 2-1 and the accounting departments involvement with the records.

Exhibit 2-1 Flow of Basic Accounting Records


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Source Documents

205.03 Each accounting transaction begins with some type of source document, which differsdepending on the type of transaction. The source documents that account for most financialtransactions include:

Purchases. Vendor invoices and supporting documentation, such aspurchase orders, packing slips, and receiving reports, are the primarysource documents for purchases of inventory and various other goodsand services.

Sales. Customer sales invoices and supporting documentation, such assales orders and shipping documents, are the primary source documentsfor recording sales transactions for companies other than retailers. Cashregister tapes, cash receipt forms, and daily cash-register reports are theprimary source documents for most small retail businesses.

Cash receipts. Remittance advices and deposit slips are the primary

source documents for recording cash received from customers on creditsales. For retailers and other companies that do not extend credit tocustomers, the cash receipt source document also serves as the salesdocument.

Cash disbursements. Company checks (accompanied by previouslyapproved vendor invoices and other documents supporting thepurchase) are the primary supporting document for recording cash

disbursements.

Payroll. Time cards, time reports, or other documents showing timeworked by employees are the primary supporting documents for

recording payroll costs. Payroll checks are the primary documentssupporting the payment of payroll costs.

Whenever possible, appropriate controls (such as using prenumbered source documents)should exist to help ensure that all transactions are captured and recorded. Section 215 brieflydiscusses some basic internal controls that small businesses should consider.

Summary Journals

205.04 Once individual transactions have been captured on source documents, theaccounting system summarizes them by transaction type and general ledger accounts using achart of accounts and summary journals. The companys chart of accounts identifies specificgeneral ledger account numbers for recording the various financial transactions. Oncetransactions have been coded with the appropriate general ledger account numbers, the

amounts are grouped together for general ledger posting using summary journals.

205.05 Each of the basic types of source documents discussed previously usually has aseparate summary journal. Thus, summary journals generally include:

a. Purchases journal.

b. Sales journal.


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c. Cash receipts journal.

d. Cash disbursements journal.

e. Payroll journal.

205.06 Each of the journals generally include individual transaction amounts or quantities

(and selected other key source document information) and an aggregate general ledger postingamount. Depending on the type of accounting system, the summary journal information may bepresented in a single report or more than one report. For example, some systems presentdetailed source document information (such as customer name, customer number, amountreceived, and date) in a detailed batch-level report. The system then summarizes theinformation for each batch and transfers it to a separate report for posting to the general ledger.

205.07 Thus, summary journals not only provide a trail showing amounts posted to thegeneral ledger, but they also show the detailed components making up each general ledgerposting. This detail makes it easier for accounting personnel to locate original source

documents when questions arise at a later date.

Subsidiary Ledgers

205.08 As the system posts summary journal totals to the general ledger, most systems also

generate subsidiary ledgers for selected balance sheet accounts, such as accounts receivable,inventory, property and equipment, and accounts payable. These subsidiary ledgers show thecomposition of ending general ledger account balances as follows:

a. Accounts receivable.The accounts receivable subsidiary ledger (oftencalled the aged trial balance) typically shows the balance owed by

customer. Amounts owed are typically divided into a current column and

several past due columns.

b. Inventory. The inventory subsidiary ledger typically lists the quantity,unit cost, and extended cost of each inventory part number. (Because ofthe time required to maintain an inventory subsidiary ledger, some

smaller companies do not maintain an ongoing subsidiary ledger.Instead, they periodically prepare an inventory listing by counting theinventory on-hand.)

c. Property and equipment. The property and equipment subsidiaryledger shows the ending asset and accumulated depreciation balances

for each fixed asset. The subsidiary ledger may also show the currentdepreciation charge for each asset.

d. Accounts payable. The accounts payable subsidiary ledger lists thebalance due each vendor by invoice. Depending on the system, theledger may also be segregated by the payment due date.

205.09 Subsidiary ledgers are the key financial records used for managing each of thesebalance sheet accounts on a day-to-day basis. Thus, it is crucial that accounting staff persons

post individual transactions accurately and on a timely basis to ensure that the subsidiaryledgers remain useful and in agreement with the related general ledger balances.


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General Ledger

205.10 As mentioned previously, summary journals group amounts by general ledgeraccounts so the system can post and update the general ledger. Accounting personnel alsoupdate the general ledger by preparing manual journal entries for transactions (such as prepaid

amortization or period-end accruals) that are not accumulated and posted automatically throughsummary journals.

205.11 The general ledger lists the period-end balance for each general ledger account.Depending on the type of general ledger system, it may also show month-to-date or year-to-date activity totals posted to each general ledger account.

205.12 General ledger accounts are comprised of assets, liabilities, and equity accounts

(called balance sheet accounts) and revenue and expense accounts (called income statementaccounts). For the general ledger to be in balance, the periods total debitsmust equal thetotal credits. Also, the revenues less expenses must equal the net income added to retainedearnings.

Financial Statements

205.13 Financial statements simply represent a further summarization and grouping ofperiod-end general ledger amounts into designated financial statement captions (such as cash,trade receivables, inventories, trade payables, revenues, and cost of sales). The accountingsoftwares report writer package defines which general ledger accounts are grouped into whichfinancial statement captions.

205.14 Common financial statements include a balance sheet, income statement, andstatement of cash flows. The balance sheet and income statement are taken directly from thecorresponding general ledger accounts. The cash flow statement is typically derived from the

balance sheet and income statement.

210 PRIMARY ACCOUNTING PROCESSES

210.01 Accounting activities generally fall into one of several natural accounting processes(or cycles). Accounting personnel may be responsible for all or only a part of a cycle. In eithercase, it is important that they have at least a basic understanding of the complete cycle. Primary

cycles include:

Sales, accounts receivable, and cash receipts.

Purchasing, accounts payable, and cash disbursements.

Payrolls.

Inventory and cost of sales.

Fixed assets and depreciation.

General ledger and financial statements.


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Each cycle is briefly discussed below.

Sales, Accounts Receivable, and Cash Receipts

210.02 This process or cycle consists of selling goods or services and receiving payment

from customers. The accounting departments role in this process generally consists of the

following activities:

Data entry (invoices). Entering the sales invoices (including any debitor credit memos) into the accounting system to produce the sales

journal.

General ledger posting (invoices). Posting the sales journal to theaged trial balance and the applicable general ledger accounts (debit toaccounts receivable and credit to sales).

Data entry (customer remittances). Applying customer payments

against applicable open sales invoices to produce the cash receipts

journal.

General ledger posting (remittances). Posting the cash receiptsjournal to the aged trial balance and the appropriate general ledgeraccounts (debit cash and credit accounts receivable).

Reconciliation. Keeping the aged trial balance in balance with theending general ledger balance.

Account maintenance. Setting up new customer accounts and creditlimits and deleting/changing existing accounts.

Chapter 3, Processing Sales and Receipts, discusses this process in more detail.

210.03 A crucial part of this process is ensuring that invoices, remittances, and anyadjustments are posted accurately and on a timely basis. If the timing is delayed or transactionsare posted inaccurately, the aged trial balance will become unreliable for managing receivables,customer complaints will become common place, and financial statement accuracy coulddiminish.

Purchasing, Accounts Payable, and Cash Disbursements

210.04 This process or cycle consists of the purchase of goods or services and thesubsequent payment of those goods or services. The accounting departments role in thisprocess generally consists of:

Account coding. Ensuring that vendor invoices have been coded withthe appropriate general ledger account numbers based on the approvedchart of accounts. Proper account coding requires accounting personnelto have a strong understanding of the companys chart of accounts.


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Data entry (invoices). Entering the vendor invoice amounts (includingany debit or credit memos) into the accounting system to produce the

purchases journal.

General ledger posting(invoices).Posting the purchases journal to theaccounts payable subsidiary ledger and the various general ledger

accounts. For instance, recording a debit to the appropriate asset(inventory or fixed asset) or expense accounts and a credit to accounts

payable.

Check preparation. Selecting invoices to pay and preparing checks forpaying specific vendor purchases to produce the cash disbursements

journal.

General ledger posting (checks). Posting the cash disbursementsjournal to the accounts payable subsidiary ledger and the general ledger(debit to accounts payable and credit to cash).

Reconciliation. Keeping the accounts payable subsidiary ledger inbalance with the ending general ledger balance.

Account maintenance. Setting up new vendor accounts and deleting oldaccounts.

Chapter 4, Processing Purchases and Payments, provides in-depth discussion of this process.

210.05 Ensuring that vendor invoices have been recorded accurately and coded with theappropriate general ledger account numbers are crucial steps in this process. Any undetectederrors at this stage could affect vendor payments, financial statement accuracy, and tax returnamounts. Thus, accounting personnel should exercise great care at this stage and follow

established internal controls (see Section 215).

Payrolls

210.06 The payroll process consists of processing payrolls and remitting amounts due toemployees, government, and others (health insurers, retirement plan trustees, etc.). Theaccounting departments role in this process generally consists of the following activities:

Time cards processing. Checking mathematical accuracy of timecards.

Data entry. Entering time distribution by employee, including hoursworked, time off, and overtime hours into the accounting system toproduce the payroll journal.

General ledger posting (payroll). Posting the payroll journal to thegeneral ledger. For example, debit compensation expense and creditliability accounts for net payroll and payroll taxes.

Check preparation. Preparing and distributing employee payroll checksto produce the payroll check register.


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General ledger posting. Posting the payroll check register to thegeneral ledger. For example, debit liability accounts and credit cash.

Tax reports preparation and deposits. Preparing payroll tax reportsand making required tax deposits to state and federal agencies.

Account maintenance. Setting up new employees, deleting terminatedemployees, changing pay rates and tax rates, revising employee

withholding amounts, etc.

Chapter 5, Processing Payrolls, covers all aspects of this process in great detail.

210.07 Preparing timely and accurate paychecks is obviously important to accountingpersonnel, since to do otherwise will often bring an immediate response from affected

employees. Also, failing to file accurate and timely payroll tax reports subjects the company andkey employees (possibly even some supervisory accounting personnel) to tax penalties.

Inventories and Cost of Sales

210.08 The inventory and cost of sales process consists of properly accounting for incomingand outgoing inventory. The extent of the accounting departments involvement in this areavaries greatly with the nature of the companys business (retailer, wholesaler, or manufacturer)and the type of inventory accounting system. In many small businesses, CPAs (both internal

and external) are heavily involved in this area because of its complexity and importance to thebusinesss success.

210.09 The accounting departments role in this process generally includes:

Data entry (purchases). Entering inventory purchases is typically done

as part of the purchasing process discussed in Paragraphs 210.04-.05.

In addition, posting the purchases journal typically updates the inventorysubsidiary ledger if one is maintained.

Cost of sales.As mentioned above, the method used to record cost ofsales varies greatly among small businesses. If a separate inventory

subsidiary ledger is maintained, cost of sales is often automaticallyrecorded by the accounting system (as part of the sales and accountsreceivable process) when customer sales are posted. If a separatesubsidiary ledger is not maintained, cost of sales is often recorded with amanual journal entry at month end by applying an estimated cost of salespercentage to sales for that month. In any event, accounting personnel

should ensure that all recorded sales have a matching recorded cost inthe same period.

Inventory transfers.Adjusting the detailed inventory records (if any) andthe general ledger for transfers of inventory between locations or thedisposal of excess, obsolete, or damaged inventory.

Reconciliation. Keeping the inventory subsidiary ledger in balance withthe ending general ledger balance.


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Account maintenance. Setting up new inventoryparts in the system andchanging part numbers of existing inventory items.

210.10 Accounting for inventories and cost of sales is a complex area that varies greatly fromone company to the next. Because most accounting staff personnel have minimal involvementin this area, this Guide does not provide in-depth discussion of this process. Accounting staff

persons are encouraged to seek the advice and help of the controller or outside CPAs whendealing with inventory and cost of sales accounting issues.

Fixed Assets and Depreciation

210.11 The fixed assets and depreciation process consists of recording fixed asset additionsand deletions and related depreciation. The accounting departments role in this processgenerally includes:

Purchases. Recording fixed asset purchases in the general ledger istypically done as part of the purchasing and cash disbursement cyclediscussed in Paragraphs 210.04-.05. Purchases are usually posted to

the general ledger by debiting the appropriate fixed asset account andcrediting accounts payable.

Subsidiary fixed assets ledger.If the companys fixed asset system isintegrated with the companys accounting system, the fixed asset

subsidiary ledger is generally updated at the same time fixed assetpurchases are posted to the general ledger. Otherwise, additions andretirements typically must be reentered into a separate stand-alone fixedasset/depreciation system.

Depreciation. Calculating and recording depreciation for each asset is

typically done by using an automated fixed assets/depreciation system.

However, companies with relatively few fixed assets sometimes usemanual or automated spreadsheets to track fixed assets and relateddepreciation. In addition, those companies make a manual journal entryto record the depreciation provision. Companies generally must makeseparate depreciation calculations for tax purposes.

Retirements. Recording fixed asset retirements (sales, trade-ins, ordisposals) is typically posted to the general ledger via a manual journalentry.

Although this Guidedoes not contain a separate chapter on fixed assets, aspects of the fixed

asset process are covered in various chapters throughout the Guide.

210.12 Accounting personnel have two primary challenges in the fixed assets and depreciationarea. They must ensure that the subsidiary fixed assets ledger stays in balance with the generalledger control account and that depreciation calculations comply with financial statement rulesand ever-changing tax requirements.


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General Ledger and Financial Statements

210.13 The general ledger process consists of posting the periods transactions to the generalledger and preparing financial statements. The accounting departments role in this processgenerally includes the following activities:

Posting summary journal entries. Entries from summary journals(purchases, sales, cash receipts, cash disbursements, payroll, etc.) aretypically posted by the system throughout the month as batches oftransactions are processed.

Preparing manual Journal entries. Preparing and posting manualjournal entries varies depending on the type of entry. The entries may beeither recurring journal entries that must be made each month oradjusting journal entries that are made as needed to correct any errorsthat are detected.

Generating the trial balance. The trial balance is simply a numerical

listing of all general ledger accounts in account number order. Accountingpersonnel generate the general ledger trial balance to ensure total debitsequal total credits.

Reconciling subsidiary ledgers and supporting workpapers. Asdiscussed previously, comparing general ledger control accounts withsubsidiary ledgers (accounts receivable, inventory, property andequipment, and accounts payable) and any supporting workpapers (bank

reconciliation, investment schedule, prepaid expense schedule, etc.) iscrucial to ensuring the accuracy of the general ledger. Accountingpersons should investigate out-of-balance situations and prepareadjusting journal entries when needed.

Closing out.Closing out the general ledger involves making an entry to

zero out all income statement accounts for the period (month or year) andposting the offsetting entry to the balance sheets retained earningsaccount. After making this entry, the balance sheet should be in balance(in other words, assets should equal liabilities plus equity).

Producing the financial statements. Producing the financial statements

is done after the general ledger has been prepared and is in balance. Asmentioned in Paragraph 205.14, computer-generated financial statementstypically include a balance sheet and an income statement.

Chapter 7, Maintaining the General Ledger, and Chapter 8, Preparing Financial Reports,provide in-depth discussion of the general ledger and financial statement process.

210.14 Accounting personnels main concern in preparing the general ledger and financialstatements is ensuring that all entries have been accurately posted. A careful review of the trialbalance and preliminary general ledger and a comparison to subsidiary ledgers and supportingworkpapers will often reveal additional adjusting journal entries that are needed to correcterrors.


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215 BASIC INTERNAL ACCOUNTING CONTROLS

215.01 Although accounting staff persons are typically not directly involved with ensuringappropriate internal accounting controls exist, a basic understanding of small business controlsis helpful in carrying out day-to-day duties. This knowledge will also help accounting staff

persons better understand why they are asked to perform certain procedures.

215.02 This section discusses the following general categories of internal accounting controls:

Segregation of duties.

Restricted access.

Document controls.

Processing controls.

Reconciliation controls.

Segregation of Duties

215.03 Segregation of duties involves allocating bookkeeping tasks among personnel so that

one individual does not have the ability to make an accounting error (either intentionally orunintentionally) and also cover it up.

215.04 The principle of segregation of duties implies that the person with physical access tocash or other moveable assets (investments or inventory) should not also be involved with therelated recordkeeping. For example, the person opening the mail and depositing customer

remittances should not also be responsible for maintaining the accounts receivable subsidiaryledger. In addition, the person responsible for writing checks should not also have responsibility

for maintaining the accounts payable subsidiary ledger. Whenever possible, bank accountsshould be reconciled by someone with no other cash receipt or disbursement functions.

215.05 Unfortunately, the limited number of accounting personnel in most small businessesoften makes it difficult to adequately segregate incompatible duties. In this situation, theservices of other nonaccounting personnel, such as the receptionist or even the businessowner, can sometimes be used in a limited capacity to provide some segregation. Also, a closer

involvement in the day-to-day affairs by the small business owner and controller often partiallycompensates for a lack of segregation of duties.

Restricted Access

215.06 Restricted access is a control category closely related to segregation of duties. Not onlyshould bookkeeping duties be segregated whenever possible, but physical access to valuableand moveable assets should be restricted to only authorized personnel.

215.07 For example, access to warehouse and other inventory should be restricted to onlythose people with responsibility for maintaining inventory. In almost all instances, salespersonsshould not have access to inventory locations. Also, inventory should not be shipped from thewarehouse unless accompanied by appropriate shipping documents. In addition, unusedchecks and petty cash should be kept in a locked filing cabinet in a secured area.


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Document Controls

215.08 Since source documents initiate the recording of transactions, it is essential thatadequate controls exist to ensure that the accounting system captures all source documents.Source document controls principally include using prenumbering documents and accounting

for the numerical sequence of those documents.

215.09 Common prenumbered source documents include company checks, receiving reports,purchase orders, sales invoices, debit and credit memos, shipping documents, and customerreceipts for over the counter sales. For retail businesses, a cash register is another basic toolfor controlling cash receipt source documents and currency.

Processing Controls

215.10 Once documents enter the accounting system, processing controls help ensure thatthe documents are processed accurately. Common processing controls include:

Batch controls. Preparing batchcontrol totals of key source document

amounts to ensure the amounts are entered into the accounting systemaccurately. For example, accounting persons may run an adding machinetape of total remittances received from customers for the day. Afterentering the remittances into the accounts receivable system, theycompare the adding machine tape total to the total generated by thesystem to ensure all remittances were accurately entered.

Source document matching. Comparing information on the various

source documents to ensure they match. For example, this control mightinclude comparing quantities and part numbers on the receivingreports/packing slips and purchase orders with the vendor invoice, andcomparing unit prices on the purchase order with the vendor invoice. For

customer shipments, this control might include comparing quantities andpart numbers on sales orders and shipping documents with customer

invoices, and comparing prices on sales orders and price lists withcustomer invoices.

Clerical accuracy of documents.Checking the mathematical accuracyof financial data on key source documents, such as vendor invoices,customer invoices, and time cards. For example, accounting personnel

may recalculate the extended prices on invoices by multiplying thequantity by the unit price.

General ledger account code checking. Checking to ensure thatamounts on source documents (such as vendor invoices) were codedwith the appropriate general ledger account numbers before entering

them into the accounting system.

Processing controls are designed to catch errors before they are posted to the general ledger.


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Reconciliation Controls

215.11 Reconciliations consist of reconciling selected general ledger control accounts tosubsidiary ledgers. Thus, in contrast to processing controls, they are designed to detect errorsafter transactions have been posted and the general ledger has been run.

215.12 Accounting persons commonly reconcile accounts receivable, property and equipment,and accounts payable subsidiary ledgers. Inventory is also commonly reconciled if the companymaintains a perpetual inventory subsidiary ledger. Monthly reconciliations of bank accounts arealso essential controls over cash balances.

220 BOOKKEEPING SKILLS EVALUATION

220.01 Knowledge and ability are key factors to assess when hiring accounting personnel. Ifthe company is primarily looking for a data entry person, that persons bookkeeping knowledgemay be less important. However, if a company is seeking a full-charge bookkeeper, thatindividual must grasp all aspects of the bookkeeping function. Properly matching the companys

needs with the applicants skills will greatly improve the success of the hiring process.

220.02 Applicants are identified through various sources, including referrals from employees,customers, suppliers, and business associates; unsolicited applications; employment agencies;

and advertisements. The sources used depend on how quickly the position must be filled andthe companys past success in attracting applicants.

220.03 Once applicants have been screened and interviewed, their past experience and skills,as presented on their resumes and disclosed during the interview process, should be verified.Two common techniques for verifying and evaluating skill levels include:

Reference checking.

Pre-employment testing.

Each technique is briefly discussed below.

Reference Checking

220.04 Applicants will typically provide a list of personal references and former employers thatthe company may contact. Although references may appear to be good sources of informationabout an applicant, the company should remember that:

Personal references are hand-picked by the applicant. Thus, the

company should expect to hear mainly positive comments aboutthe applicant.

Many federal and state employment laws have been enacted to

protect the rights of present and former employees. Often,employers are hesitant to provide candid information about formeremployees because of fear of a possible employment lawsuit.


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220.05 Information requested from former employers should concentrate on the applicantswork duties and performance, attendance record, dependability, cooperation, and other job-

related matters. The information should confirm what has already been provided by theapplicant.

Pre-employment Testing

220.06 To more objectively assess an applicants abilities, some companies require applicantsto take a skills test. If such tests are used, they should be given to all applicants and be relevantto the specific job. In other words, the skills tests should assess only those abilities that theapplicants will need for the position.

220.07 If the company is primarily looking for someone with strong data entry skills, moststate-sponsored employment commission agencies administer data-entry tests for a reasonablefee.

225 SUMMARY

225.01 To perform to the best of their abilities and to receive increased responsibility,accounting staff persons should have a good understanding of the entire bookkeeping process.Otherwise, expanded duties and advancement within the department often will be delayed.

225.02 Getting a big picture understanding of the bookkeeping process involvesunderstanding how the various financial records interact within the accounting system. Keyfinancial records include various source documents, summary journals, subsidiary ledgers,general ledger and financial statements. The accounting system starts with numerous sourcedocuments and continually processes and groups these transactions to ultimately producemonth-end financial reports.

225.03 Each accounting transaction generally falls into one of a handful of accountingprocesses or cycles. Common accounting processes and cycles include purchasing, accountspayable, and cash disbursements; sales, accounts receivable, and cash receipts; payrolls;

inventory and costs of sales; fixed assets and depreciation; and general ledger and financialstatements. Although the general steps performed in each of these processes may appearsimilar on the surface, the specific procedures performed are generally quite different. There arealso certain aspects of each process that are more crucial than others.

225.04 Although accounting staff persons may not have direct responsibility for internal

accounting controls, a basic understanding of controls is helpful for understanding whyaccounting procedures are performed in a certain way. This knowledge can also help controllersimprove the companys control environment when circumstances permit. The controls generallyfall into one of the following categories: segregation of duties, restricted access controls,document controls, processing controls, and reconciliation controls.

225.05 Finally, small businesses should ensure that applicants for bookkeeping positions havethe skills and experience needed for the position. Two common techniques for verifying andevaluating disclosed skills include reference checking and bookkeeping skills tests.


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Table of Contents


300 INTRODUCTION ................................................................................................... 3-1

305 SYSTEM CONSIDERATIONS ................................................................................ 3-2

.03 Credit Sales: Open Item vs. Balance Forward Systems ................................ 3-2

.07 Order-entry System ........................................................................................ 3-3

.08 Retailers: Point of Sale (POS) System .......................................................... 3-3

310 PROCESSING MAIL RECEIPTS ............................................................................ 3-4

.03 Opening the Mail ............................................................................................ 3-4

.04 Making the Deposit ........................................................................................ 3-5

.05 Applying Remittances to Customer Accounts ................................................. 3-5.06 Batch Daily Remittances before Processing .......................................... 3-5

.09 Apply Remittances to Customer Accounts Accurately ........................... 3-6.10 Enter Batches in a Batch Control Log .................................................... 3-6.11 Handling Remittance Exceptions ................................................................... 3-7

.12 Cash Discounts Taken .......................................................................... 3-7

.14 Unauthorized Deductions Taken ........................................................... 3-7

.16 Unmatched Remittances ....................................................................... 3-7

.17 Unidentified Remittances ...................................................................... 3-8

.18 Deposits or Advance Payments............................................................. 3-8

.19 Overpayments ....................................................................................... 3-8

.20 Small Dollar Differences ........................................................................ 3-8

.21 Returned Checks .................................................................................. 3-8.24 Reducing Future Remittance Exceptions ....................................................... 3-9

.27 Processing Debit or Credit Memos ................................................................. 3-9.29 Posting Receipts to General and Subsidiary Ledgers .................................... 3-9.30 Consider Backing up Files before Posting ............................................. 3-9.32 Post Each Batch Promptly ..................................................................... 3-10.33 Compare Cash Receipts Summary Journal to Batch

Control Log ........................................................................................... 3-10.34 Filing Remittance Documents ........................................................................ 3-10

315 PROCESSING OVER-THE-COUNTER RECEIPTS ............................................... 3-10

.03 Making the Store Deposit ............................................................................... 3-11

.06 Auditing the Daily Cash-register Report (DCR) ............................................ 3-11

.07 Sample DCR ......................................................................................... 3-11.09 DCR Audit Procedures .......................................................................... 3-13.10 Recording Store Receipts in the General Ledger ........................................... 3-13.13 Handling Credit Card Sales ............................................................................ 3-15

.15 Reconciling Deposited Credit Card Sales........................................... 3-15


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Table of Contents (Continued)


315 .16 Reconciling Electronically-transmitted Credit Card Sales..................... 3-15.19 Recording Chargebacks and Fees ........................................................ 3-16

.20 Filing the Retail Cash Receipt Documents ..................................................... 3-16

320 PROCESSING SALES INVOICES ......................................................................... 3-17

.04 Entering Sales Orders .................................................................................... 3-17.05 Batch Processing .................................................................................. 3-17.08 Online, Order-entry Processing ............................................................. 3-18

.09 Posting Sales Invoices ................................................................................... 3-18.10 Batch Processing .................................................................................. 3-18.11 Online, Order-entry Processing ............................................................. 3-18

.12 Filing the Sales Documents ........................................................................... 3-18

325 COMPLETING PERIOD-END ACTIVITIES ............................................................ 3-19

.02 Reconciling the Bank Accounts ...................................................................... 3-19.03 Who Should Perform the Bank Reconciliation and When? .................... 3-19.05 How to Reconcile the Bank Statement .................................................. 3-19

.08 Reconciling the Subsidiary Ledger to the General Ledger .............................. 3-22

.10 Reviewing the Accounts Receivable Aged Trial Balance................................ 3-22

.11 Making a Proper Period-end Cutoff ................................................................ 3-22

330 SUMMARY

Appendix

3A Cash Receipts Batch Cover Sheet ......................................................................... 3-27

3B Cash Receipts Batch Control Log........................................................................... 3-29

3C Cash Remittance Exception Log............................................................................. 3-31

3D Daily Cash-register Report (DCR) Form................................................................. 3-33

3E DCR Audit Checklist............................................................................................... 3-37

3F Sales Invoices Batch Cover Sheet.......................................................................... 3-39

3G Sales Invoices Batch Control Log........................................................................... 3-41

3H Bank Reconciliation Form....................................................................................... 3-43

3I Period-end Sales Cutoff and Reconciliation Form................................................... 3-45


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o SYSTEM CONSIDERATIONS

o PROCESSING MAIL RECEIPTS

o PROCESSING OVER-THE-COUNTER RECEIPTS

o PROCESSING SALES INVOICES

o COMPLETING PERIOD-END ACTIVITIES

300 INTRODUCTION

300.01 Processing cash receipts, and to a lesser extent sales invoices, are major activities ofmost small business accounting departments. Not only must accounting personnel handle anddeposit incoming cash promptly, but they must also process it accurately to effectively managethe companys cash flows and maintain good customer relations.

300.02 This chapter provides accounting personnel step-by-step guidance for processing cashreceipt and sales transactions, both in a traditional small business that extends trade credit andin a small retail business that receives cash over the counter. The chapter assumes the smallbusinesss accounting function is computerized.

300.03 The guidance in this chapter is useful to full-charge bookkeepers as well as accountingpersonnel involved in selected accounting and bookkeeping areas. The chapter helps existingcash receipts personnel fine-tune their processing activities and provides newly-hired or cross-trained employees with a solid foundation for processing cash receipts.

300.04 The chapter includes the following major sections:

System Considerations.Section 305 briefly discusses three aspects ofaccounting systemsthe type of accounts receivable subsidiary ledger,an order-entry system, and a retailers point of sale systemthat impacthow cash receipts are processed.

Processing Mail Receipts. Section 310 covers the processing ofcustomer remittances received through the mail. The section includesopening the mail, making the deposit, applying remittances to customeraccounts, handling remittance exceptions and credit memos, posting thetransactions, and filing the documents.

Processing Over-the-counter Receipts. Section 315 covers theprocessing of a retail businesss over-the-counter receipts. It includesmaking the deposit, auditing the daily cash-register report (DCR),handling credit card sales, and filing the documents.


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Processing Sales Invoices. Section 320 provides a brief overview ofsales invoice processing for those small business accountingdepartments that have responsibilities in this area. However, thisfunction is now frequently handled by order entry personnel outside theaccounting department.

Completing Period-end Activities.Section 325 discusses activities thatare performed after each month end in preparation for closing thegeneral ledger and preparing financial statements. Activities includereconciling the bank account and accounts receivable subsidiary ledger,reviewing the aged trial balance, and properly cutting off or endingmonth-end transactions.

305 SYSTEM CONSIDERATIONS

305.01 As mentioned previously, the chapter assumes that accounting personnel using thisGuide are working with a basic computerized accounting system. However, even though a

company is computerized, the nature of a businesss activities will sometimes dictate systemvariations unique to that type of business. Those system variations often impact how cashreceipt transactions are processed.

305.02 Three system variations that are covered in this section include:

Credit sales: open item vs. balance forward systems.

Order-entry system.

Retailers: point of sale system.

The first two generally apply to traditional businesses that extend trade credit, and the last typeapplies to retailers.

Credit Sales: Open Item vs. Balance Forward Systems

305.03 Most accounting systems offer businesses two options for tracking unpaid customerinvoices: the open item method (which is generally more costly to maintain) or the balanceforward method.

a. Open item method. The open item method tracks all open items foreach customer. Invoices are the primary method used to notify and billcustomers for purchases.

b. Balance forward method.The balance forward method keeps details ofonly the current periods activity and groups all other open items into asingle beginning balance amount. Statements are the primary methodused to notify customers of purchases.

305.04 Small businesses that recurrently sell goods (rather than services) to commercialcustomers typically use the open item method since commercial customers generally recordand pay for purchases using invoices (as opposed to statements). Retailers and other


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companies that sell to individual consumers or provide a regular service to individuals orcommercial accounts often use the balance forward method.

305.05 The open item method requires accounting personnel to apply remittances to specificunpaid invoices, whereas the balance forward method allows accounting personnel to applyremittances to the aggregate unpaid balance. If the balance forward system is used in the

wrong type of company, however, accounting personnel must constantly invest extensiveclerical time researching the composition of the beginning balance-forward amounts.

305.06 The discussion in this chapter focuses principally on the open item method since it isthe most common in small businesses, and its cash application process is more complex.

Order-entry System

305.07 Many small businesses today use an order-entry system for entering sales invoices.An order-entry system works similarly to a retailers point of sale system discussed below. Asan order is received from a customer (typically over the phone), it is entered into the onlinesystem by the order person and posted to the invoice register before taking the next order. In

contrast to a batch-processing mode, an order-entry process allows order personnel to accesscurrent inventory quantities and other information at any time.

Retailers: Point of Sale (POS) System

305.08 Small retailers have traditionally used a stand-alone electronic cash register to captureover-the-counter sales. Today, many retailers are converting to point of sale (POS) terminals toimprove processing efficiency. Since cash receipts processing and related transactions can beaffected by the type of system used, the following paragraphs briefly discuss and contrast thetwo types of systems.

Stand-alone electronic cash register. The traditional electronic cash

registers primary purpose is to classify cash receipts by type andprovide a total of each days sales transactions. The register requiresaccounting personnel to prepare manual journal entries to record eachdays sales transactions.

Point-of-sale (POS) terminal. A POS terminal is essentially a computerterminal disguised as a cash register. A key difference between thetraditional cash register and a POS is that a POS is typically linked to thecompanys accounting system (inventory, accounts receivable, andgeneral ledger). Thus, when individual sales are entered, the POSsystem updates the inventory records for each item sold. The POS alsogenerates daily journal entries that may be posted manually orautomatically to the companys general ledger.

305.09 The primary advantages of a POS system over a traditional cash register are that thePOS eliminates duplicate processing tasks and automates certain tasks (such as the cashregister closeout/reconciliation process) that were previously performed manually.


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310 PROCESSING MAIL RECEIPTS

310.01 Mail receipts processing is often the single most time-consuming task performed bysmall business accounting personnel. The process typically includes applying a high volume ofremittances against the related customer invoices and dealing with customers to resolvevarious remittance exceptions. If remittances are not applied accurately and promptly,

complaints will come quickly from both external customers and internal credit and collectionpersonnel.

310.02 This section covers small business processing of mail receipts. It includes a completestep-by-step process that begins with the task of opening the mail and ends with posting thecash receipt transactions to the general ledger and filing the related documents. Morespecifically, it covers each of the following tasks:

Opening the mail.

Making the deposit.

Applying remittances to customer accounts.

Handling remittance exceptions.

Reducing future remittance exceptions.

Processing debit or credit memos.

Posting receipts to general and subsidiary ledgers.

Filing remittance documents.

This section applies to small businesses that extend traditional trade credit to their customers.Retail businesses that receive over-the-counter receipts are covered in Section 315.

Opening the Mail

310.03 The first step in processing mail receipts naturally begins with opening the mail,controlling and safeguarding the receipts are the companys most important concerns at thisstage. When performing this function, small businesses should consider the followingrecommendations:

Use secretary/receptionist. Whenever possible, the company shouldassign someone with no other cash receipt or processing duties toreceive, open, and sort the mail. This practice improves the companysinternal controls by segregating the asset custody function from therecordkeeping function. In most small businesses, the secretary orreceptionist can fill this role.

Restrictively endorse checks. The secretary or receptionist shouldseparate customer remittances from other mail (junk mail, vendorinvoices, etc.) and immediately restrictively endorse all checks. In otherwords, the back of each check should be stamped with appropriate


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wording to preclude a lost or stolen deposit from being cashed. Typically,the stamp indicates that the check is For Deposit Only and includes thecompanys name and bank account number.

Forward remittance advices.The secretary/receptionist should forwardthe customer remittance advices (not the actual checks) to accounting

personnel. If remittance advices are missing or incomplete, copies of therelated checks should also be made and forwarded to accountingpersonnel.

Prepare duplicate deposit slips.The secretary or receptionist shouldprepare the original deposit slip along with a duplicate copy. The depositslip should typically list the amount and customer names for each checkincluded in the deposit. At a minimum, an adding machine tape of thecustomer checks should accompany the deposit. (Thesecretary/receptionist should retain the duplicate deposit slip and a copyof the adding machine tape for later comparison to the validated depositslip. They should then be forwarded to the accounting department.)

Making the Deposit

310.04 The next step in processing mail receipts consists of making the deposit. The followingare two aspects of making the deposit that small businesses should follow:

Make the deposit daily. Typically, an office manager or some othertrustworthy nonaccounting employee will take the deposit to the bank.Deposits should be made daily whenever possible. In addition, depositsshould be made before the banks daily cutoff time (say, 2:00 p.m.) inorder to receive credit from the bank for the deposit on that day.

Obtain and verify the validated deposit slip.The person making thedeposit should have the bank validate the deposit slip and return it to thesecretary/receptionist. The secretary/receptionist should compare thevalidated deposit slip amount with the duplicate deposit slip amount toensure all monies were actually deposited. The deposit slips should thenbe forwarded to the accounting personnel.

Applying Remittances to Customer Accounts

310.05 Accounting personnel use the remittance advices and other supporting documentationreceived from the receptionist/secretary to apply the receipts to each customers outstandingbalance. The process can become tedious and time consuming, particularly when remittanceexceptions are common. The following paragraphs discuss the general cash applicationprocess, followed by Paragraphs 310.11-.26 that show how to deal with various remittanceexceptions.

310.06 Batch Daily Remittances before Processing. Batch processing is the most commonapproach used by small businesses for applying remittances to customer accounts. Afterreceiving the daily remittance advices from the secretary/receptionist, accounting personnelsimply assemble the remittances in a manageable bundle and prepare an adding machine tapeof the total remittances (batch control total). Limiting each batch to between 25 and 50


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receipts will help reduce the time spent researching input errors.

310.07 The batch control totals purpose is to help ensure that all remittances were enteredaccurately. After entering each batch of remittances into the computer, the system will typicallycalculate a batch control total. If the manual and computer-generated totals agree, the dataentry person gains some assurance that remittances were accurately entered. In somesystems, the data entry person must enter the manually-calculated batch control total into the

computer and may not finish the data entry until the total agrees with the system-generatedtotal. Accounting personnel should then agree the batch-total to the cash receipts journal andthe related validated deposit slip.

310.08 Cash application persons often use a batch cover sheet to document batch processingsteps. The cover sheet contains a unique batch identifying number and has space to documentsteps taken in processing the batch and recording the batch total. The batch cover sheet isphysically attached to the bundle of remittance advices. Appendix 3A presents a Cash ReceiptsBatch Cover Sheet that may be used by cash application persons.

310.09 Apply Remittances to Customer Accounts Accurately. Accurately enteringremittances is crucial to maintaining the integrity of the accounts receivable subsidiary records.

Batch control totals help ensure that all remittances were accurately entered into the system.However, batch control totals generally do not provide assurance that receipts were applied tothe proper invoices or even that payments were applied to the proper customers account. Thecash application process varies depending on whether the small business uses a balanceforward or an open item subsidiary ledger. (The two systems are also briefly discussed atParagraphs 305.03-.06).

Balance forward system.The cash application process is much simplerfor companies using balance forward systems. The data entry personsimply calls up each customers account and applies the payment in totalto the outstanding account balance (not to specific invoices).

Open item system. The cash application process is more difficult forcompanies using an open item aged trial balance. In this case, the dataentry person must call up the specific customers account and match uppayment amounts to specific outstanding invoices. In most smallbusinesses, the matching process is performed manually, but somecomputer programs now include an automatic application feature thatallows the system to apply a large percentage of remittancesautomatically. For example, by simply entering the customer number andcash receipt amount, the system can search the customers file and applythe payment to the appropriate outstanding item.

Unfortunately, the cash application process is often not nearly as straightforward as the above

discussion may imply. Paragraphs 310.11-.23 discuss in more detail the various exceptions anddifficulties that tend to crop up when applying cash receipts.

310.10 Enter Batches in a Batch Control Log.Once data entry is complete, the data entryperson should record the batch control total (see Paragraphs 310.06-.08) and selected otherprocessing information into a batch control log. Typically, the data entry person records the


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data-entry date, the person who entered the batch, and the batch control total. Accountingpersonnel subsequently compare the control log to the cash receipts journal to ensure allentered receipts were posted1 (see Paragraph 310.33). Appendix 3B contains a Cash ReceiptsBatch Control Log that cash application persons may use.

Handling Remittance Exceptions

310.11 If payments from customers always matched up with specific outstanding invoices,remittance processing would be simple. Unfortunately, remittance exceptions are common.Cash application persons must clearly identify remittance exceptions for prompt follow-up andresolution. Otherwise, unresolved exceptions will quickly grow, reducing the usefulness of theaccounts receivable aged trial balance for collection purposes. The following paragraphsdescribe how cash application persons should handle common remittance exceptions.

310.12 Cash Discounts Taken. Invoices are typically recorded at their gross amounts, evenif the company offers customers an early payment discount. Thus, when customers claim adiscount when remitting payment, the difference between the gross invoice amount and thepayment must be adjusted off.

310.13 Accounts receivable systems typically allow cash application persons to write off cashdiscounts taken (often even unearned discounts) as part of cash application processing. Thediscount amount is simply designated as a discount, and the system credits the invoice amountand debits the applicable expense account. When customers take unearned discounts,however, cash application persons should be given clear guidance by the company on how tohandle the discounts. For example, the company should instruct cash application employeesabout whether it will allow unearned discounts to be granted and whether or not customersshould be contacted when discounts are taken improperly.

310.14 Unauthorized Deductions Taken.Besides taking unearned discounts, customers willfrequently initiate other claims by deducting the amounts from the check. Common claimsinclude freight disputes, quantity shortages, and price adjustments.

310.15 Some accounts receivable systems will allow cash receipts personnel to adjust thecustomers account during the cash application process and make the corresponding generalledger adjustment. To maintain control over unauthorized deductions, however, adjustmentsgenerally should not be made until a properly approved debit or credit memo has beenprepared (see Paragraphs 310.27-.28). Thus, cash application personnel should post only thenet payment amount against the related invoice. The remaining portion of the invoice shouldremain open until the claim can be properly resolved.

310.16 Unmatched Remittances.Customers will frequently send payments without indicatinghow the payment should be applied. Remittances that cannot be readily matched tooutstanding invoices generally should be temporarily posted to the customers account as an

unapplied credit (payment on account). In other words, personnel should not apply the paymentto specific invoices until the customer is contacted and indicates how the payment should beapplied. At that time, accounting personnel should then match the unapplied credit to theappropriate outstanding invoices.

1The term posting, as used in this chapter, means instructing the computer to update the

accounting records (summary journals, subsidiary ledgers, or general ledger) for transactionsentered during batch processing. Prior to posting, transactions entered during batchprocessing remain in a temporary suspense file.


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310.17 Unidentified Remittances.Occasionally, payments will be received from companiesthat do not appear to be customers. For example, if a customer is a subsidiary of anothercorporation, a cash application person might have difficulty identifying payments made by theparent company on behalf of the subsidiary. These remittances should generally be postedtemporarily to a dummy customer account in the aged trial balance until cash applicationpersons identify the customer. Once identified, the posting to the dummy account should be

promptly reversed and posted to the proper customers account.

310.18 Deposits or Advance Payments.Customers sometimes will make advance paymentsor deposits. These payments should be handled similarly to unmatched remittances. Cashapplication persons should temporarily post them to the customers account as an unappliedcredit (payment on account) until the related invoice amount is entered.

310.19 Overpayments. Customers will occasionally overpay an invoice. When this occurs,cash application persons should apply the payment against the invoice and designate theremaining overpayment as an unapplied credit (payment on account) until the customer can becontacted.

310.20 Small Dollar Differences.Customers will often pay amounts that differ slightly fromthe companys recorded invoice amount. In those situations, cash application persons shouldbe authorized by the company to write off any insignificant differences while processing theremittances. In other words, the cash application person should be able to directly post thewrite-off adjustment while in the remittance processing mode without having to prepare a

journal entry or obtain further approvals. The company should set a preapproved dollar limit(say, differences of less than $1) for direct write-offs.

310.21 Returned Checks. Checks that are returned from the bank because of insufficientfunds represent negative receipts and generally require special treatment by cash applicationpersons. Cash application persons should typically process returned checks separately. Inother words, they should not be included with the normal cash receipts batch processing.

310.22 Banks typically notify companies of returned checks either by phone or through themail. When the company is notified of a returned check, it can request the bank to resubmit thecheck a second time for collection. (This request can be automatic. In other words, thecompany can instruct the bank to return the checks only after they have been sent through thebank collection system twice.) If the bank is unable to collect the check, the company thenprocesses and records the returned check.

310.23 The exact method the company uses to process a returned check will vary dependingon the system. Some systems only permit the company to enter a returned check as a negativecash receipt (similar to entering a debit memo). Alternatively, systems that maintain atransaction history file of paid invoices and cash receipts will often allow cash applicationpersons to call up the original check posting and effectively reverse it. In other words, theoriginal invoice is reinstated (debit to accounts receivable) and cash is credited. In all cases,however, cash applications persons must enter the returned checks through the accountsreceivable subsidiary ledger to ensure the general ledger and subsidiary ledger remain inbalance.


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Reducing Future Remittance Exceptions

310.24 Not only should small businesses establish procedures to ensure that remittanceexceptions are resolved timely, but they should also strive to minimize the number of futureexceptions. To correct a problem, however, management must first know the problems cause.When cash application exceptions arise that require further follow-up and action, the cash

application person should immediately document them on a log. The log will help ensure theexceptions are promptly resolved and will provide information to help reduce future exceptions.

310.25 Cash application persons may use the Cash Remittance Exception Log at Appendix3C for this purpose. The log will quickly show exceptions that have not been resolved byinternal action or follow-up with the customer. In addition, the log reveals both the type andfrequency of exceptions.

310.26 Once the exceptions have been identified in the log, determining the cause is generallystraightforward. Problems can be caused internally, such as by pricing or other clerical errors,or externally, such as when customers do not follow sales terms and policies or fail to includeremittance information with payments. In either case, educating the appropriate company

employees and customers will frequently correct the problems and reduce future exceptions.

Processing Debit or Credit Memos

310.27 The cash application process is clearly a common source for identifying remittanceexceptions that require adjustments to customer accounts. Credit, collection, and salespersonnel are another common source in small businesses. Regardless of the source,however, the company should require that all proposed adjustments be subject to anappropriate review and approval process.

310.28 Thus, cash application and other data entry persons normally should not adjustcustomer accounts during processing without first obtaining a properly approved debit or credit

memo. In addition, appropriate supporting documentation, such as receiving reports indicatingreturned goods, should accompany all debit or credit memos before processing them. Thespecific policies and procedures will generally be set by the owner or controller.

Posting Receipts to General and Subsidiary Ledgers

310.29 After entering remittances and other adjustments into the system, the cash applicationperson must instruct the computer to post the individual transactions to the accounts receivableledger and cash receipts summary journal. Depending on the system, the summary journaltotals will subsequently be posted to the appropriate general ledger accounts automatically orthrough a manual journal entry.

310.30 Consider Backing Up Files before Posting. Depending on the accounting softwarefeatures and the number of data entry persons, accounting personnel may wish to back upaffected data files before posting transactions. This backup procedure is a safety measure incase the computer was to fail during the posting process. If the system fails during posting, itsometimes becomes difficult determining where the system left off when it failed.

310.31 However, this backup procedure may not be necessary depending on thecircumstances. Backing up is generally not needed because of recovery procedures in manynewer software packages. These recovery procedures allow the system to restart processing atthe precise point it left off when the system failed.


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310.32 Post Each Batch Promptly. Cash application persons generally should instruct thecomputer to post batches after each batch is processed or at least at the end of each day.Frequent posting will ensure the subsidiary ledger and general ledger reflect the most recentactivity. Also, if the computer system is subject to power outages or other system failures thatmay damage existing files, frequent posting will help ensure previously entered data is not lost.

310.33 Compare Cash Receipts Summary Journal to Batch Control Log. After posting the

cash receipts, the cash remittance person should record in the cash receipts batch control log(see Paragraph 310.10) the number of the cash receipts journal to which the batch was posted.That person should also agree the totals of posted batches (per the cash receipts batch controllog) to the cash receipts journal. If they agree, the cash application person knows that all cashreceipts entered were posted to the cash receipts journal. In that case, that person shoulddocument the agreement in the last column of the cash receipts batch control log. If the totalsdo not agree, the difference must be located and corrected.

Filing Remittance Documents

310.34 After remittance batches have been entered and posted, they should typically be filedchronologically in a filing cabinet or storage box by week or month, depending on the volume.

Each drawer or box should clearly show which days are included to allow easy retrieval whenlater questions arise. If the batches are initially filed in filing cabinets, they should be transferredto storage boxes annually. Each box should be clearly labeled with a destruction date.

315 PROCESSING OVER-THE-COUNTER RECEIPTS

315.01 The small business accounting departments role in processing retail over-the-counterreceipts is often very different from its role in processing mail receipts. The differences stemprimarily from how the customers pay for their purchases. Retail customers typically makepurchases by using cash, checks, or credit cards, compared to commercial customers whotypically use trade credit to purchase goods. Also, the retailers accounting department is often

in a location physically separate from the retail store(s), which usually requires store personnelto perform some of the traditional bookkeeping activities.

315.02 This section discusses the small business accounting departments role in processingover-the-counter receipts. It covers the following key areas:

Making the store deposit.

Auditing the daily cash-register report (DCR).

Recording store receipts in the general ledger.

Handling credit card sales.

Filing the retail cash receipt documents.


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Making the Store Deposit

315.03 In contrast to commercial businesses that receive mail remittances from customers ata central location, retailers typically receive payment from customers at a retail store that isphysically located away from the companys accounting department (corporate o ffice). Thus,the receiving and depositing of cash is often handled by store personnel. in addition, most retailbusinesses require the store cashier to reconcile cash per the cash register at least dailybefore making the deposit.

315.04 Anytime a cash register is closed out, either because of a shift change or store closing,the cashier typically reconciles the actual cash with the expected cash. In other words, thecashier counts the cash in the register and reconciles it to the registers recorded sales andother transactions. The cashier usually documents this reconciliation process on a formcommonly referred to as a daily cash-register report (DCR).

315.05 After completing the DCR the store manager (or other designated employee) typicallycompletes a deposit slip, takes the deposit to the bank, and receives a validated deposit slip.The store manager then forwards the DCR, validated deposit slip, cash register tape, and anyother related documents (such as sales receipts, cash withdrawal vouchers or invoices, etc.) to

the accounting department for processing.

Auditing the Daily Cash-register Report (DCR)

315.06 The DCR often serves as the primary document used by accounting personnel tocontrol store cash and record daily sales transactions. Because of its importance in a retailenvironment, accounting personnel typically verify its accuracy by auditing it. The followingpresents a sample DCR and typical audit procedures.

315.07 Sample DCR. As mentioned previously, a DCR simply reconciles actual cash in theregister with expected cash. Any unresolved differences are shown as a cash over or short,as reflected in Part A of the sample DCR form at Exhibit 3-1.

315.08 The DCR consists of three basic parts. The first part is the actu