Definition of Cash Inventory and Cash Concept in Accounting

Definition of Cash Inventory:

Cash inventory is a periodic examination and review process of actual cash balances present in the organization's treasury, comparing them with balances recorded in accounting books to ensure accuracy and precision of financial data.

Cash inventory includes counting and examining actual cash present including paper and metal currencies, plus received and undeposited checks, and other cash items.

Cash Concept in Accounting:

Cash in accounting is a current asset account representing immediately available cash in the organization, considered the highest liquidity asset in the statement of financial position.

The cash concept includes all forms of cash stored within the organization such as local and foreign currencies and received checks, excluding bank deposits which are recorded in a separate account.

Objectives and Timing of Cash Inventory

Cash Inventory Objectives:

• Verify balance accuracy: Match actual cash with accounting records to ensure financial data accuracy
• Detect violations: Identify accounting errors, manipulation, theft, and potential embezzlement
• Enhance internal control: Ensure implementation of security and protection procedures for cash
• Evaluate cashier performance: Review responsible person's compliance with financial procedures and policies
• Prepare financial reports: Provide accurate data for preparing financial statements and periodic reports
• Comply with standards: Apply audit requirements and accounting standards

Cash Inventory Timing:

• Daily inventory: End of each business day to monitor daily cash movement
• Weekly inventory: Each week-end for periodic review and continuous control
• Monthly inventory: End of each month for monthly reports and reconciliations
• Annual inventory: End of fiscal year for final financial statements
• During changes: Handover to new cashier to ensure safe transfer
• Surprise inventory: Without prior notice to test internal control effectiveness
• When suspicious: When discovering indicators of violations or errors

Cash Inventory Procedures and Steps

How is cash counted in the cash box?

Steps to follow for cash inventory:

• Form inventory committee from independent members with cashier present as witness
• Stop all cash operations and ensure no ongoing transactions
• Prepare necessary tools like inventory forms, money counting machine, and required documents
• Open safe or cash box with all committee members and cashier present
• Count all banknotes and coins by different denominations
• Record actual values for each currency denomination separately (100 SAR, 50 SAR, 20 SAR, etc.)
• Examine received and undeposited checks and verify their validity and dates
• Review temporary disbursement and receipt vouchers not yet recorded
• Calculate total actual cash present in the cash box
• Compare actual results with balance recorded in accounting books
• Identify and document any differences between actual and book balance with reasons
• Prepare detailed inventory report including all results and observations
• All committee members and cashier sign the inventory report
• Submit report to senior management with necessary recommendations to address violations

Determining and Reconciling Cash Account Balance

Determining Cash Account Balance:

• Review book balance: Examine last balance in cash account from general ledger and verify posting accuracy
• Determine actual balance: Calculate total actual cash from count results including currencies and checks
• Inventory pending operations: Identify unrecorded receipts, deferred operations, and amounts in transit
• Review records: Examine cash journal to ensure complete recording of all operations

Reconciling Differences:

When actual cash exceeds book balance:

• Entry: From Cash Account to Miscellaneous Revenue or appropriate account based on increase reason
• Verify increase source (unrecorded operation, recording error, unknown source amount)

When actual cash is less than book balance:

• Entry: From Cash Shortage Account (or Cashier Account) to Cash Account
• Analysis: Determine shortage reason (theft, counting error, incorrectly recorded operation)

Detailed Reconciliation Procedures:

• Identify causes: Comprehensive analysis of difference sources whether accounting errors, unrecorded operations, or violations
• Prepare reconciling entries: Record appropriate accounting entries to correct errors and reconcile differences
• Update balances: Adjust cash account balance to reflect correct actual position
• Documentation and procedures: Keep count reports, entries, and correspondence with disciplinary action when necessary
• Follow-up and control: Establish preventive procedures to prevent difference recurrence and enhance internal control

Cash Box Funding Sources

Cash box is funded through several sources:

• Bank withdrawals: Transfer funds from company bank accounts to cash box via checks or bank transfers for necessary liquidity
• Cash receipts: Money collected directly from cash sales or services provided in cash from customers
• Accounts receivable collection: Recovery of amounts due from customers in cash when paying invoices or obligations
• Advances and loans: Obtaining short-term financing from banks or financial institutions and depositing in cash box when needed
• Payment refunds: Recovery of amounts paid in advance for expenses not fully used or returns from suppliers
• Internal transfers: Moving funds from other company branches or departments or from various internal accounts
• Other cash settlements: Various amounts from compensations, returns, or settlements with external parties

Can Cash Balance Appear as Credit Balance?

No, cash balance should not be credit under normal circumstances as it is an asset account.

Exceptional Cases for Credit Balance:

• Accounting error in recording
• Disbursement exceeding available balance
• Temporary cash return operation
• Error in posting entries

Treatment:

• Review operations and correct errors
• Reconcile account to return to debit
• Transfer balance to appropriate account

Credit balance indicates a problem requiring immediate treatment.