MAT 200 Module 7 Cash and Internal Control Example

Trust, Then Check: A Bank Reconciliation and Cash Controls for a Growing Bike Shop

Student Name

Business Administration Program, Aspen University

MAT 200: Principles of Accounting I

Instructor Name

Month Day, Year

Trust, Then Check: A Bank Reconciliation and Cash Controls for a Growing Bike Shop

By July, Prairie Spoke Cycles had five employees and busy weekends. Two things prompted a closer look at cash. The shop's records showed $1,060 more in the bank than the bank statement did, and the register came up short on eleven days in the month, by $1,140 in total. Sam Whitaker asked the bookkeeper, Lena Ortiz, to reconcile the bank account and review how cash is handled. This paper presents the reconciliation, the entries it requires and a plan to control cash.

The Bank Reconciliation

A reconciliation accounts for every dollar of difference between what the bank says the shop has and what the shop's own ledger says. Some differences come from timing: deposits the bank has not yet recorded and checks that have not yet cleared. Others come from items the business has not yet recorded, such as fees, or from errors on either side.

Entries the Reconciliation Requires

Lena recorded three entries. The $35 fee: debit Bank Service Charges, credit Cash. The returned check: debit Accounts Receivable for $375, credit Cash, so the shop can collect from the customer. The recording error: debit Accounts Payable for $360, credit Cash, correcting the understated payment. Deposits in transit and outstanding checks need no entries, because the shop recorded them correctly; the bank will catch up. Lena will check that the July 31 deposit appears on the August statement within two days and follow up on any outstanding check more than sixty days old, since a check that never clears may have been lost or never sent.

The Register Shortages

The register shortages were not random. Nine of the eleven short days fell on shifts worked by one part-time clerk, and the point-of-sale system showed that clerk voiding three times as many sales as anyone else, often cash sales of accessories after the customer had left. The evidence suggests a problem but does not prove theft; voids can also come from honest mistakes or a confusing system. The point-of-sale system was installed in May with little training, and two other clerks said they sometimes void and re-ring a sale when they press the wrong key. Any review has to separate those habits from deliberate removal of cash.

Why Small Shops Are Exposed

Hess and Cottrell (2016) explained that small businesses tend to suffer larger fraud losses relative to their size than large ones, because they have fewer employees to separate duties, fewer formal controls and often an owner who trusts staff personally. They recommended practical measures within a small firm's reach: assessing where fraud could occur, separating key duties where possible, having the owner review transactions, requiring employees to take vacations, conducting surprise checks and setting a clear tone that fraud will not be tolerated.

Kramer (2015) studied fraud in small businesses and found that owners commonly relied on trust in long-standing or likable employees in place of controls, and that this trust created opportunity. The title of his article captures the lesson: trust, but verify.

Doyle et al. (2007) studied firms that disclosed material weaknesses in internal control and found such problems clustered in companies that were small, newly formed, short of money, complicated, expanding fast or in the middle of a reorganization. Prairie Spoke is small, young and growing quickly, the profile in which controls tend to lag behind the business.

Cash Controls for Prairie Spoke

The plan separates the handling of cash from its recording. Clerks run the register; Lena records sales from the system's reports; Sam reviews and signs the monthly reconciliation. Voids above $20 require a manager's code. Each register is counted at the end of every shift by the clerk and a second employee, and differences over $10 are noted the same day. Cash goes to the bank daily. Sam receives the bank statement directly.

Controls Over Other Cash

The register is not the only place cash moves. Rental deposits are collected on a card terminal and refunded when bikes return; refunds above $100 will require a manager's approval, since false refunds are a common way to take money that leaves no shortage in the drawer. Supplier payments go out through the bank's online system, and Sam will approve every payment above $1,000, with Lena able to prepare but not release payments. A small petty cash fund of $200 for parts runs and coffee is kept in a locked box, replenished only against receipts. Each of these controls separates the person who handles or requests money from the person who approves or records it.

The Cost of Controls

Controls take time, and a small shop cannot afford many. The plan adds about fifteen minutes a day for shift counts and two hours a month for Sam's reviews. Against that, the July shortages alone were $1,140, and Hess and Cottrell note that small business frauds often run for long periods before discovery, so losses compound when no one is checking.

Handling the Clerk Fairly

Sam and Lena will meet the clerk, show the void reports and ask for an explanation before drawing conclusions. The new void approval rule applies to everyone, so no one is singled out by the change itself. If the explanation does not hold up, Sam will follow the shop's written discipline policy and consult the shop's attorney before any accusation is made, since a mistaken accusation would be unfair to the clerk and costly to the business.

Conclusion

The reconciliation corrected three items and brought both balances to $58,710. Hess and Cottrell, Kramer and Doyle, Ge and McVay show why a small, fast-growing shop is exposed, and the control plan separates duties, makes the owner a reviewer and handles the shortages fairly.

References

Doyle, J., Ge, W., & McVay, S. (2007). Determinants of weaknesses in internal control over financial reporting. Journal of Accounting and Economics, 44(1-2), 193-223. https://doi.org/10.1016/j.jacceco.2006.10.003

Hess, M. F., & Cottrell, J. H., Jr. (2016). Fraud risk management: A small business perspective. Business Horizons, 59(1), 13-18. https://doi.org/10.1016/j.bushor.2015.09.005

Kramer, B. (2015). Trust, but verify: Fraud in small businesses. Journal of Small Business and Enterprise Development, 22(1), 4-20. https://doi.org/10.1108/JSBED-08-2012-0097