Question

During his review of one of the intern's work, he discovered that an accountant was entering transactions without any supporting documentation.

Another intern was erroneously reversing all of the entries related to cash, by debiting it for decreases and crediting it for increases. When asked why he was doing this, he mentioned that his personal checking account register showed a debit for decreases/withdrawals and a credit for increases/deposits.

A third intern questioned the need to have two separate entries for every transaction, claiming that it duplicates the work for no apparent reason. "If we are paying a bill, why can't we just show the cash decrease?", he asked.

Discuss the following:

1. How would you respond to the first intern regarding the need for supporting documentation?
2. How would you respond to the second intern regarding the increases and decreases to cash? Is he correct?
3. How would you respond to the third intern regarding the need for multiple entries for each transaction?

Answer 1

Solution

Response to the first intern

Every transaction must be supported with documents (eg: invoice) due to the following reasons

1) It is an evidence to prove the validity of the transaction. It helps in proving that the transaction has actually taken place.

2) It provides all the necessary information about the transaction such as its nature, value, parties involved etc

3) It would be required at the time of audit.

4) It would act as an evidence if in case any suit is filed against the entity.

Response to the second intern

In case of real accounts, the golden rule of accounting is

Debit what comes into the business and credit what goes out of the business.

Cash account is a real account. It is an asset. Therefore in case of a business entity the cash account is to be debited when there is an increase (debit when cash comes in) and it is to be credited when there is a decrease (credit when cash goes out).

When we deposit cash in a bank or a financial institution, it would be a debit entry for them as cash is coming into their business. But it is a liability for them as the money does not belong to them. It belongs to the depositor. Therefore the depositor's account is credited. That is why a credit entry appears in the personal checking account register when cash is increased or deposited in the bank. Similarly a debit entry appears in the personal checking account register when cash is withdrawn.

Response to the third intern

With single entries made in the books of accounts, the chances of occurrence of errors is very high. Adoption of double entry system in accounting helps in reducing the errors. It helps in making the accounting method standardized and enhances the accuracy of the accounts.