OCW041: Managing Cash

Cash Controls

Cash internal controls is a system used to promote accuracy, prevent theft, and ensure a business has enough cash to pay its debts.

Learning Objectives

Explain how internal cash controls benefit a company

Key Takeaways

Key Points

  • Internal controls assure achievement of an organization’s objectives in operational effectiveness and efficiency, reliable financial reporting, and compliance with laws, regulations, and policies.
  • According to the Committee of Sponsoring Organizations of the Treadway Commission (COSO), internal control has five components: the control environment, risk assessment, information and communication, control activities, and monitoring processes.
  • Businesses will generally be required to perform an audit at least once a year on all of its financial reports and internal controls, including those controls associated with cash.
  • Three common types of internal controls for cash include bank reconciliations, voucher systems, and electronic funds transfers (EFT).

Key Terms

  • electronic funds transfer: the transfer of money from one account to another, either within a single financial institution or across multiple institutions, through computer-based systems
  • internal controls: In accounting and auditing, internal control is defined as a process affected by an organization’s structure, work and authority flows, people and management information systems, designed to help the organization accomplish specific goals or objectives [1]. It is a means by which an organization’s resources are directed, monitored, and measured. It plays an important role in preventing and detecting fraud and protecting the organization’s resources, both physical (e.g., machinery and property) and intangible (e.g., reputation or intellectual property such as trademarks).
  • internal control: a process affected by an organization’s structure, work and authority flows, people and management information systems, designed to help the organization accomplish specific goals or objectives

Every business should have internal controls regarding its financial activities. If designed well, internal controls can prevent theft and fraud. They also ensure that a business’s financial statements are accurate.

Balance Sheet: Internal controls are vital to ensure that financial statements, such as balance sheets, are accurate.

While internal control should be designed for every aspect of a business’s operation, the controls for cash are arguably among the most important. Since cash is the most liquid asset and the easiest for people to convert for their own needs, it is often the easiest thing to steal or misreport. Therefore, the internal controls associated with cash must be more stringent.

Goals for Internal Cash Controls

  • Check that the business’s actual cash balances equal what is recorded in its financial records.
  • Ensure that there is enough cash available to pay a business’s debts on time.
  • Prevent the business from having “idle funds”—more cash than is necessary to function. These funds can instead by invested for higher return.
  • Prevent theft or fraud.

Five Elements of Internal Controls

According to the Committee of Sponsoring Organizations of the Treadway Commission (COSO), internal control has five components:

  • The Control Environment. Every business is different. A business comprised of five people will demand different controls than a company with 500 people. Prior to establishing any set of internal controls, you should consider the business’s management philosophy, the integrity of the employees, and the legal requirements established by the state and federal government.
  • Risk Assessment. Next, you should consider how a business’s cash is at risk. Are large amounts of cash kept where employees have access to it? Who is responsible for receiving and depositing cash? Who is responsible for giving cash to settle debts? These are the types of questions that address what possible risks a business may face when it comes to cash.
  • Control activities. Control activities are steps that a business takes to minimize risks. Examples of control activities include having different employees being responsible for different parts of the transaction. An example of a control activity would be having one person selling the product, another person receiving the money from the sale, and a third person checking to make sure that the agreed sales price equals what was deposited.
  • Information and communication. Control activities must be designed and then executed by relying on information to be communicated between the people who control different aspects of the transaction. To minimize errors and fraud, the correct information must flow to the right people in a timely manner.
  • Monitoring. The entire process must be reviewed by upper level management to ensure that every person is complying with their responsibilities. It is also generally required that the business audits its books and review its internal controls at least annually.

Common Cash Controls

  • Bank Reconciliations: A process where the cash accounts on a business’s books are regularly checked against bank statements.
  • Voucher System: A system focused on documenting every aspect of every transaction to ensure that all required payments are made and are only made once.
  • Electronic Funds Transfer (EFT): By using services that transfer funds automatically, such as through PayPal, a business can minimize the number of people who have access to its funds. These types of transfers also tend to generate documentation showing when the transaction was made and with whom.

Using a Bank for Control

A bank is a good cash control because it limits employees’ access to company assets and provides documentation on withdrawals and deposits.

Learning Objectives

Describe why a bank is one of the best internal controls a business can use

Key Takeaways

Key Points

  • Internal controls are meant to ensure that a business’s assets are protected, that its financial data is accurate, and to ensure efficiency.
  • Most banks keep “signature cards” on hand for business accounts so its tellers are aware of who can sign checks to withdraw funds. All other individuals are prevented from withdrawing cash from the business’s account.
  • The bank generally sends the business a monthly statement summarizing the activity related to cash. The statement will generally also include the documentation related to each transaction.

Key Terms

  • control: A security mechanism, policy, or procedure that can counter system attack, reduce risks, and resolve vulnerabilities, synonymous with safeguard and counter-measure.

Money Control through a Bank

Using a bank is one of the best internal controls on a business’s cash. Internal controls are meant to ensure that a business’s assets are protected, that its financial data is accurate, and to ensure efficiency. For cash, this generally requires that the people with the ability to obtain a business’s cash are limited to a few select individuals and that each transaction is recorded in detail. The documents regarding each transaction should list when each deposit or withdrawal took place, who initiated the transaction, and how much cash was involved.

Deutsche Bank: Keeping money in a financial institution, such as Deutsche Bank, can provide a critical control over a business’s cash.

As an independent third party, a bank is less susceptible to schemes by a business’s employees to steal funds. Since a bank holds a business’s funds, it provides a physical barrier preventing employees from accessing the cash. Most banks keep “signature cards” on hand for business accounts so its tellers are aware who can sign checks to withdraw funds. All other individuals are prevented from withdrawing cash from the business’s account.

Banks generally require that every deposit is accompanied by a signed and dated deposit slip. Every withdrawal must be paired with a signed and dated check. These documents are kept by the bank to resolve any disputes that may arise regarding a transaction.

The bank generally also sends the business a monthly statement that summarizes the activity associated with the account. This statement will list all deposits and withdrawals. It will also include a copy of each transaction’s documentation. Generally, the person in charge of the business’s books will receive this documentation and compare it to the business’s own records. If there are any differences between the business records and the bank’s, the company can use the documentation enclosed with the statement to determine where the discrepancy is and contact the peopled involved with the questionable transactions.

Reconciling Cash Accounts and Bank Statements

A bank reconciliation is an internal control that ensures that the cash in its accounts equals what it has recorded in its books.

Learning Objectives

Describe how a company uses a bank reconciliation as an internal control

Key Takeaways

Key Points

  • Bank reconciliations are necessary because legitimate transactions that a business has recorded in its books might not be listed on its bank statements and vice versa.
  • A bank reconciliation consists of a book balance column and a bank balance column. One column is adjusted by adding all of the legitimate transactions that either the bank statement or books do not show. The reconciliation is complete when the two columns equal each other.
  • When a legitimate transaction that was not recorded in the books is discovered, it must be added by recording a journal entry.

Key Terms

  • Bank Reconciliation: A process that explains the difference between the bank balance shown in an organization’s bank statement, as supplied by the bank, and the corresponding amount shown in the organization’s own accounting records at a particular point in time.
  • journal entry: A journal entry, in accounting, is a logging of transactions into accounting journal items. The journal entry can consist of several items, each of which is either a debit or a credit. The total of the debits must equal the total of the credits or the journal entry is said to be “unbalanced. ” Journal entries can record unique items or recurring items, such as depreciation or bond amortization.
  • bank statement: a communication from a bank to a person holding an account in that bank, usually issued monthly, detailing the value of the holdings in that account and the effects of all transactions occurring with respect to that account

A bank statement only reflects a specific period of time, such as one month. However, it takes the banks time to prepare the statement and send it out. Therefore, while a bank may prepare a statement for the month of October, a business might not receive it until a week later.

As a result, a bank statement will generally not reflect the amounts that a company has on its own books. This can be due to a few reasons. The company could have issued several checks prior to the end of the period, but the check holders had not cashed the check. The business could have also received some cash amounts prior to the end of the period covered by the statement, but was unable to deposit those amounts until after the period ended. The differences could also be due to mistakes, either by the bank or in the company’s books. The differences could also be due to something more troublesome, such as theft.

A bank reconciliation is a process that explains the difference between the bank statement on the amount shown in the organization’s own financial records. This process is important because it ensures that any differences are due to the timing of payments and not because of a mistake or theft.

Reconciliation Process

A bank reconciliation consists of two columns; one for the book balance, the other for the bank balance. The person reconciling the accounts then adjusts one column by adding deposits that had not yet been recorded and subtracting checks and other outlays that had not yet been cashed when the statement had been prepared. The reconciliation is not complete until the adjusted column equals the unadjusted column.

There may be some cases where the process reveals a legitimate transaction that was not recorded in the books. When that occurs, the person responsible for the business’s books must record the transaction using a journal entry.

Cash: Due to the amount of time between when a bank statement is prepared and when it is received by a business, the document may not accurately reveal what the business actually has in terms of cash. This is why reconciling the bank statement is necessary.

Basics of Cash Management

A company manages its cash primarily through the use of a voucher system and bank reconciliations.

Learning Objectives

Explain how a voucher system helps a company manage their cash

Key Takeaways

Key Points

  • A voucher system is used for monitoring cash payments.
  • A voucher system consists of vouchers, an unpaid voucher file, a paid voucher file, a voucher register, and a check register.
  • Before marking a voucher as paid, the person in charge of the system should check the transaction’s corresponding documentation, which generally includes a purchase order, invoice, and receiving report.
  • Deposits are generally monitored through bank reconciliations.

Key Terms

  • voucher: A receipt.
  • purchase invoice: the buyer’s name for a commercial document issued by a seller to a buyer, indicating the products, quantities, and agreed prices for products or services the seller has provided the buyer

Managing cash is about monitoring how it comes in and goes out. To meet this goal, a business must come up with a system that not only documents all of these transactions, but organizes those documents in such a way so that any issues are immediately noticed by management.


A current liability, such as a credit purchase, can be documented with an invoice.: Current liabilities are debt owed and payable no later than the current accounting period.

Voucher System

A voucher system is used primarily for monitoring and documenting payments made by a company to a third party. A voucher is composed of five parts.

  • Individual vouchers: A voucher is a document that proves a payment was authorized and eventually made. Each voucher should be assigned a number to identify it. A voucher should be prepared for every transaction.
  • Voucher register: Is a book or spreadsheet that lists every voucher.
  • Unpaid voucher file: Where all vouchers that have been authorized, but not yet been paid are kept.
  • Paid voucher file: Where all paid vouchers are kept. The paid vouchers should be filed in numerical order.
  • Check register: A book or spreadsheet that records when all vouchers were paid and how it was paid. If the voucher was paid using a check, the check register will pair the voucher identification numbers with the check identification numbers.

When an obligation is about to be settled, the person in charge of the vouchers should review the other documents associated with the transaction prior to transferring the related voucher from the unpaid to paid file. The related documents generally include purchase orders, receiving reports, and invoices. These documents demonstrate that the payment was authorized, all goods and services that the business was supposed to get were received, and that the amount paid equaled the amount due.

Bank Reconciliations

Bank reconciliations, or the process of checking to make sure that a business’s financial records on cash equals how much is in the business’s bank accounts, are especially useful as a control over deposits. This type of control will be discussed in a later section.

Source: Accounting