7 Cash Account
Controls and Bank Reconcilliation
Dr. Jacqueline Gagnon
We already know quite a lot about cash from previous chapters. You learned how business transactions affect the cash balance on the Statement of Financial Position. You know that debits make the cash balance higher, and credits make it lower. Examples of transactions that increase cash are:
- cash sales,
- A/R collection,
- interest received,
- dividends received, and
- sales of PPE.
On the other hand, decreases to cash include:
- payments to suppliers,
- operating costs like office expenses or salaries,
- interest paymentsInterest Payments:
Contractual cash flows paid by a borrower to a lender. Interest is designed to fairly compensate the debtholder for loaning their money. Interest payments are calculated as the loan principal multiplied by the annual interest rate specified in the loan agreement. For semi-annual or monthly payments, the annual interest rate must be prorated., and - dividend payments
You should have a solid understanding of how the cash balance changes before you start this chapter. Please go back and review these topics if you haven’t yet mastered them. This link will take you back to Chapter 3.
In this chapter, we get to play detective. We will focus on two main issues: (1)internal controlsInternal Controls:
Company processes designed to keep assets safe by avoiding theft and misuse, including physical controls (cashing out, video surveillance, and maintaining maximum bank balances) and HR controls (separation of duties and job rotation)., which is checks and balances to avoid money being stolen or misused, and (2)bank reconciliationsBank Reconciliation:
Checks a company’s bank accounts against the bank statements, and provides a listing of differences between a company’s records and the bank’s records. If it reconciles, the company can be confident that their accounting records are complete and error-free. See also: Balance per bank, Balance per books., which is how to compare accounting records with the company’s bank statement to detect missed transactions and errors. But before we play detective, let’s take a look at what gets included in the cash account on the Statement of Financial Position.
