How does a business protect its cash and prove the bank balance is correct?
Apply internal controls over cash and prepare a bank reconciliation statement.
Internal controls that safeguard cash, and the bank reconciliation that explains the gap between the cash ledger and the bank statement using timing items.
Reviewed by: AI editorial process; not yet individually human-reviewed
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What this dot point is asking
Cash is the asset most at risk of theft and error, so Unit 2 covers both controlling it and verifying it. Internal control is about prevention; bank reconciliation is about detection and proof.
Internal control over cash
Good control reduces the chance of fraud and mistakes going unnoticed. Common controls include:
- Separation of duties: the person who handles cash should not also keep the records, so no single person can both steal and hide it.
- Daily banking of all receipts, so cash does not accumulate on the premises.
- Issuing pre-numbered receipts and paying by cheque or electronic transfer for an audit trail.
- Regular bank reconciliation by someone independent of cash handling.
- Authorisation limits, so large payments need approval.
Why the two cash figures differ
The business records cash in its Cash at Bank ledger, while the bank produces a bank statement. At any date the two rarely match, almost always because of timing.
- Outstanding (unpresented) cheques: recorded by the business but not yet cleared by the bank.
- Outstanding deposits: banked too late to appear on the statement.
- Bank entries the business has not recorded yet: bank fees, interest, direct debits and credits, and dishonoured cheques.
Worked example
Why this matters
A reconciliation that balances gives confidence that cash is recorded accurately and that nothing has been stolen or omitted. If it will not balance, it points to an error or possible fraud to investigate. Exam tasks usually require both steps: adjusting the cash account for bank-only items, then preparing the statement with timing items so the two figures agree.