Cash Controls

Bank Accounts

Cash Controls and Banks

The use of bank accounts has many advantages over retaining cash within the company. Banks have multiple ways of documenting cash transactions, which helps ensure cash control.

As the asset most likely to be stolen or misused, cash—and cash transactions—must be controlled. Anything that can be deposited in the bank is considered cash, including coins, checks, and money orders. It is also important to ensure that there is a separation in the custody of assets from accounting—the cashier should not be permitted access to the accounting records, nor should the accountant be permitted to handle cash. This protects a business as well as its employees.

Bank accounts are an important and necessary aspect of controlling cash because they limit employee cash interaction. Because of the ease of theft or misuse, cash should be protected—and bank accounts are an excellent way to safeguard cash. The use of a bank account avoids the dangers associated with having large amounts of cash on hand. When business entities have excess cash on hand, they invest in cash equivalents, such as certificates of deposit (CDs) or savings bonds. Cash equivalents are short-term assets that can be quickly converted to cash within 30 to 90 days. Cash equivalents are presented on the balance sheet combined with cash.

A business entity may have several bank accounts. Commonly, businesses have separate accounts for operations and payroll. Bank accounts assist with managing both deposits and withdrawals. Bank accounts offer a number of advantages that include minimizing the cash on hand, facilitating electronic funds transfer (EFT) and providing an independent record of cash transactions. Banks use many tools to exercise control over cash, such as signature cards, deposit tickets, checks, bank statements, and EFTs. A signature card provides documented authorization for a specific person to sign checks. As a standard bank form, the deposit ticket serves as proof of the bank deposit. A check is a prenumbered document stating an amount to be paid from the designated bank account by one individual or company to another. Three parties are included on a check: the maker (issuer), the payee (to whom the check is made payable), and the financial institution from which the funds are drawn.

Companies may also utilize zero balance accounts, or ZBAs, with debit cards to have another measure of cash control and prevent unauthorized cash payments. A business may have several bank accounts for different purposes. To minimize having excessive balances or reserves in such separate accounts, companies can set up ZBAs. The company opens a separate master account with a balance. When a payment is drawn against a ZBA, there is an automatic transfer of funds from the master account to the ZBA to cover the amount of the withdrawal. After the withdrawal has occurred, a zero balance remains in the ZBA. When an employee uses a company debit card linked to a ZBA, the cash transaction can be monitored because debits must be preapproved before funds are transferred.

Independent Verification of Cash Balance

Bank accounts are often used because they serve as an independent record of business transactions and are used to process EFTs. Cash controls are effective when the cash balances can be verified by bank records.

The business bank account is treated as a liability by the financial institution because it is a deposit on demand account, which means that at any given moment, a business entity can demand all its funds entrusted to the bank. Some businesses find it beneficial to use a bank account with a compensating balance requirement. A specified minimum account balance is required by the bank or other lender in order for the company account to receive certain benefits, such as an unsecured loan. The established compensating balance amount is not available for use by the business entity. Compensating balances can provide reduced interest rates on loans and may lower service charges for loans or lines of credit. Business entities are required to disclose the compensating balance requirements in their notes to the financial statements.

The cash account is an asset account for the business. The bank will issue a credit memo to notify the company that it is increasing the company's account balance. Some example transactions that will require a credit memo by the bank include electronic funds transfer (EFT), deposits, note collection by the bank on a business's behalf, loan proceeds, interest earned by a checking account, and error corrections. A debit memo, however, indicates that the amount in the account is being decreased. Transactions that would require a debit memo include EFT payments, service charges, not sufficient funds (NSF) checks received by the company but returned by the bank, and error corrections. NSF checks require an adjusting entry to be made to update the company's records. Issued monthly by the financial institution, bank statements outline account activity for the month.
Banks have an important role in controlling cash for businesses that maintain cash accounts, as banks provide an independent record of transactions, such as electronic funds transfer (EFT).