Key Terms
Key Terms: Accounting for Internal Control
This chapter focuses on how a business controls its cash. Learn the following terms for cash control, the Bank Reconciliation Statement and the Cash Budget so you understand the concepts instead of only memorising procedures.
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Cash Control (purpose & methods)
- Meaning: a system of procedures to protect cash from theft, misappropriation and loss, and to keep cash records accurate. Its purpose is to safeguard the most liquid asset, detect errors, and prevent fraud.
- Control methods: segregation of duties (whoever receives cash is not the one who records it), bank all collections daily, make payments by cheque, use serially numbered receipts, prepare a Bank Reconciliation Statement regularly, and prepare a Cash Budget.
- Memory hook: "Bank–Cheque–Check–Split", that is, bank the cash, pay by cheque, check via reconciliation and split the duties. These four cover the main methods usually asked.
- How it is tested: structured/essay questions ask you to state the purpose of cash control and explain the methods. Answer in full sentences that link each method to a purpose (e.g. "pay by cheque so there is proof and to prevent misappropriation").
Bank Statement & Bank Reconciliation Statement
- Bank Statement: a document issued by the bank listing all transactions in the trader's account for a period. Its function is to let the trader check and verify the entries in the Cash Book.
- Important: from the bank's view, our deposits are credits and our withdrawals are debits, the opposite of our Cash Book. So a debit balance in the Cash Book appears as a credit balance on the Bank Statement.
- Bank Reconciliation Statement: a statement prepared to reconcile the Bank account balance in the Cash Book with the Bank Statement balance. Its purpose is to trace the reasons for differences, detect errors or fraud, and confirm the true cash balance.
- Memory hook: the Bank Statement is a "mirror" of our records (our debit is the bank's credit). How it is tested: explain the function of the Bank Statement and the purpose of preparing the reconciliation (usually explanation marks).
Timing differences: Unpresented Cheques & Uncredited Deposits
- Unpresented (outstanding) cheques: cheques we issued and already recorded on the credit side of the Cash Book, but the payee has not yet cashed them at the bank. Effect: the Cash Book balance is temporarily lower than the Bank Statement.
- Uncredited deposits (deposits in transit): cash or cheques we banked in and recorded on the debit side of the Cash Book, but the bank has not yet credited them. Effect: the Cash Book balance is temporarily higher than the Bank Statement.
- Both are timing differences only: our Cash Book is correct and the bank has not caught up yet. Therefore they are NOT entered into the Cash Book; they appear only in the Bank Reconciliation Statement.
- Memory hook: the keyword "not yet" means a timing difference → goes into the reconciliation, not the Cash Book. How it is tested: identifying these items and placing them in the correct add/subtract section.
Items in the Bank Statement but not in the Cash Book
- Direct credits/collections: money received straight into the bank account, e.g. dividends, bank interest, and rent received. The bank knows first, so it is not yet in our Cash Book.
- Direct debits/payments & standing orders: payments made by the bank on our behalf, e.g. loan instalments, insurance premiums, and bank charges or interest on overdraft.
- Dishonoured cheque: a customer's cheque we banked in but which the bank rejected (insufficient funds). It reduces our bank balance even though it was first recorded as a receipt.
- These are NOT timing differences; they must be entered in the Cash Book (direct credits on the debit side; payments/charges/dishonoured cheques on the credit side). Memory hook: "bank knew first → correct our book."
Two methods: with and without updating the Cash Book
- With updating: first enter into the Cash Book every item the bank has recorded but we have not (direct credits, charges, dividends, dishonoured cheques), obtain the updated balance, then prepare the reconciliation using only the timing differences.
- Without updating: start from the Cash Book balance before updating, then reconcile ALL differences (both timing differences and items the bank recorded first) until you reach the Bank Statement balance.
- Key difference: the updating method gives a "correct and up-to-date" Cash Book balance (the figure reported in the Statement of Financial Position), while the non-updating method merely links the two balances without correcting the book.
- How it is tested: you may be asked to produce the reconciliation both by updating AND without updating for the same data. Memory hook: "update first for a clean balance; otherwise, bridge the two balances."
Cash Budget: Receipts, Payments, Surplus & Deficit
- Cash Budget: a forecast of expected cash receipts and payments for a future period. Its importance: to plan liquidity, spot in advance when a cash shortage will occur so a loan or overdraft can be arranged, and to control spending.
- Receipts are cash inflows (cash sales, collections from debtors, capital, loans); Payments are cash outflows (purchases, rent, wages, expenses). Only items involving cash are included; bad debts and depreciation are NOT included.
- Surplus means receipts exceed payments (positive cash flow); Deficit means payments exceed receipts. Also compare actual with expected: actual receipts above expectations are favourable, but actual payments above expectations signal overspending or weak control.
- Format & how it is tested: opening balance + total receipts − total payments = closing balance, carried to the next month. You may be asked to draw the format, identify items, and produce the budget manually or using ICT applications (a spreadsheet).
| Details | RM |
|---|---|
| Balance as per Cash Book (updated) | 1,500 |
| Add: Unpresented cheques | 800 |
| 2,300 | |
| Less: Uncredited deposits | 300 |
| Balance as per Bank Statement | 2,000 |
Illustrative figures only: updated balance 1,500 + unpresented cheques 800 − uncredited deposits 300 = Bank Statement balance 2,000.
| Details | Jan (RM) | Feb (RM) |
|---|---|---|
| Opening balance | 1,000 | 1,500 |
| Receipts | ||
| Cash sales | 5,000 | 6,000 |
| Total receipts | 5,000 | 6,000 |
| Payments | ||
| Purchases | 3,000 | 3,500 |
| Rent | 1,500 | 1,500 |
| Total payments | 4,500 | 5,000 |
| Surplus/(Deficit) | 500 | 1,000 |
| Closing balance | 1,500 | 2,500 |
Illustrative figures only: opening balance + total receipts − total payments = surplus/(deficit), and the closing balance is carried to the next month.
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