Proof of cash definition
/What is a Proof of Cash?
A proof of cash is essentially a roll forward of each line item in a bank reconciliation from one accounting period to the next, incorporating separate columns for cash receipts and cash disbursements. The columns (and formula) used for a proof of cash are:
Beginning balance + Cash receipts in the period - Cash disbursements in the period = Ending balance
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Bank Reconciliation Essentials
Understanding a Proof of Cash
When used for each line item in a bank reconciliation, the proof of cash highlights areas in which there are discrepancies, and which may therefore require further investigation, and perhaps some adjusting entries. A proof of cash can indicate an array of other reconciliation issues that will require adjustments to a company's accounting records, including the following:
Bank fees not recorded
Not sufficient funds checks not deleted from the deposit records
Interest income or interest expense not recorded
Checks or deposits recorded by the bank in different amounts than what they were recorded by the company
Checks cashed by suppliers that the company voided
Cash disbursements and/or cash receipts recorded in the wrong account
Using a Proof of Cash to Detect Fraud
A proof of cash can uncover instances of fraud. If there is a difference between the totals, it can indicate the presence of unauthorized borrowings and repayments within the time period covered by a single bank statement. Thus, if a controller were to illegally withdraw $10,000 from the company accounts near the beginning of the month for his personal use and replaced the funds before the end of the month, the issue would not appear in a normal bank reconciliation as a reconciling item. However, a proof of cash would be more likely to flag the extra cash withdrawal and cash return within the period.
Advantages of a Proof of Cash
Here are some advantages associated with using a proof of cash:
Enhanced fraud detection. A proof of cash helps identify discrepancies between the company’s records and the bank statement by breaking down cash receipts and disbursements separately. This detailed approach makes it easier to spot unauthorized transactions, altered checks, or other fraudulent activities that might not be evident in a standard bank reconciliation.
Improved accuracy in financial reporting. By aligning the company’s cash records with the bank’s records on a line-by-line basis, a proof of cash ensures that all cash transactions are accurately recorded. This reduces the risk of errors in financial statements and enhances the reliability of reported cash balances, which is crucial for decision-making and audits.
Simplifies the reconciliation process. A proof of cash breaks down the reconciliation into more manageable parts—beginning balance, cash receipts, cash disbursements, and ending balance. This structured approach makes it easier to identify and resolve discrepancies quickly, saving time compared to a standard bank reconciliation.
Supports audit and compliance requirements. Auditors often request a proof of cash to verify the accuracy of cash transactions and to assess internal controls over cash handling. Having a well-prepared proof of cash not only facilitates the audit process but also demonstrates strong financial controls and compliance with accounting standards.
These advantages make a proof of cash a valuable tool for enhancing financial accuracy, detecting fraud, and ensuring effective cash management.
Disadvantages of a Proof of Cash
A proof of cash is more complicated to complete than a bank reconciliation. Further, very few software packages include a template that reduces the work required to complete a proof of cash, which means that the proof must be completed manually.