The 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

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 probably 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 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 receipts recorded in the wrong account

A proof of cash can also 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.

A proof of cash is more complicated to complete than a bank reconciliation. However, it provides a greater degree of detail, and so makes it easier to locate errors than a bank reconciliation. Thus, it may be cost-effective to use a proof of cash when you expect to find a large number of different cash-related errors within an accounting period.

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