BUSS1030 Chap.8 Working Capital, Controls and Ethics
Working Capital, Controls and Ethics
Working capital management depends on reliable controls over cash, receivables, inventory and payables. This chapter uses bank reconciliation to separate timing items from book adjustments, follows unresolved differences into investigation and connects segregation of duties with ethical judgement. The goal is not merely equal totals, but evidence that resources are protected and records support decisions.
Bank reconciliation compares an external statement with the cash ledger. Deposits in transit and outstanding payments are normally timing items on the bank side because the business has already recorded them; fees, direct deposits, interest and dishonoured customer payments may require book-side entries because the bank reveals them first. Errors are corrected where they occurred.
Both paths should converge on one supported adjusted balance. A difference that remains is not permission to insert a plug. It is evidence requiring recalculation, document comparison, subsequent-clearing checks and independent review. Other working-capital controls follow the same logic.
Credit approval and ageing protect receivables, physical counts and restricted access protect inventory, and purchase authorisation with document matching protects payables and cash. Separating custody, recording, authorisation and review reduces the opportunity for an error or misuse to be concealed. Smaller organisations may need compensating owner review, alerts or external checks when complete separation is impractical.
Ethical judgement determines what happens after a control identifies an exception: preserve evidence, correct only supported errors, document responsibility, escalate according to policy and monitor resolution. An accusation without evidence is irresponsible, but quiet concealment also damages users.
A complete control response names the risk, the procedure, the reviewer, the evidence retained and the decision consequence of leaving the weakness unresolved.
What this chapter covers
- 01
Working capital
- 02
Cash control
- 03
Bank reconciliation
- 04
Receivables control
- 05
Inventory and payables
- 06
Ethical escalation
Worked example · free
Reconcile bank and book cash
- +2Add deposits in transit and subtract outstanding payments on the bank side.
- +2Add bank collections not yet recorded in the ledger.
- +2Subtract fees and dishonoured customer payments from the books.
- +2Compare adjusted balances and identify any unexplained difference.
- +2Post only supported book entries and assign investigation of the exception.
Key terms
- Working capital
- Current assets and current liabilities used to support the daily operating cycle.
- Deposit in transit
- A receipt recorded by the business that has not yet appeared on the bank statement.
- Outstanding payment
- A payment recorded by the business that has not yet cleared the bank.
- Segregation of duties
- Separation of authorisation, custody, recording and review so one person cannot hide an error or misuse.
Working Capital, Controls and Ethics FAQ
Which reconciliation items require ledger entries?
Bank fees, direct collections, interest, dishonoured payments and book errors usually require entries because the ledger is incomplete or wrong. Deposits in transit and outstanding payments are timing items already recorded by the business.
What should I do when adjusted balances still differ?
Do not create a plug. Recheck source documents, transpositions, prior reconciling items and missing bank or book activity. Document the difference, assign follow-up and post only corrections supported by evidence.
Why is segregation of duties important for cash?
If one person handles cash, records transactions and performs the reconciliation, an error or theft can be concealed. Independent review makes the external bank evidence a meaningful control rather than a formality.
Exam move
Prepare reconciliations in two clearly labelled columns and classify each difference before calculating. Practise explaining why an old item requires follow-up. For control questions, name the resource at risk, the incompatible duties, the evidence needed and the person who should review or escalate the exception. Memorise the classification logic instead of one template.
Deposits in transit and outstanding payments are timing items already in the books, so they alter the bank side. Fees, direct collections, interest, dishonoured payments and bank errors may require book entries depending on where the omission occurred. After both sides are adjusted, equality is a test rather than a target to force.
If a difference remains, recalculate, trace old timing items to later statements, inspect transpositions and duplicates, then obtain independent review. Practise writing the journal effect for every book-side adjustment. Extend the same control reasoning to receivables, inventory and payables. Name the asset or obligation, the risk, the preventive control, the detective control and the reviewer.
For segregation-of-duties questions, separate authorisation, custody, recording and reconciliation. Where a small organisation cannot separate every role, propose compensating review or bank alerts and explain the risk they reduce. Connect ethics to the process by preserving evidence, resisting pressure to hide a difference and escalating unresolved exceptions without making unsupported accusations.
Finish each answer with the decision effect on liquidity, reporting reliability or resource protection.
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