How Businesses Use Cash Accounts

By Maire Loughran from Auditing For Dummies

From an auditing standpoint, cash is an important account because cash transactions affect all other business and financial processes. Businesses acquire cash by selling goods or services, disposing of fixed assets, or acquiring debt or equity. The same businesses put their cash to use through purchasing, paying employees, and buying inventory.

Businesses organize and manage their cash by using various cash.

Here’s a rundown of the types of cash accounts a client is most likely to have:

Operating checking account: Almost all companies have at least one checking account that’s earmarked for operations — customer payments are deposited into that account, and vendors are paid from it. Checks may be the primary instrument for withdrawing the company’s funds. However, businesses can also use debit cards, just like you can — to withdraw money and make electronic fund transfers from automatic teller machines (ATMs) and to make purchases at stores.
Payroll checking account: Many businesses also have a separate checking account for their payroll transactions. They use this account only to pay their employees and settle up with the government for payroll taxes. No revenue is deposited directly into this account; instead, the company transfers funds each pay period from the operating account to cover all disbursements.
Merchant account: If a company accepts credit card payments from its customers, it may also have a dedicated merchant account. The only deposits to this account (which is usually a checking account) come from the merchant provider, the company that provides the ability to use credit cards for customer payments. The only withdrawals are done to move money to operating or other special payment accounts to cover withdrawals.
Money market account: Some companies use money market accounts for their operating, payroll, or savings bank accounts. A money market’s main attraction is that it generally pays a higher interest rate than a checking account. However, money market accounts often require maintaining minimum balances, which is why many businesses don’t use them.
Imprest account: An imprest account always carries the same balance and is generally used for petty cash, though it can be used for other functions, such as payroll or branch accounts.

You may be wondering why a company would gunk up its accounting and bookkeeping life with different bank accounts to pay expenses and accept revenue. Actually, in a company whose size warrants it, having different bank accounts simplifies the work flow and increases internal controls. For example, having a dedicated payroll account allows payroll-disbursing employees to do their job (processing payroll paper checks and electronic transfers) while having access to a limited, defined amount of cash.

If your audit client has multiple locations/subsidiaries in different cities, states, or countries, it probably has bank accounts at each location. These accounts are called branch accounts. Keep in mind that all branch accounts within the same company won’t necessarily be held at the same bank. After all, the bank that a company headquarters uses may not operate where a subsidiary is located.