Final answer:
Effective internal control over cash involves using checks for payments and segregating duties between individuals who make and record deposits. This helps manage cash flow, ensures accuracy, and prevents fraud. Banks facilitate secure transactions and help in preventing overdrafts through proper checkbook management.
Step-by-step explanation:
Effective internal control over cash is paramount in managing a business's finances. It helps in managing the cash flow and ensures that payments are accurately tracked and recorded. The principle that only checks should be used for payment of purchases is central to maintaining a trail of expenditure and mitigating the risk of theft or mismanagement of funds. Moreover, it is important for a different person to record deposits separate from the individual who makes the deposits to prevent any potential fraudulent activities within the company.
Using a bank for financial transactions allows for secure and efficient management of business operations. Banks serve as reliable depositories, facilitating a variety of transactions through savings and checking accounts. These financial institutions provide the means for direct withdrawals and the use of debit cards while also allowing checks to serve as demand deposits. Balancing your checkbook regularly is associated with good financial management and helps to prevent overdrafts—situations where accounts have insufficient funds to cover transactions.