Payment Methods and Controls
Payment methods
Cash settles small immediate purchases but carries theft and loss risk, so it is controlled through a petty cash imprest and receipts. Cheques are written orders to a bank; crossings such as 'A/c payee only' restrict negotiation. Electronic methods include BACS (bulk, three-day cycle, used for wages and supplier payment runs), Faster Payments (near-instant, value limits), CHAPS (same-day high-value, charged per payment), standing orders (the payer instructs their bank to pay a fixed amount regularly) and direct debits (the payee collects a variable amount under the payer's mandate). Debit cards reduce the bank balance immediately; credit cards create a liability settled later.
Controls
Key controls are segregation of duties (ordering, receiving, approving and paying are split), dual authorisation, cheque signatories within the bank mandate, three-way matching of purchase order, goods received note and invoice, remittance advices, restricted access to online banking tokens, and bank reconciliation as a detective check. Controls are either preventative (stopping a problem) or detective (finding it afterwards).
Traps
Questions frequently mix up direct debit and standing order, BACS and CHAPS, and 'prevents' with 'detects'. Remember that a supplier collecting a variable utility bill uses direct debit; a fixed rent paid by the business is a standing order. Do not assume a debit card is a credit facility.
Worked example
A business pays monthly rent of £1,200 and a variable electricity bill. Rent is paid by standing order; electricity by direct debit. Both are recorded in the cash book when the bank statement confirms them.
Rule of thumb
Fixed amount you initiate = standing order; variable amount the supplier collects = direct debit.