in financial accounting what is internal control
Internal control in financial accounting refers to the policies, procedures,
and processes implemented by a company to ensure the accuracy,
reliability, and integrity of its financial reporting. The purpose of internal
control is to help a company achieve its objectives by preventing and
detecting errors and fraud in financial reporting.
Internal control covers a wide range of activities that include:
1. Separation of duties: Assigning different responsibilities to different
employees to ensure that no one person has complete control over a process
or transaction.
2. Authorization and approval: Requiring approvals and authorizations for
financial transactions to ensure they are legitimate and comply with
company policies.
3. Segregation of assets: Separating assets and liabilities to ensure they are
properly accounted for and protected from theft or loss.
4. Record keeping and documentation: Ensuring that financial transactions
are properly recorded, classified, and documented to support the accuracy
of financial statements.
5. Physical controls: Implementing controls such as locks, cameras, and
security personnel to protect assets from theft or damage.
Overall, internal control helps a company to achieve its goals by ensuring
that financial reporting is accurate, complete, and reliable. Effective
internal control also helps to prevent and detect fraud, error, and waste,
which can harm a company's financial performance and reputation.
in financial acccounting define control of cash how control of cash is done
Control of cash refers to the procedures and processes a company uses to
ensure the proper handling, security, and accounting of its cash. Effective
control of cash is important to prevent loss, theft, or misappropriation of
cash and to ensure the accuracy and reliability of financial statements.
To control cash, a company may implement the following procedures:
1. Separation of duties: Different employees should be assigned
responsibilities for handling cash to ensure that no one person has complete
control over cash handling.
2. Segregation of functions: The functions of cash receipt, recording, and
custody should be segregated to avoid errors or fraud.
3. Use of prenumbered documents: All cash receipts and disbursements
should be recorded on prenumbered documents to provide a clear audit
trail and to prevent unauthorized transactions.
4. Daily reconciliation of cash balances: The company should reconcile its
cash balances on a daily basis to ensure that all cash transactions have been
properly recorded and to detect any discrepancies.
5. Physical controls: Physical controls such as safes, locks, and surveillance
cameras should be used to secure cash and protect it from theft or loss.
6. Authorized access: Only authorized personnel should have access to cash
and only for authorized purposes.
7. Periodic audits: Regular internal and external audits should be conducted
to ensure compliance with cash control policies and to identify any
weaknesses or deficiencies in the system.
Overall, control of cash is a critical component of a company's internal
control system, and it requires a combination of procedures and controls to
ensure the proper handling and accounting of cash.
in financial acccounting define control of cash how control of cash is done
Control of cash refers to the procedures and processes a company uses to
ensure the proper handling, security, and accounting of its cash. Effective
control of cash is important to prevent loss, theft, or misappropriation of
cash and to ensure the accuracy and reliability of financial statements.
To control cash, a company may implement the following procedures:
1. Separation of duties: Different employees should be assigned
responsibilities for handling cash to ensure that no one person has complete
control over cash handling.
2. Segregation of functions: The functions of cash receipt, recording, and
custody should be segregated to avoid errors or fraud.
3. Use of prenumbered documents: All cash receipts and disbursements
should be recorded on prenumbered documents to provide a clear audit
trail and to prevent unauthorized transactions.
4. Daily reconciliation of cash balances: The company should reconcile its
cash balances on a daily basis to ensure that all cash transactions have been
properly recorded and to detect any discrepancies.
5. Physical controls: Physical controls such as safes, locks, and surveillance
cameras should be used to secure cash and protect it from theft or loss.
6. Authorized access: Only authorized personnel should have access to cash
and only for authorized purposes.
7. Periodic audits: Regular internal and external audits should be conducted
to ensure compliance with cash control policies and to identify any
weaknesses or deficiencies in the system.
Overall, control of cash is a critical component of a company's internal
control system, and it requires a combination of procedures and controls to
ensure the proper handling and accounting of cash.
components of internal cash control
Internal cash control is a critical component of a company's overall
internal control system. Effective internal cash control is essential for
ensuring the accuracy and reliability of financial reporting and preventing
fraud, errors, and other financial irregularities. The components of
internal cash control typically include:
1. Separation of duties: This involves separating the responsibilities of cash
receipt, recording, and custody to different employees to prevent any one
person from having complete control over cash handling. For example, the
person responsible for recording cash receipts should not also be
responsible for handling cash.
2. Authorization and approval procedures: This involves establishing
procedures for authorizing and approving all cash transactions, such as
cash receipts and disbursements, to ensure that they are legitimate and
authorized.
3. Physical control of cash: This involves implementing physical controls,
such as secure storage facilities, locks, safes, and surveillance cameras, to
safeguard cash and prevent theft or loss.
4. Reconciliation of cash balances: This involves regularly reconciling cash
balances, such as comparing cash on hand to the cash balance in the
accounting system, to detect any discrepancies and prevent errors.
5. Monitoring and review: This involves ongoing monitoring of cash
transactions and reviewing the effectiveness of internal cash control
procedures to identify any weaknesses or deficiencies in the system and
make improvements.
6. Audit trail: This involves establishing an audit trail for all cash
transactions, such as using prenumbered documents, to provide a clear
record of all cash transactions and to help identify any discrepancies or
unauthorized transactions.
Overall, the components of internal cash control work together to establish
a system of policies, procedures, and processes that aim to ensure the
proper handling, accounting, and safeguarding of cash resources. Effective
internal cash control is essential for maintaining the integrity and accuracy
of financial reporting and preventing fraud or other financial
irregularities.
highlight internal controls for E-commerce
Effective internal controls are critical for the success and security of ecommerce businesses. The unique aspects of e-commerce, such as online
transactions and data security, require specific internal controls to ensure
that transactions are processed accurately and securely, and to prevent
fraud, errors, and other financial irregularities. The internal controls for ecommerce typically include:
1. Access controls: This involves establishing appropriate access controls for
e-commerce systems, such as password protection, multi-factor
authentication, and role-based access control. This ensures that only
authorized personnel have access to e-commerce systems and sensitive
data.
2. Data security: This involves implementing data security controls, such as
encryption, firewalls, intrusion detection, and antivirus software, to protect
sensitive customer information and prevent data breaches.
3. Fraud prevention: This involves establishing fraud prevention controls,
such as real-time transaction monitoring, anomaly detection, and order
verification procedures, to prevent fraudulent transactions and
unauthorized access to customer data.
4. Payment processing controls: This involves implementing controls for
payment processing, such as secure payment gateways, PCI compliance,
and reconciliation of payments, to ensure that all payments are processed
accurately and securely.
5. Inventory management controls: This involves implementing controls for
inventory management, such as real-time inventory tracking, order
fulfillment processes, and periodic inventory reconciliation, to prevent
errors and ensure accurate inventory reporting.
6. Internal audit and review: This involves conducting periodic internal
audits and reviews of e-commerce systems and processes to identify any
weaknesses or deficiencies in the internal control system and make
improvements.
Overall, effective internal controls for e-commerce require a
comprehensive approach that addresses the unique aspects of online
transactions and data security. E-commerce businesses must establish
appropriate access controls, data security, fraud prevention, payment
processing, inventory management, and internal audit and review
procedures to ensure the accuracy and security of online transactions and
to maintain the trust of customers.
How effective is the bank account as control device
How effective is the bank account as control device
Bank accounts are an effective control device for businesses because they
provide a number of benefits in terms of internal control. Some of the key
benefits of using bank accounts as a control device include:
1. Cash management: Bank accounts allow businesses to manage their cash
more effectively by consolidating cash into a single account and tracking
incoming and outgoing cash flows. This makes it easier for businesses to
monitor their cash balances and ensure that they have sufficient funds to
cover their expenses.
2. Fraud prevention: Bank accounts can help prevent fraud by providing a
paper trail for all transactions and ensuring that transactions are
authorized before funds are released. Additionally, many banks offer fraud
prevention services that can help detect and prevent fraudulent activity.
3. Reconciliation: Bank accounts make it easier to reconcile cash balances by
providing a statement of all transactions and balances. This can help
identify errors or discrepancies in the accounting records and ensure that
the financial statements accurately reflect the company's financial position.
4. Security: Bank accounts provide a secure way to store cash, reducing the
risk of theft or loss. Additionally, electronic payments and online banking
services can reduce the need for physical cash and checks, further
improving security.
5. Audit trail: Bank accounts provide an audit trail for all transactions, which
can be useful in the event of an audit or investigation.
However, it's important to note that bank accounts alone are not enough to
provide effective internal control. Other internal control measures, such as
separation of duties, authorization and approval procedures, and regular
monitoring and review, should also be implemented to ensure effective
control of cash and other assets. Additionally, it's important to select a
reputable and trustworthy bank and to regularly review and monitor bank
account activity to ensure that it aligns with the business's financial goals
and objectives.
define and explain the process of bank reconciliation
Bank reconciliation is the process of comparing the balance in a company's
accounting records to the balance on the bank statement to identify and
explain any differences. The goal of bank reconciliation is to ensure that
the cash balance in the accounting records is accurate and complete.
The process of bank reconciliation typically involves the following steps:
1. Obtain the bank statement: The first step in bank reconciliation is to obtain
a copy of the bank statement for the period being reconciled. This
statement will show all transactions that have been processed by the bank
during that period, including deposits, withdrawals, and fees.
2. Compare transactions: The next step is to compare the transactions on the
bank statement to the transactions recorded in the company's accounting
records. This involves matching each transaction on the bank statement to
the corresponding transaction in the company's records.
3. Identify differences: Any differences between the bank statement and the
accounting records are then identified. These differences may be due to
timing differences, errors, or other discrepancies.
4. Adjust accounting records: If the differences are due to errors in the
accounting records, the records should be adjusted to reflect the correct
balance. For example, if a deposit was recorded in the accounting records
but was not included on the bank statement, the accounting records should
be adjusted to include the deposit.
5. Prepare reconciliation statement: Once all differences have been identified
and resolved, a bank reconciliation statement is prepared to summarize the
reconciliation process. The reconciliation statement will typically include
the balance per bank, the balance per company records, and any
adjustments made to the records.
6. Investigate outstanding items: If any differences cannot be resolved, they
are considered outstanding items and may require further investigation.
Outstanding items may include checks that have not cleared the bank,
deposits that have not been credited, or errors that require additional
review.
By performing bank reconciliation on a regular basis, businesses can
ensure that their accounting records accurately reflect their cash position,
identify any errors or discrepancies, and prevent fraud or other financial
irregularities.
explain bank reconciliation method
Bank reconciliation is a process of comparing the company's accounting
records of cash transactions with the bank statement, in order to identify
and resolve any differences or discrepancies. The purpose of bank
reconciliation is to ensure that the company's accounting records of cash
transactions match the bank's records of the same transactions.
The method for bank reconciliation typically involves the following steps:
1. Obtain a copy of the bank statement: The first step in bank reconciliation
is to obtain a copy of the bank statement. This statement shows all
transactions processed by the bank during the period being reconciled,
including deposits, withdrawals, and fees.
2. Update the company's accounting records: The next step is to update the
company's accounting records to reflect any transactions that have not
been recorded in the accounting system. These transactions may include
checks written by the company that have not yet cleared, deposits made by
the company that have not yet been credited, and bank fees or charges.
3. Compare the bank statement to the company's accounting records: The
bank statement is then compared to the company's accounting records to
ensure that all transactions have been properly recorded. Any
discrepancies are identified and investigated.
4. Record any necessary adjustments: If discrepancies are found, any
necessary adjustments are made to the company's accounting records. For
example, if a check was recorded in the company's records but did not
clear the bank, the check may need to be voided in the accounting system.
5. Prepare a reconciliation statement: Finally, a reconciliation statement is
prepared to summarize the bank reconciliation process. This statement
shows the beginning and ending balances for the bank account and the
company's accounting records, and any adjustments made during the
reconciliation process.
The bank reconciliation method is an important process for ensuring the
accuracy of a company's accounting records and identifying any
discrepancies or errors. By performing bank reconciliation on a regular
basis, businesses can prevent fraud and other financial irregularities,
ensure the accuracy of their financial statements, and maintain good
relationships with their banks.
write a short note on internal control over cash payments
Internal control over cash payments is a process of managing the flow of
cash out of a business, in order to prevent fraud, errors, and other financial
irregularities. The objective of internal control over cash payments is to
ensure that all cash disbursements are properly authorized, supported by
appropriate documentation, and accurately recorded in the company's
accounting records.
Some of the key components of internal control over cash payments
include:
1. Segregation of duties: To prevent fraud or other financial irregularities, it's
important to ensure that the process of cash payments is properly
segregated from other accounting functions, such as cash receipts,
bookkeeping, and financial reporting.
2. Approval processes: All cash disbursements should be authorized by an
appropriate level of management, such as a supervisor or manager, and
supported by appropriate documentation, such as purchase orders,
invoices, or receipts.
3. Payment controls: Payment controls should be in place to ensure that cash
payments are made in accordance with company policies and procedures,
such as verifying the accuracy of invoices and checks, reviewing and
approving payment requests, and ensuring that payments are made only to
authorized vendors.
4. Recordkeeping: Accurate and complete recordkeeping is essential for
internal control over cash payments. This includes maintaining detailed
records of all cash disbursements, as well as reconciling these records with
bank statements and other financial records.
By implementing effective internal control over cash payments, businesses
can minimize the risk of fraud and errors, ensure the accuracy of their
financial records, and maintain the trust of their customers, suppliers, and
other stakeholders.
give brief introduction of account receivables in financial accounting
Accounts receivable is a term used in financial accounting to refer to the
money owed to a company by its customers or clients for goods or services
that have been sold or provided on credit. In other words, accounts
receivable represents the company's right to receive payment from its
customers for the products or services they have purchased, but have not
yet paid for.
Accounts receivable is considered an asset on a company's balance sheet, as
it represents the company's expectation of receiving payment in the future.
To record accounts receivable, a company creates invoices for each sale or
service provided, which specify the amount due, the payment terms, and
the due date. Once the invoice has been sent to the customer, it becomes a
receivable until the customer pays.
Managing accounts receivable is an important part of financial accounting,
as it affects a company's cash flow, profitability, and overall financial
health. Companies need to monitor their accounts receivable to ensure that
customers are paying on time and to identify any delinquent accounts. To
manage accounts receivable effectively, companies may use various
strategies such as offering discounts for early payment, establishing credit
policies, and utilizing collection efforts for overdue accounts.
explain account receivable accounting with example
Accounts receivable accounting is the process of managing and recording
the money owed to a company by its customers for goods or services sold
on credit. The accounting for accounts receivable involves tracking the
balances due from customers, managing the credit terms and payment
schedules, and recognizing revenue when the products or services are
delivered.
Here is an example of accounts receivable accounting:
Suppose a company sells $10,000 worth of goods to a customer on credit
with payment terms of 30 days. The company would record the sale as
follows:
Debit: Accounts Receivable $10,000 (to record the amount owed by the
customer) Credit: Sales Revenue $10,000 (to recognize the revenue earned
from the sale)
At the end of the 30-day payment period, the customer pays the invoice in
full. The company would record the payment as follows:
Debit: Cash $10,000 (to record the receipt of cash) Credit: Accounts
Receivable $10,000 (to reduce the amount owed by the customer)
If the customer does not pay the invoice within 30 days, the company may
need to take collection actions to recover the amount owed. The company
may send reminder notices, make phone calls, or even take legal action to
collect the debt.
To manage accounts receivable, companies may also establish credit
policies, such as requiring credit checks, setting credit limits, and
establishing payment terms. Companies may also use aging schedules to
monitor the status of their accounts receivable and identify delinquent
accounts.
In summary, accounts receivable accounting is an important part of
managing a company's financial health. By effectively managing their
accounts receivable, companies can improve their cash flow, profitability,
and customer relationships.
define with example allowance method in account receivables
The allowance method is a method used in accounting to estimate and
record the amount of uncollectible accounts receivable. It involves creating
an allowance account on the balance sheet, which is used to offset the
accounts receivable balance, resulting in a net accounts receivable balance.
Here is an example of the allowance method in accounts receivable:
Suppose a company has $100,000 in accounts receivable, but the company
estimates that 2% of these accounts will be uncollectible. The company
would create an allowance account for $2,000 (2% of $100,000) on the
balance sheet.
At the end of the accounting period, the company reviews its accounts
receivable and identifies a specific customer with an outstanding balance of
$5,000 that is deemed uncollectible. The company would record the
following journal entry:
Debit: Bad Debt Expense $5,000 (to recognize the expense of the
uncollectible account)
Credit: Allowance for Doubtful Accounts $5,000 (to reduce the allowance
account)
This entry reduces the balance in the allowance account by the amount of
the uncollectible account, resulting in a net accounts receivable balance of
$98,000 ($100,000 - $2,000 - $5,000).
The allowance method is a way for companies to account for the risk of
uncollectible accounts and to ensure that their financial statements
accurately reflect the value of their accounts receivable. By estimating and
recording a reserve for bad debts, companies can better manage their cash
flow, maintain their creditworthiness, and reduce the risk of financial
losses.
the direct write off method in accountreceivables with example
The direct write-off method is a method used in accounting to account for
uncollectible accounts receivable. Under this method, a company waits
until a specific account is deemed uncollectible before recording the bad
debt expense. This method is simple and straightforward, but it does not
match expenses to revenues and can distort financial statements.
Here is an example of the direct write-off method in accounts receivable:
Suppose a company has a customer with a balance of $5,000 that is deemed
uncollectible. The company would record the following journal entry:
Debit: Bad Debt Expense $5,000 (to recognize the expense of the
uncollectible account) Credit: Accounts Receivable $5,000 (to reduce the
accounts receivable balance)
This entry reduces the accounts receivable balance by the amount of the
uncollectible account, resulting in a net accounts receivable balance that
does not reflect the potential risk of future uncollectible accounts.
The direct write-off method is not generally used in practice because it
violates the matching principle in accounting, which requires that expenses
be recognized in the same period as the related revenues. The allowance
method is preferred because it estimates the amount of uncollectible
accounts and records the bad debt expense in the same period as the
related revenues.
what is credt card and debit card .how sales are done with the help of these
cards respectively
A credit card and a debit card are two different types of payment cards
that allow consumers to make purchases or transactions without using
cash.
A credit card is a payment card that allows the cardholder to borrow funds
from the issuing bank or financial institution up to a certain credit limit.
The cardholder must pay back the borrowed amount plus any interest
charged by the bank or financial institution. When a credit card is used to
make a purchase, the cardholder is essentially borrowing money from the
issuer of the credit card to make the purchase.
On the other hand, a debit card is a payment card that allows the
cardholder to access funds from their bank account to make purchases or
transactions. The cardholder can only spend the available balance in their
bank account, and transactions made with a debit card are immediately
deducted from the cardholder's account.
When a sale is made with a credit card, the seller or merchant receives the
payment from the credit card issuer or processor, and the amount of the
sale is added to the cardholder's credit card balance. The cardholder will
then need to pay off the balance on the credit card, either in full or with
interest charges added over time.
When a sale is made with a debit card, the seller or merchant receives the
payment directly from the cardholder's bank account. The amount of the
sale is immediately deducted from the available balance in the cardholder's
account.
In both cases, the use of credit cards and debit cards allows for fast,
convenient, and secure payment transactions, and they are widely used in a
variety of settings such as online shopping, in-person retail, and bill
payments.
what do you mean by notes receivables
Notes receivable is a type of financial instrument that represents a written
promise by a borrower to pay a specific sum of money to a lender at a
future date or on demand. It is a type of asset that a company can hold on
its balance sheet, and it represents an amount owed to the company by a
borrower.
A note receivable is similar to a loan, where a lender provides funds to a
borrower in exchange for the borrower's promise to repay the amount
borrowed plus interest by a specified date. The borrower is typically
required to make regular payments of both principal and interest until the
note is paid in full. Notes receivable may be secured or unsecured,
depending on whether the borrower has provided collateral to the lender.
For example, a company may provide a loan to a customer in the form of a
note receivable, which specifies the amount borrowed, the interest rate, and
the repayment terms. The customer may be required to make regular
payments until the note is paid in full, and the company would record the
payments as a reduction in the notes receivable balance on its balance
sheet.
Notes receivable are an important component of a company's assets and
are commonly used to finance business operations or provide financing to
customers. The valuation and management of notes receivable require
careful consideration and analysis to ensure that the company is adequately
compensated for the risk associated with lending money.
How accounting information is used for decision making in account
receivables
How accounting information is used for decision making in account
receivables
Accounting information related to accounts receivable can be used to make
important decisions related to a company's cash flow, credit management,
and customer relationships. The following are some ways in which
accounting information related to accounts receivable can be used for
decision-making:
1. Cash flow management: Accounting information related to accounts
receivable can be used to determine the amount and timing of expected
cash inflows. This information can be used to make important decisions
related to cash flow management, such as determining when to invest in
new projects, pay suppliers, or pay dividends to shareholders.
2. Credit management: Accounting information related to accounts
receivable can be used to evaluate the creditworthiness of customers and to
assess the risk associated with extending credit. This information can be
used to make important decisions related to credit management, such as
determining credit limits, setting payment terms, and deciding when to
take action against delinquent accounts.
3. Customer relationship management: Accounting information related to
accounts receivable can be used to track customer payment history and to
identify opportunities to improve customer relationships. This information
can be used to make important decisions related to customer relationship
management, such as identifying loyal customers for special promotions or
offering payment plans to customers experiencing financial difficulties.
4. Performance evaluation: Accounting information related to accounts
receivable can be used to evaluate the performance of the accounts
receivable function and to identify areas for improvement. This
information can be used to make important decisions related to
performance evaluation, such as setting performance targets, identifying
training needs, and allocating resources.
In summary, accounting information related to accounts receivable can be
used for various decision-making purposes, including cash flow
management, credit management, customer relationship management, and
performance evaluation. By using this information effectively, companies
can improve their financial position, reduce risk, and enhance customer
relationships.