Day 4_Session 1 - The accounting and controlling

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The company's trading activity is recorded on the Profit and Loss statement. This
essentially records how much has been sold and how much has been spent running
the company.
This profit figure then gets adjusted to reflect the cash actually generated by the
business through the Cash Flow statement.
Once it emerges from the Cash Flow statement, then you can see how it turns up on
the Balance Sheet.
Profit and
Revenue and
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Cash Flow
Changes in working
Assets and Liabilities
capital, dividends, capital
expenditure and financing
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Profit and Loss statement
A financial statement that summarizes the revenues, costs and
expenses incurred during a specific period of time - usually a fiscal
quarter or year.
These records provide information that shows the ability of a company
to generate profit by increasing revenue and reducing costs.
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Profit and Loss statement
The sum of the sales
Cost of Goods Sold: the costs directly related
to producing the
goods or services to be sold
Costs such as logistics, customs, commissions and
How much of your fixed assets have been "used up" in that
financial year.
Operational expenditure: consists mainly of salary costs (for as far as
they don’t belong to man-hours in the manufacturing plants, they belong
to COGS).
Interest paid on loans or on overdue A/P, interest earned on a bank account
and costs/gains on exchange differences
A cost which had nothing to do with your recurring business, say a lost
Earnings Before Interest and Tax = Gross profit minus OPEX
Earnings Before Interest, Tax, Depreciation and Amortization
The profit that remains after all costs are
subtracted from the top line
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Cash Flow statement
provides aggregate data regarding all cash inflows a company receives
from both its ongoing operations and external investment sources, as
well as all cash outflows that pay for business activities and
investments during a given quarter.
With the help of cash flow statement:
1. track the accounting profit, and onto the balance sheet
2. figure out how cash is being generated by the business, and whether or not this is
due to normal trading activity or whether this is as a result of aggressive working
capital management
3. have a good sense of whether depreciation matches Capital Expenditure and
whether this is likely to mean the company is under or over investing
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Cash Flow statement
Earnings Before Interest and Tax
Earnings Before Interest, Tax, Depreciation and
There are three parts to working capital:
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trade debtors (how much the company is
owed – which will hopefully turn into cash)
trade creditors (how much the company owes
to others - which is just like short term debt)
stock (which is also a bit like cash in terms of
its value to the business).
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Balance Sheet
A financial statement that summarizes a company's assets, liabilities and
shareholders' equity at a specific point in time. These three balance sheet
segments give investors an idea as to what the company owns and owes, as
well as the amount invested by the shareholders.
Assets = Liabilities + Owner’s Equity
Assets: what the company owns
Liabilities: what the company owes
Equity: what is left for the stockholders if all assets are sold and all debts are paid
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Balance Sheet
Account Receivables: sum of all the invoices the company has sent out to customers, but have remained unpaid - need
to be kept at a minimum at all time
Inventory: should not be kept too high
Goodwill: monetized surplus that has been paid to take over a business
Equity: the sum of the values of all stockholders and
the reserves, these are typically the retained earnings
Provisions: liability of uncertain timing and uncertain amount
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Good internal controls are essential no matter how small the company, for many valid
reasons. Fraud prevention, embezzlement detection, and accurate financials are all
reasons to follow good internal control practices.
Internal control is a process, effected by an entity’s board of directors, management
and other personnel, designed to provide reasonable assurance regarding the
achievement of objectives in the following categories:
Effectiveness and efficiency of operations
Reliability of financial reporting
Compliance with applicable laws and regulations
Internal controls of accounting are an essential business function for a growthoriented organization, and include the elements of risk assessment, information
communications and even employees' roles and responsibilities. Internal controls of
accounting systems are designed to protect a company from fraud, abuse and inaccurate
data recording and help organizations keep track of essential financial activities.
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 Help align objectives of the business – to ensure thorough reporting procedures
and that the activities carried out by the business are in line with the business’s
 Safeguard assets – ensuring the business’s physical and monetary assets are
protected from fraud, theft and errors.
 Prevent and detect fraud and error – ensuring the systems quickly identify errors
and fraud if and when they occur.
 Encourage good management – allowing the manager to receive timely and relevant
information on performance against targets, as well as key figures that can indicate
variances from target.
 Allow action to be taken against undesirable performance – authorizing a formal
method of dealing with fraud, dishonesty or incompetence when detected.
 Reduce exposure to risks – minimizing the chance of unexpected events.
 Ensuring proper financial reporting – maintaining accurate and complete reports
required by legislation and management, and minimizing time lost correcting errors
and ensuring resources are correctly and efficiently allocated
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Poor internal control creates opportunity for fraud.
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Management, not auditors, must establish and maintain the entity’s controls. Management’s
commitment to implementing internal control and how well they follow their own internal
controls sends a strong signal to all employees about the importance of internal controls,
fraud prevention and financial statement accuracy.
Internal controls structure should provide reasonable assurance that financial reports are
correctly stated
Internal Control Framework
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Control Environment
Sets the tone of an organization for all other components of internal control, providing
discipline and structure.
Risk Assessment
is the entity’s identification and analysis of relevant risks to achievement of its
objectives, forming a basic for determining how risks should be managed.
Control Activities
are those policies and procedures that help ensure that management directive are
carried out.
Information and Communicaton
Are the identification, capture, and exchange of information in a form and time frame
that enable people to carry out their responsibilities
is a process that assesses the quality of internal control performance over time.
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Control Activities
General categories of internal accounting control activities:
 Segregation of duties.
 Restricted access.
 Document controls.
 Processing controls.
 Reconciliation controls.
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Segregation of Duties
 allocating bookkeeping tasks among personnel so that one individual does not have the ability to
make an accounting error (either intentionally or unintentionally) and also cover it up
the person with physical access to cash or other moveable assets (investments or inventory)
should not also be involved with the related recordkeeping. For example, the person opening the
mail and depositing customer remittances should not also be responsible for maintaining the
accounts receivable subsidiary ledger. In addition, the person responsible for writing checks
should not also have responsibility for maintaining the accounts payable subsidiary ledger.
Whenever possible, bank accounts should be reconciled by someone with no other cash receipt
or disbursement functions.
Unfortunately, the limited number of accounting personnel in most small businesses often makes it
difficult to adequately segregate incompatible duties. In this situation, the services of other nonaccounting personnel, such as the receptionist or even the business owner, can sometimes be used
in a limited capacity to provide some segregation.
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Restricted Access
Restricted access is a control category closely related to segregation of duties. Not only
should bookkeeping duties be segregated whenever possible, but physical access to
valuable and moveable assets should be restricted to only authorized personnel.
For example, access to warehouse and other inventory should be restricted to only those
people with responsibility for maintaining inventory. In almost all instances, salespersons
should not have access to inventory locations. Also, inventory should not be shipped
from the warehouse unless accompanied by appropriate shipping documents. In
addition, unused checks and petty cash should be kept in a locked filing cabinet in a
secured area.
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Document Controls
Since source documents initiate the recording of transactions, it is essential that
adequate controls exist to ensure that the accounting system captures all source
documents. Source document controls principally include using prenumbering
documents and accounting for the numerical sequence of those documents.
Common prenumbered source documents include company checks, receiving reports,
purchase orders, sales invoices, debit and credit memos, shipping documents, and
customer receipts for "over the counter" sales. For retail businesses, a cash register is
another basic tool for controlling cash receipt source documents and currency.
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Processing Controls
Once documents enter the accounting system, processing controls help ensure that the documents are
processed accurately.
Common processing controls include:
 Batch controls. Preparing batch control totals of key source document amounts to ensure the amounts
are entered into the accounting system accurately.
 Source document matching. Comparing information on the various source documents to ensure they
match. For example, this control might include comparing quantities and part numbers on the receiving
reports/packing slips and purchase orders with the vendor invoice, and comparing unit prices on the
purchase order with the vendor invoice
 Clerical accuracy of documents. Checking the mathematical accuracy of financial data on key source
documents, such as vendor invoices, customer invoices, and time cards. For example, accounting
personnel may recalculate the extended prices on invoices by multiplying the quantity by the unit price.
 General ledger account code checking. Checking to ensure that amounts on source documents (such
as vendor invoices) were coded with the appropriate general ledger account numbers before entering
them into the accounting system.
Processing controls are designed to catch errors before they are posted to the general ledger.
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Reconciliation Controls
Reconciliations consist of reconciling selected general ledger control accounts to
subsidiary ledgers. Thus, in contrast to processing controls, they are designed to detect
errors after transactions have been posted and the general ledger has been run.
Accounting persons commonly reconcile accounts receivable, property and equipment,
and accounts payable subsidiary ledgers. Inventory is also commonly reconciled if the
company maintains a perpetual inventory subsidiary ledger. Monthly reconciliations of
bank accounts are also essential controls over cash balances.
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Controls to safeguard assets
These controls aim to protect physical and non-physical assets and minimize losses from both
internal and external events. Physical assets include cash, stock and equipment, and non-physical
assets could include debtors, intellectual property or customer lists.
Types of control techniques used to protect assets include:
• Physical security, such as locking premises, personal offices, filing cabinets and safes, etc.
• Using security cameras.
• Restricting access to areas and databases.
• Assigning and changing computer passwords, access codes and safe combinations
• Avoiding giving one employee total control over a key process.
• Making sure accounts payable are supported by properly raised (original) invoices.
• Making sure there is an independent check on processes and procedures.
• Having firewalls and protective devices on computer systems.
• Having clear guidelines on personal use of assets.
• Ensuring proper management supervision.
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Controls to ensure financial information is accurate and reliable
Internal controls support the collection of correct information for management and financial reports.
Many decisions are based on the information in these reports, so accurate information is crucial.
The financial staying power of a business depends on reliable and timely reporting of both good and
bad news.
Types of controls used to ensure accurate and reliable financial information include:
• Assigning responsibility for who can create or alter financial records.
• Numbering documents, such as cheques, sequentially to avoid duplication.
• Regular reconciliation of accounts.
• Automated controls, such as valid date ranges or dollar value limits.
• Comparisons between budgeted and actual figures.
• Segregation of duties.
Very small businesses may question the need for internal
controls or consider them to be useful only in larger
• Procedures for authorization of payments.
businesses, however, many controls can be modified for
• Independent checks.
small businesses. Even a sole operator can regularly
reconcile their bank statement and chequebook or check
• Validation checks.
budgets against actual. Personal observation and routine
• Exception reports.
checks can detect errors before they have an effect in
• Approved authority levels.
another part of the business. Remember that every dollar
lost or stolen is a dollar less in your pocket.
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Controls to ensure compliance with financial and operational requirements
Businesses have many compliance obligations and need to ensure these are met.
Some examples of controls used to ensure compliance include:
• Assigning responsibility to individuals for compliance with particular requirements,
such as safety officer or fire warden.
• Physical controls to prevent accidents.
• Processing customer complaints fairly and in a timely manner.
• Staff feedback processes.
• Procedures that are well documented.
• Conduct of regular audits.
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Controls to assist in achieving businesses objectives
Without accurate financial information, decision making becomes very difficult and the
business will suffer. Internal controls help to ensure financial information is accurate
and timely, so that managers and owners can take the correct action to meet the
business’s objectives and goals. Other internal controls also ensure the business
meets its goals.
Some examples of human resource controls include:
• Undertaking reference checks on new staff to ensure they do have essential
• Ensuring correct training for staff has been provided.
• Appropriate supervision of staff.
• Police and bankruptcy checks can be undertaken when the nature of the job
requires it.
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You can start to develop your regular accounting procedures by separating your tasks by
expected frequency: daily, weekly, monthly, quarterly, or yearly. General accounting
chores will fall into each category, but tax-related tasks typically come up no more than
Every business will have unique needs, and your task schedule can be tailored to match
whatever your company requires.
To keep on top of your regular recordkeeping, enter transactions in the journals daily. Post
to the ledgers at least weekly; if your company has a high transaction volume, post
transactions more frequently. Once transactions have hit the ledgers, file the
corresponding paperwork so you'll be able to easily locate any documents you need.
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Daily and Weekly Tasks
For many small businesses, the first five items on the following list will be daily tasks; the rest will be
weekly. However, only you can judge your company's transaction volume and tailor the schedule
accordingly. For example, with a very light transaction volume, you may want to shift more items to your
weekly list.
Sort your mail into action piles (such as bills to pay and orders to fill).
Inspect and stock any incoming inventory orders, and record the purchase
transactions in your purchases journal.
Process any new customer orders, record all sales transactions, and mail out any
new accounts receivable invoices.
Gather the day's cash and checks, make up a deposit slip, and put any necessary
entries in your cash receipts journal (and checkbook).
Pay any invoices that are due or for which you can get an early payment discount.
Record any checks that you've written in your cash payments journal.
Record any cash transactions in the appropriate cash journal.
Record any other transactions of the day in the appropriate journals.
Post all journal transactions to the ledger accounts.
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Monthly Tasks
Make time to deal with all the recordkeeping and tax-oriented month-end chores. These tasks are
often more complex than journalizing and posting transactions, and may take some time to accomplish,
especially when you're first getting started.
Make sure all your accounts have correct balances. For some accounts, you will perform
reconciliations, which means you will match your general ledger account balance with something else to
verify its accuracy; if they don't match, you can find and fix the error. For example, every month, you have
to reconcile your cash accounts with corresponding bank statements
When you think all the accounts are accurate, prepare a trial balance to make sure your general ledger
is in balance. If you want to look at rough financial statements for the month, you can create them once
your trial balance balances.
Once you have all the reports you need, you can close out your books for the month (unless you use
different accounting periods for your company, such as quarters).
Once all your regular monthly accounting tasks are complete, you can turn toward tax responsibilities.
Which chores you have to do depends completely on your business; you may not have to deal with
monthly tax issues at all. If you have employees, you may be required to make a monthly payroll tax
deposit. When your company has taxable sales, you may have to file a monthly sales tax return along with
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Quarterly Tasks
On the recordkeeping front, your quarterly tasks won't be much different than regular month-end tasks
(unless you close your books only quarterly).
 Take a look at how close your actual revenues and expenses are to what you've expected. For
example, if you prepared a budget at the beginning of the year (or as part of your original business
plan), you can compare your real-life results to those estimates.
From the tax side, the end of a quarter usually brings a lot of responsibilities.
 If your business structure is anything other than a C corporation, or a limited liability company (LLC)
taxed like a C corporation, you and any co-owners must file personal quarterly estimated federal
and state income taxes. C corporations must file their own quarterly estimated income taxes. In
addition, most companies with employees will have to file payroll tax returns each quarter,
sometimes along with payment. Finally, you may have quarterly sales tax reporting obligations,
depending on your state law.
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Annual Tasks
On the accounting front, you have to do the following:
1. Pay every bill that you want to be able to deduct in the current year (for cash basis)
2. Prepare adjusting entries
3. Verify your trial balance
4. Create comprehensive financial statements
5. Set a budget for the upcoming year
6. Close out your books for the year
7. Set up your journals and ledgers for the upcoming year (only for manual systems)
Turning to taxes, the list is just as long, but many of the chores can be grouped together.
1. the payroll responsibilities: In addition to all your normal payroll filings, you must provide a
personal tax statement to each employee. A copy of each of these, along with a summary report,
has to be sent to the federal government. The annual federal unemployment tax return is also
due at this time.
2. Year-end is also income tax time. You will have to prepare both the company tax returns and
your personal tax returns (in that order), for both the state and federal governments.
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