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Learn Accounting :Understanding Basic Accounting Controls

Tampa, FL March 27, 2009 – Whether you operate a large multi-national corporation or a small local restaurant, understanding some basic accounting controls will go a long way towards creating more reliable financial results and rendering you a better night’s sleep. Basically, accounting controls are operational, financial, or technological mechanisms used by businesses to ensure or encourage a particular behavior or result. Internal controls give owners and managers some degree of assurance that people are doing what they are supposed to be doing and that material mistakes, accidental or otherwise, will be detected prior to going out the door. For example, segregating responsibility for check writing from the responsibility for reconciling monthly bank statements helps to control against improper check disbursements. In the example above, segregating such duties may be difficult in small businesses with limited staffing capabilities. However, alternate control mechanisms, such as manager or owner review of monthly bank reconciliations, can be implemented to partially mitigate such risks.

It’s no surprise that internal controls frequently come at a cost. As such, the number and strength of the controls within any given internal control structure is usually a function of the owner or manager’s resource capacity and risk tolerance level. As such, it is important to conduct a general risk assessment of the business process or function that you are looking to control in order to focus your efforts most effectively and gain the most bang-for-your-buck as they say.

First, let’s talk about some higher-level control concepts that should be present across most accounting processes to set the stage for more detailed transaction or process-level control mechanisms. One of the best ways to standardize behavior and set expectations is to create formal written policies and procedures to govern the actions and activities within your business or department. In accounting, such policies and procedures are frequently summarized in an Accounting Manual, which specifies the who, what, when, and how of common accounting procedures and activities. Another control concept, illustrated in the earlier example, is known as segregation of duties. Optimally, no single individual should have the responsibility or ability to initiate, authorize, process, and record a given transaction (i.e. they shouldn’t have end-to-end responsibility). Segregating such duties decreases the chances of errors, intentional or otherwise, going undetected.

Next, let’s look at some common accounting functions and give some examples of common internal controls specific to each. It is important to note that these are only examples and any good internal control system should be customized to the needs and risks within your organization or department. Below is a list of some common accounting areas, their functional objectives, and some common internal controls suggestions.

Accounts Receivable, Credit, & Collections - To ensure that all funds intended for the organization are received, promptly deposited, properly recorded, reconciled, and kept under adequate security. • Formally document policies and procedures governing accounts receivable, credit, and collection processes detailing timelines, responsibilities, actions, responsibilities, etc • Require credit reporting on all customers prior to credit issuance • Require periodic review of key customers to ensure ongoing credit worthiness • Establish limits of authority for credit issuance and terms (system or otherwise) • Limit system access to alter credit limits and/or terms only to appropriate personnel • Require manager approval for adjustments to and/or write-offs of A/R balances • Sequentially number credit memo adjustments to A/R balances • Require periodic reconciliation of the General Ledger to the Cash and A/R subsidiary ledger balances along with managerial review of this reconciliation • Reconcile bank statements to the General Ledger on a regular basis • Set-up lock-boxes for receipt of customer payments in order to limit the handling of checks and other forms of payment • Establish a central point of contact for incoming mail, preferably someone without the ability to post cash and/or adjust customer A/R balances in the system • Create summary reporting to be reviewed by management on a periodic basis, such as A/R aging, credit memos by customer, credit memos by employee, write-offs by customer, write-offs by employee, etc. • Limit access to alter or create records in the customer master file to appropriate parties • Batch receipt input data is compared to control totals and differences are investigated and resolved • Mail account statements to customers • Maintain support files in a secured area and restrict to appropriate personnel

Accounts Payable, Purchasing - To ensure that funds are disbursed only upon proper authorization of management, for valid business purposes, and that all disbursements are properly recorded. • Formally document policies and procedures governing accounts payable and purchasing processes detailing timelines, responsibilities, actions, responsibilities, etc • System access to create, edit, or delete purchase orders is restricted to appropriate personnel • Ability to add, modify, or delete vendor records in the vendor master file is restricted to appropriate individuals • All new vendors or major modifications to vendor information require manager approval • The vendor master file is periodically purged of old and obsolete vendors • A three-way match between the invoice, PO, and receiver must be present before payment is released to the vendor • Adjustments to A/P balances (credit notes) require managerial approval and is restricted to appropriate personnel • Check stock, signature plates, etc are appropriates secured and access is restricted to appropriate personnel • Dual signatures are required on all manual check disbursements • Positive pay account maintained at bank • Check sequences and gaps are investigated • Bank statements are reconciled to the general ledger regularly and reviewed by management • Major supplier statements are reconciled to the A/P subsidiary ledger • Support files are maintained in a secured area and restricted to appropriate personnel

Payroll - To ensure that payroll disbursements are made only upon proper authorization to bona fide employees, that payroll disbursement is properly recorded and that related legal requirements (such as payroll tax deposits) are complied with. • Formally document policies and procedures governing payroll processes detailing timelines, responsibilities, actions, responsibilities, etc • Access to add, modify, delete records from the employee master file is restricted to appropriate personnel. Modification to significant data (i.e. salaries, etc) requires managerial approval. • Payroll is disbursed manually with picture ID only on an annual basis in order to validate that paychecks are for bona fide employees (i.e. not ghost employees) • Support files are maintained in a secured area and restricted to appropriate personnel

Fixed Assets - To ensure that fixed assets are acquired and disposed of only upon proper authorization, are adequately safeguarded, and properly recorded. • Formally document policies and procedures governing fixed asset-related processes detailing timelines, responsibilities, actions, responsibilities, etc • Assets are appropriately secured • Book to physical reconciliation is conducted annually to validate condition and existence • Access to the fixed assets register is restricted to appropriate personnel • Asset disposals and write-offs require managerial approval above certain levels • Asset acquisitions must be approved in advance of purchase • Pre-numbered asset tags are affixed to all fixed assets • Asset valuations are periodically reviewed by management for continued relevance • All supporting paperwork must be obtained prior to entry into the fixed asset register • Support files are maintained in a secured area and restricted to appropriate personnel

Inventory – To ensure that inventories are received and/or shipped only with proper authorization and documentation, properly recorded, and appropriately safeguarded. • Formally document policies and procedures governing inventory-related processes detailing timelines, responsibilities, actions, responsibilities, etc • Inventories are appropriately secured • Book-to-physical or cycle counts are conducted periodically to validate condition and existence • Inventory will only be received with valid support paperwork (i.e. PO) • All inventory receipts must be verified for quantity and condition against the bill of lading and the packing slip and recorded on pre-number receiver forms or a log • The receipts log is reviewed and reconciled to system receipts by management on a daily basis • Support files are maintained in a secured area and restricted to appropriate personnel • Inventories are periodically marked to market to ensure proper valuation • Inventory write-offs require management review and approval • System access to process inventory adjustments is restricted to appropriate personnel • All inventory shipments must be accompanied by a valid order • Periodic managerial review of open work orders, inventory aging reports, etc • All shipments are recorded in a shipping log, which is reviewed and reconciled to the system shipments by management on a daily basis

Financial Closing or Reporting– To ensure that financial data is recorded, consolidated, and reported accurately, timely, and in compliance with US GAAP. • Formally document policies and procedures governing financial closing processes detailing timelines, responsibilities, actions, responsibilities, etc • Create and maintain a comprehensive close checklist of all close activities • Closing checklist and binder with all supporting entries should be reviewed and approved by the controller and/or owner prior to close • Segregate duties within the account reconciliation, journal posting, and management review/approval processes • All non-standard, adjusting, and/or manual journal entries require management approval • Establish a budgeting and forecasting process. Use trend analysis (horizontal and vertical) in order to sanity check results. Research and resolve any unusual variations • Ability and/or access to post journal entries is limited to appropriate personnel

Understanding the underlying concepts behind basic accounting controls will allow you and your organization to create an internal control structure, both within accounting and beyond, that enables more effective and efficient operating and financial results. And one more thing it provides…a little extra peace of mind.

For more information on accounting and auditing, please visit The Accounting Nation website at http://www.accountingnation.com.

About the Author

Robert Stewart runs a portal for Accounting and Auditing- Accounting Nation . It was created to provide accountants and auditors with a single-source virtual community to explore, learn, connect and grow with one another.

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There is no blanket brand that is best for every single tool. And to go cordless with every tool is not wise. No, Dewalt is not top of the line, they just have a rep. This is my list on many years experience.

Drills - Panasonic, yes Panasonic, makes the finest drills around. Pick up one of the cordless combo packs with a drill and impact driver and you will be astounded at the performance and accuracy of the tools. They are the only drill maker that delivers torque at even levels no matter what speed the chuck is spinning. In other words, other brands derive higher torque by spinning faster which makes for sloppy work if you dig in too deep or start off at top speed. These are the best cordless drills and priced near Milwaukees. I gave my Dewalt cordless to my Dad after discovering Panasonics. Don't buy a hammer drill unless you are doing extensive work with concrete drilling. If they are out of your price range, go Craftsman as their replacement batteries are dirt cheap. Keep a decent corded drill around just in case.

Circ Saw - Many fine brands out there, but Bosch fits my hand very well. Pick up the saw and see how it fits in your hand. Circ. saws must be comfortable or you will make sloppy cuts. If you need high power and are cutting very thick pieces of wood a worm drive Skil Saw is the way to go. Comfort and weight is key and Bosch works best for me in this dept. Cordless circ saws are a waste of money in my opinion. The battery life is horrific on any brand I have used. If these are too much money for you (Bosch circ saw is around $110), then I really don't know what to say. Just buy anything that is comfortable and in your price range.

Sanders - Porter Cable makes great sanders. Again, stay clear of cordless in this department as the batteries just can't keep up. If you are working on a tight budget, skip the sander all together and spend more on better saws and drills. Elbow grease replaces any sander at 1/100th the price.

Router - Porter Cable again in this dept. Honestly, I won't go near any other brand router. The true cost of a router begins AFTER you buy one. Bit sets are very expensive and you may be better off buying trim that matches the type of edges you want. Cut them to size and glue on the corners.

Those are the tools you listed. Cordless tools have advantages when used properly. Anything that runs for long periods of time (sander, jig saw, etc) will be a huge disappointment to you. If you absolutely must have one of those cordless combo sets and Dewalt is too expensive, go with Craftsman or Ryobi.

If all you have is some hand tools and you want to make furniture properly, be ready to shell out at least $1000 on power tools. It sounds like the things you want to work on are indoor projects. For the projects you listed, skip the circ saw and buy a miter saw.

Making things for around the house is very rewarding so keep at it. For shelves, go buy a $100 miter saw (Lowes has a Hitachi for $100 I believe as does Ryobi and Craftsman), wood glue, a Craftsman cordless drill (get corded if you do not already have one, cheap cordless drills can't match the power of a corded drill), a carpenters square, a level, and some screws. Sand the pieces first, assemble, and finish with some stain. Build up your skills with the basics first and things will make more sense when you go shopping for power tools. Have fun!