Comment on Internal Control: A Preventive Mainentance Program by localizer method

You read about this in every newspaper in every town in the entire country: Some bookkeeper, trusted by the owner of a small business, embezzles thousands of dollars. If the theft doesn’t put owner out of business, it certainly causes a major headache.

The reason we hear of these cases so often is that, in a small business, theremay only be the owner and a bookkeeper. The owner doesn’t like doing the books, doesn’t understand them, and relies on this one person to take care of things. The bookkeeper, who is usually having personal financial difficulties, takes a small amount of money intending to pay it back. No one seems to notice, so more is taken. Over a period of time, it starts to mount up to a lot of money.

This is where the concept of “internal control” comes in. Essentially, every business should have, at some level, an internal control system in place to protect against losses, both intentional and unintentional. This is because “internal control” systems will: 1) protect cash and other assets; 2) promote efficiency in processing transactions; and, 3) ensure reliability of financial records. An internal control system consists primarily of policies and procedures designed to provide reasonable assurance that these three objectives will be achieved. The size and complexity of the business will determine the extent of the internal control system.

Regardless of size, one of the most important aspects of an internal control system is the concept of separation of duties. Separating duties makes it more difficult for theft and errors to go undetected. It is highly unusual for two employees to “collude” in an effort to steal from the company.

I worked as an internal auditor for a newspaper chain for three years. My job was to walk in to the newspaper offices unannounced and go directly to the cash boxes, count them, and verify receipts. One of my most important audit steps was to make sure the internal control procedures were in place and working properly. Here are a few suggestions for internal control procedures regarding
handling of cash:

Allow only specific designated individuals to handle cash.Give responsibility for bookkeeping to an individual who does not handle cash.Use numbered receipts to document all payments.Make all bank deposits promptly.The person who prepares the bank reconciliation should be different than the one handling cash.If possible, the person who makes the bank deposit should be different than the one who handles
the cash and the one who prepares the bank reconciliation.Make deposits intact with no amounts withdrawn to pay expenses.Keep cash and checkbook in a locked drawer or cash register.Since tills will never be 100% correct all the time, establish a tolerance level for overages and shortages to determine the point at which corrective measures will be triggered.Make all disbursements by check, except minimal amounts paid from petty cash.Make certain every payment is related to a paper document, such as a voucher,
to ensure that a paper trail exists for all disbursements.Conduct random surprise counts of petty cash and cash drawers.Count inventory and other assets frequently and compare with company books.

An internal control system set up early as a preventative measure is more efficient than establishing a corrective system in reaction to a loss. If it so happens, that there is just you and the bookkeeper in your small business, you need to learn how to do some of the bookkeeping tasks so you can spot check the bookkeeper’s work. That, in itself, is an excellent preventative measure.

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Most popular Q&A from 2010

Here are the 20 most popular posts from the Accounting Coach Blog during 2010. New questions will be answered starting January 2011.

About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years.

He is the author of the 2010 Master Accounting Download Package which has been praised for it's ability to simplify accounting in a way that anybody can understand.

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Comment on T-Accounts: A Great Tool for Solving Accounting Transactions by AccountanQueenstown

A T-Account is a template or format shaped like a “T” that represents a particular general ledger account. Debit entries are recorded on the left side of the “T” and credit entries are recorded on the right side of the “T”. It is a tool for organizing journal entries and analyzing accounting transactions.

There are a few business owners or managers who have a fantastic ability to remember details, but I would venture to say that most of us find our memory diminishing over time. T-Accounts come in handy when a series of journal entries are required and it becomes too difficult to keep all of them in your head.

When solving accounting problems, you have to think of accounting transactions in terms of the “accounting model”. Click this link if you need to refresh your memory regarding the accounting model:

http://www.reallifeaccounting.com/accounting_model.asp

The “accounting model” is a template you can use to remember how debits and credits work. The two most common scenarios for using T-Accounts are: 1) determining why certain transactions were previously posted to the general ledger; or, 2) working out the most appropriate place to post certain accounting
transactions.

T-Accounts work because they are visually effective. This means they are simple to understand and usually it is possible to portray all the T-Accounts on one page. Let’s look at a basic accounting transaction and then translate it into T-Account form. Assume you sold an accessory to one of your rental inventory assets for $35 cash and deposited the money into the bank. You originally bought the accessory for $20 and put it into inventory until it was sold. The journal entries for the transaction would look like this:

The T-Accounts would look like this:

You can easily see that the debits equal the credits. Let’s look at a more complex accounting transaction. You bought a company van to delivery your rental inventory for $25,000 and you did this by putting $5,000 down and setting up a liability (Notes Payable) for $20,000. You made your first payment of $380, of which $80 was interest, and your first month’s depreciation was $833. To the unfamiliar, these transactions might appear confusing until T-Accounts are used.

A critical step is to make sure that the debits equal the credits. If not, you have made a mistake that must be solved. Next, simply put these T-Accounts in journal entry form:

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Comment on Working with the Equity section of your Balance Sheet by John

As I say in my newly posted article, “Equity Accounts – It’s Your Money“, the equity section of the balance sheet is the least understood. I give examples of the general ledger accounts that are found in the equity section for a sole proprietor, partnership, and corporation along with an explanation of how the accounts function.

The key to understanding these accounts is having a working knowledge of how debits and credits are recorded depending on whether a transaction calls for an increase or a decrease. Use the Accounting Model link in the article if you need brusing up.

For example, if you are a sole proprietor and you take money out of your business for personal purposes then you would record an entry on the debit side of the general ledger account “Owner’s Draw”. Increases to Equity require a credit entry, while decreases to Equity require a debit entry.

In the example, if you wrote yourself a check you would be decreasing Cash, which is an asset. Since you wrote the check to yourself, it makes sense that you decreased your Equity. Here is the tricky part and why you need to “think out” what you are doing using the Accounting Model:

You decreased your Equity by making a debit entry to Owner’s Draw and you decreased cash in your bank account when you withdrew money for personal reasons and made a credit entry to CASH. Seems straightforward doesn’t it?

But you increased the Owner’s Draw account while at the same time decreasing your equity. Sometimes this concept is hard for people to grasp. You just have to remember that Owner’s Draw is a general ledger account found within the Equity Section.

It is useful to remember the fundamental accounting equation:

ASSETS = LIABILITIES + EQUITY

When Cash, an asset, was decreased then either Liabilities or Equity would also have to be decreased in order to stay in balance. In this case, the decrease was in Equity.

The rule is that in any transaction recorded the DEBIT SIDE MUST EQUAL THE CREDIT SIDE of the ledger.

Any questions?

View the original article here

Comment on T-Accounts: A Great Tool for Solving Accounting Transactions by Business Tax Account

A T-Account is a template or format shaped like a “T” that represents a particular general ledger account. Debit entries are recorded on the left side of the “T” and credit entries are recorded on the right side of the “T”. It is a tool for organizing journal entries and analyzing accounting transactions.

There are a few business owners or managers who have a fantastic ability to remember details, but I would venture to say that most of us find our memory diminishing over time. T-Accounts come in handy when a series of journal entries are required and it becomes too difficult to keep all of them in your head.

When solving accounting problems, you have to think of accounting transactions in terms of the “accounting model”. Click this link if you need to refresh your memory regarding the accounting model:

http://www.reallifeaccounting.com/accounting_model.asp

The “accounting model” is a template you can use to remember how debits and credits work. The two most common scenarios for using T-Accounts are: 1) determining why certain transactions were previously posted to the general ledger; or, 2) working out the most appropriate place to post certain accounting
transactions.

T-Accounts work because they are visually effective. This means they are simple to understand and usually it is possible to portray all the T-Accounts on one page. Let’s look at a basic accounting transaction and then translate it into T-Account form. Assume you sold an accessory to one of your rental inventory assets for $35 cash and deposited the money into the bank. You originally bought the accessory for $20 and put it into inventory until it was sold. The journal entries for the transaction would look like this:

The T-Accounts would look like this:

You can easily see that the debits equal the credits. Let’s look at a more complex accounting transaction. You bought a company van to delivery your rental inventory for $25,000 and you did this by putting $5,000 down and setting up a liability (Notes Payable) for $20,000. You made your first payment of $380, of which $80 was interest, and your first month’s depreciation was $833. To the unfamiliar, these transactions might appear confusing until T-Accounts are used.

A critical step is to make sure that the debits equal the credits. If not, you have made a mistake that must be solved. Next, simply put these T-Accounts in journal entry form:

View the original article here

Comment on Working with the Equity section of your Balance Sheet by liran

As I say in my newly posted article, “Equity Accounts – It’s Your Money“, the equity section of the balance sheet is the least understood. I give examples of the general ledger accounts that are found in the equity section for a sole proprietor, partnership, and corporation along with an explanation of how the accounts function.

The key to understanding these accounts is having a working knowledge of how debits and credits are recorded depending on whether a transaction calls for an increase or a decrease. Use the Accounting Model link in the article if you need brusing up.

For example, if you are a sole proprietor and you take money out of your business for personal purposes then you would record an entry on the debit side of the general ledger account “Owner’s Draw”. Increases to Equity require a credit entry, while decreases to Equity require a debit entry.

In the example, if you wrote yourself a check you would be decreasing Cash, which is an asset. Since you wrote the check to yourself, it makes sense that you decreased your Equity. Here is the tricky part and why you need to “think out” what you are doing using the Accounting Model:

You decreased your Equity by making a debit entry to Owner’s Draw and you decreased cash in your bank account when you withdrew money for personal reasons and made a credit entry to CASH. Seems straightforward doesn’t it?

But you increased the Owner’s Draw account while at the same time decreasing your equity. Sometimes this concept is hard for people to grasp. You just have to remember that Owner’s Draw is a general ledger account found within the Equity Section.

It is useful to remember the fundamental accounting equation:

ASSETS = LIABILITIES + EQUITY

When Cash, an asset, was decreased then either Liabilities or Equity would also have to be decreased in order to stay in balance. In this case, the decrease was in Equity.

The rule is that in any transaction recorded the DEBIT SIDE MUST EQUAL THE CREDIT SIDE of the ledger.

Any questions?

View the original article here

Comment on Detail of the General Ledger Report by Gerald

How in the world could anyone working in accounting get along without a Detail of the General Ledger report? That would be like working with your hands tied and your eyes blindfolded. Without this report you would have a very difficult time determining how a final balance in a particular account was derived. Here is why:

Picture this: Back in the not-to-distant past (before computers really caught on) we accountants recorded each transaction of the business manually into a great big hard-bound, three-leaf binder book with yellow pre-printed ledger pages. Obviously, this was a very time-consuming, tedious process. Each page not only recorded the numbers associated with the transaction, it also recorded where the numbers came from, the date, and, when appropriate, a very brief note to the side describing additional detail. Here is an example of a general ledger account page:

Account 1010 – Cash-in-Bank

Transactions may come from a variety of journals, but they all pyramid into the General Ledger. I use the word “pyramid” because it is helpful to visualize the shape of a pyramid with all the source documents spread out at the base. The information is being summarized from each document and “migrates” upward to the General Ledger and eventually to the financial statements, which are at the top of the pyramid:

Fin State
Trial Balance
General Ledger
Gen Jour, Cash Rec, Cash Disb, Acct Rec, Acct Pay
Sales Invoices, Purchase Invoices, Bank Rec, Check Register

If I wanted to find out how a particular balance came to be, all I had to do was look at the detail on the general ledger page. That detail would then tell me which source documents contained the numbers that contributed to the final balance. I did not have search all over kingdom come to find what I was looking for.

Nowadays, your computer accounting software should give you a report of the detail in your General Ledger that is laid out as cleanly and clearly as presented above. Just like you would find in a manual general ledger. The report should not be encumbered with all kinds of other information that makes it hard to decipher. Some software programs don’t call this report a Detail of the General Ledger, they call it a transaction report or something similar.

Furthermore, you should be able to print a report for any period your heart desires, for instance: a year-to-date report; from February to July; for just one month; or whatever. You need that flexibility. If you need to see all twelve months of activity for a particular account, then you need to see all twelve months. You should not have to print out each month separately and then manually piece them together. And, if you only need to look at one month, you don’t want to have to print out the entire year.

A good report will enable you to use it as an analytic tool to find mistakes. Let’s assume that after printing your financial statements you looked at the Cash-in-Bank account and it said the balance was $3,556.38. Being the good accountant that you are, you verified that balance with the bank reconciliation balance and found that it said the balance should be $3,583.38. The difference between the two totals is $27.00. Your first step should be to run a Detail of the General Ledger report for the month, which you do and it is our example above. The first thing you notice is a $27.00 credit entry. This is suspicious and worth investigating. You can see that this entry came from the General Journal so you turn to page 4. Let’s hypothesize and assume that you really meant for this credit entry to go to Employee Advance, which is 1110. You simply wrote the wrong GL Account number.

We used to call this procedure “smoking out the error”. Sometimes the errors are easy to find, sometimes not so easy. The process consists of verifying the final balances that are on the financial statements. What is in the General Ledger should be what is on the financial statements. Therefore, you must use another document as a means of verifying the account balance. In our example above, we used the Bank Reconciliation. Other documents used to verify balances could be the Accounts Payable Ledger, Accounts Receivable Ledger, Sales Tax Report, Payroll History Report, Inventory Control Report, Notes Payable Amortization Schedule, and so on.

Just like a carpenter who uses a level before nailing up a board, you will want to verify your balances with these other control reports before accepting the financial statements as being correct. If the board isn’t level, the carpenter must figure out why. If an account balance is different than the balance found on the control document, then use your analytical tool called the Detail of the General Ledger Report to discover why.

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