Accounting Systems and Internal Control

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Chapter 5

• Accounting Systems and Internal Control

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Accounting System

• Methods and procedures for
• collecting, classifying, summarizing,
• and reporting a businesss financial
• and operating information

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Accounting System

• Management designs an accounting system that
• 1) Balances costs with benefits
• 2) Produces useful reports
• 3) Adapts to future needs
• 4) Has adequate internal controls

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3 Objectives of Internal Control

• Policies and procedures provide reasonable
  assurance that
• Assets are safeguarded and used for business
  purposes
• Business information is accurate
• Employees comply with laws and regulations

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5 Elements of Internal Control

• Control Environment
• Risk Assessment
• Control Procedures
• Monitoring
• Information and Communication
• Protect business from threats

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Some Common Internal Controls (1)

• Personnel hire competent personnel, rotate
  duties, make vacations mandatory
• Segregation of Duties - split responsibility for
  related operations among two or more persons or
  departments
• E.g. Purchasing, Receiving, Paying

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Some Common Internal Controls (2)

• Authorization
• Proofs
• Account reconciliations
• Bank reconciliations
• Security measures
• Cash registers
• Bank accounts
• Cameras and alarm systems

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Clues to Potential Problems
Warning signs with regard to people

• 1. Abrupt changes in lifestyle.
• 2. Close social relationships with suppliers.
• 3. Refusing to take a vacation.
• 4. Frequent borrowing from other employees.
• 5. Excessive use of alcohol or drugs.

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Clues to Potential Problems
Warning signs from the accounting system
1. Missing documents or gaps in transaction
numbers. 2. An unusual increase in customer
refunds. 3. Differences between daily cash
receipts and bank deposits. 4. Sudden increase in
slow payments. 5. Backlog in recording
transactions.
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Internal Controls Sarbanes-Oxley

• Management must evaluate and report
• on the effectiveness of the companys
• internal controls in the yearly Financial
• Statements

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Different Types of Ledgers

• General ledger the primary ledger which
  contains all of the balance sheet and income
  statement accounts
• Subsidiary ledger lists individual customer
  accounts and suppliers and their account
  balances. Posting are done daily.
• Controlling account each subsidiary ledger has
  one in the General Ledger

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General Ledger and Subsidiary Ledgers
General Ledger
Cash 11
Accts. Rec. 12
Supplies 14
Accts. Pay. 21
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Types of Subsidiary Ledgers

• Account Receivable Subsidiary Ledger the total
  in this ledger must equal the general ledger
  balance in Accounts Receivable
• Accounts Payable Subsidiary Ledger the total in
  this ledger must equal the general ledger balance
  in Account Payable

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Special Journals

• Journals designed to be used for
• recording a single type of transaction
• that occurs frequently
• Types of Special Journals
• Revenue
• Cash Receipts
• Purchases
• Cash Payment
• General

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Computerized Accounting Systems

• Advantages
• Elimination of many math, posting and journal
  recording errors
• Transactions are simultaneously recorded in
  journals and posted electronically to general and
  subsidiary ledger accounts
• Management has current account balance information

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Homework Assignment

• Key Terms page 206 (quiz)
• Self-Examination Questions page 208
• Class Discussion Questions page 209
• Problems
• Exercise 5-2
• Activity 5-1