What are Internal Controls? In a broad sense, internal control comprises controls which embrace the organizational plan and the methods used to protection the assets, create the dependability of financial data and records, endorse working efficacy and loyalty to managerial policies. Internal control is categorized by independence between departments and lines of vicarious duty and authority. It is important that these internal controls verify the dependability and correctness of the data supportive all transactions using control total techniques, sanctions and approvals, contrasts, and other tests of data accuracy. Why Internal Controls are Important? Before management can make judgments to maximize the long run profit of a firm, it must first have dependable accounting data on which to base these decisions. This info should be timely, accurate, complete, and reliable. The protection of the assets of the firm against losses from misappropriation, robbery, failure to take discounts, inadequacy, and unjustified delays Continue reading
Accounting Basics
Top Down Approach for Audit of Internal Controls
The purpose of using the top down approach for an audit of internal controls is to allow the auditor to take a systematic approach to identify risks and select which controls to test. The top down approach begins with the auditor forming a general understanding of the entity and the industry in which it operates. This is accomplished by looking at the company’s financial statements, and acquiring general business knowledge. The auditor then looks at the entity-level controls of the company to ensure that sufficient policies and procedures are implemented to recognize misstatements, due to error or fraud, in a timely manner so that material misstatements do not affect the financial statements. The two most important types of entity-level controls are those related to the control environment, and those over the period-end financial reporting process. Controls over the control environment should assess how management promotes ethical values and integrity, as Continue reading
Double Entry Bookkeeping System
Bookkeeping is an act of keeping permanent records of the financial transactions of a business in a systematic and orderly manner. The financial transactions of the business are identified, recorded and classified in different books. In modern entities, records of financial transactions are maintained under a double entry system. The double entry system has been recognized as a systematic and complete system for recording financial transactions. Double entry system recognizes that every financial transactions has two aspects. It then records two aspects of a transaction simultaneously in two separate accounts with equal amounts. It provides the aspects of a transaction with their names of debit and credit. Thereafter, with the help of ledger accounts, profit and loss account and the balance sheet are prepared to ascertain the profit and loss and the financial position of the business. Thus, the double entry system is the most systematic and complete system of Continue reading
Traditional and Modern Innovative Management Accounting Practices
In last many years, few management accounting innovations has been developed. Managers have to make decision on a daily basis as well make decisions regarding the future and how to survive and grow in an energetic market place with ever growing uncertain circumstances. Traditional and modern management accounting system give relevant information to all levels of management, financial and other information to make decisions about planning, control of operations and identifying opportunities to add value. The modern management accounting practices are typically different from that of traditional management accounting as they enable managers to make sound decisions to minimize cost as well in the same time add value to the products and services by improving the quality of products, which is required by the customers, and reduce waste. In addition, the modern management accounting systems allow the organisation as whole to develop the innovative capacity of the organisation and flexibility Continue reading
Process Costing – Definition, Steps and Charactristics
In accounting, process costing is a method of assigning production costs to units of output. In process costing systems, production costs are not traced to individual units of output. Costs are assigned first to production departments and then to units of output as they move through the departments. The process costing method is typically used for processes that produce large quantities of homogeneous products. The process costing method is in contrast to other costing methods, such as product costing, job costing, or operation costing systems. Using the process costing method is optimal under certain conditions. If the output products are homogeneous, that is, the units of output are relatively indistinguishable from one another, it may be beneficial to use process costing. If the output products are of low value, meaning each individual unit of output is not worth much, it may be beneficial to use process costing. And if it Continue reading
Evaluate a Businesses Overall Financial Performance Using Profitability Ratios
An accounting ratio is made by dividing one account’s transactions into another. The aim is to achieve a comparison that is easy as well as beneficial to clarify. Evaluate ratios for one Industry enterprise over several years. A graph of the ratio may allow a long-term trend. The same ratio is from many firms of similar size in the same industry. These ratios are used to assess performance and, with other data, forecast prospect profitability. Along with that is the future viability in addition to the soundness, which will repay loans as well as credit, additionally pay the interest along with dividends. Since profits are divided amongst shares, the profit per share indicates a possible dividend. While profitability ratios “evaluate a business’ overall financial performance through appraising its capability to produce revenues in surplus of service costs as well as other expenses. There are at least four profitability ratios, which Continue reading