ch. 7 - Financial Accounting - Chapter 7 1 Chapter 7 -...

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Unformatted text preview: Financial Accounting - Chapter 7 1 Chapter 7 - Study Objectives After studying this chapter, you should be able to: 1. Identify the principles of internal control. 1. Explain the applications of internal control to cash receipts. 1. Explain the applications of internal control to cash disbursements. 1. Prepare a bank reconciliation. 1. Explain the reporting of cash. 1. Discuss the basic principles of cash management. 1. Identify the primary elements of a cash budget. Financial Accounting - Chapter 7 2 Internal Control Internal control consists of all related methods and measures adopted within a business to: Safeguard its assets from employee theft, robbery, and unauthorized use; and Enhance the accuracy and reliability of its accounting records by reducing the risk of errors (unintentional mistakes) and irregularities (intentional mistakes and misrepresentations) in the accounting process. Financial Accounting - Chapter 7 3 Principles of Internal Control To safeguard its assets and enhance the reliability and accuracy of its accounting records, a company should follow the following specific principles of internal control: 1. Establishment of Responsibility control is most effective when only one person is responsible for a given task. 2. Segregation of Duties e.g., the responsibility for keeping the records for an asset should be separate from the physical custody of that asset. Main Point to detect or prevent irregularities in performance of an employees duties. 3. Related Activities include ordering merchandise, receiving goods, and paying for goods. Main Point when one individual is responsible for all of the related activities, the potential for errors and irregularities is increased. 4. Accountability for Assets the custodian of the asset is not likely to convert the asset to personal use if one employee maintains the record of the asset that should be on hand and a different employee has physical custody of the asset. Financial Accounting - Chapter 7 4 Principles of Internal Control 1. Documentation Procedures documents should provide evidence that transactions and events have occurred. Documents should be prenumbered and accounted for, and source documents should be forwarded to the accounting department to ensure timely recording. 2. Physical, Mechanical, and Electronic Controls use of these devices ensures safeguarding of assets and accuracy of accounting records. Examples include safes, time clocks, and access controls to computer facilities and equipment....
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This note was uploaded on 04/14/2008 for the course ACCT 201 taught by Professor Romney during the Fall '06 term at San Diego.

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ch. 7 - Financial Accounting - Chapter 7 1 Chapter 7 -...

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