6.2 Accounting cycles and associated controls

recording types

inventory control AR GL AP timekeeping cost accounting payroll

Recording ; cash receipts cycle

Accounts Receivable General Ledger

A properly designed system of internal controls should

- reduce the risk of errors - prevent an individual from fraud - segregation of duties - cost-benefit

The accounting process can be described in terms of five cycles:

1. Sales to customers on credit and recognition of receivables 2. Collection of cash from customer receivables 3. Purchases on credit and recognition of payables 4. Payment (disbursement) of cash to satisfy trade payables 5. Payment of employees for work performed and allocation of costs

Segregation of duties

1. authorization of the transaction 2. Recording of the transaction 3. Custody of the assets associated with the transaction

segregation of duties- chief accounting officer (controller)

AR billing Ap GL inventory control cost accounting payroll

Recording: cash payments cycle

Accounts Payable General Ledger

Recording: purchase payables cycle

Accounts Payable General Ledger

Employees record time worked on various tasks on job time tickets.

Allows accumulation of labor costs by job as well as tracking of direct and indirect labor.

Cash Receipts prepares a deposit slip and deposits checks in Bank. Bank validates the deposit slip.

Bank provides independent evidence that the full amount was deposited.

Goods arrive at Receiving with a packing slip.

Because quantities are blank on Receiving's copy of the purchase order, employees cannot assume the order is correct as received and must count items.

Function: sales rec. cycle Recording

Billing Inventory Control Accounts Receivable General Ledger

Custody; payroll cycle

Cash Disbursements Bank

Custody; cash payments cycle

Cash Payments

Accounts Receivable periodically sends account statements to customers showing all sales and payment activity.

Customers will complain about mistaken billings or missing payments.

Function: cash receipts cycle Authorization

Department: Customer Bank

Function: sales rec. cycle Authorization

Department: Customer Sales Credit

Payroll Cycle Function: Authorization

Department: Human Resources Production

Function: purchase payables cycle Authorization

Department: Inventory Control Purchasing

Cash Payments Cycle Function: Authorization

Department: Vendor Purchasing

Warehouse verifies that goods received match those listed on the receiving report.

Detects any loss or damage between Receiving and Warehouse.

Receiving prepares a receiving report and forwards it with the goods to Warehouse.

Detects discrepancies between the vendor packing slip and actual goods received.

Employees paid by manual check are given checks by Treasury personnel, not by Payroll or their supervisors.

Ensures that Payroll or supervisory personnel cannot perpetrate fraud through the creation of fictitious employees.

Accounts Payable receives the payroll register from Payroll, prepares a payment voucher, and forwards it along with the payroll register to Cash Disbursements (Cash Payments).

Ensures that a payable is accrued. Authorizes the movement of cash into the payroll imprest account.

Accounts Receivable receives the invoice from Billing and posts a journal entry to the AR file.

Ensures that customer accounts are kept current.

Mail Room also sends the remittance listing and remittance advices to Accounts Receivable for updating of customer accounts.

Ensures that customer accounts are kept current.

Upon receipt of the packing slip and bill of lading, Billing matches them with the approved sales order, prepares an invoice, and sends it to the customer. If the invoice is paper-based, a remittance advice is included for use in the cash receipts cycle.

Ensures that customers are billed for all goods, and only those goods, that were actually shipped. Reconciling sequentially numbered invoice transactions helps prevent misappropriation of goods.

Timekeeping prepares a summary of hours worked by job and forwards it to Cost Accounting for updating of the job records.

Ensures that direct labor costs are appropriately assigned to jobs.

Timekeeping reconciles the clock cards and job time tickets.

Ensures that employees are paid only for actual hours worked.

Timekeeping prepares a summary of hours worked by employee and forwards it to Payroll. Payroll matches it with the authorized employee list, prepares a payroll register, and updates the payroll records.

Ensures that employees are paid the proper amount.

At the end of the pay period, a production supervisor approves clock cards and job time tickets and forwards them to Timekeeping.

Ensures that employees worked only authorized hours.

Purchasing locates authorized vendor in vendor file, prepares a purchase order, and updates the purchase order file.

Ensures that goods are bought only from vendors who have been preapproved for reliability. Reconciling sequentially numbered purchase orders helps ensure that orders are legitimate.

Credit performs a credit check on the customer. If the customer is creditworthy, Credit approves the sales order.

Ensures that goods are shipped only to actual customers and that the account is unlikely to become delinquent (просрочка платежа по счету).

Receiving sends the receiving report and packing slip to Inventory Control for matching with the purchase requisition and updating of inventory records.

Ensures that inventory records are current. Updating inventory and GL files separately provides an additional accounting control when they are periodically reconciled.

Upon receipt of the packing slip and bill of lading, Inventory Control matches them with the approved sales order and updates the inventory system.

Ensures that inventory unit counts are updated once the goods have actually been shipped. Updating inventory and GL files separately provides an additional accounting control when they are periodically reconciled.

Upon receipt of an approved sales order, Warehouse pulls the merchandise, prepares a packing slip, and forwards both to Shipping.

Ensures that merchandise is removed from Warehouse only as part of a legitimate sale.

Human Resources sends a list of authorized employees, pay rates, and deductions to Payroll.

Ensures that only actual persons are carried on the payroll and that rates of pay and withholding amounts are accurate.

Upon receipt of a payment voucher with an approved vendor invoice, Cash Payments issues a check and forwards it to Purchasing.

Ensures that payments are made only when goods have actually been received.

Cash Payments prepares a check register of all checks issued during the day and posts a journal entry to the cash payments journal.

Ensures that the cash payments journal is updated for the total of checks requested.

Upon receipt of the validated deposit slip, Cash Receipts posts a journal entry to the cash receipts journal.

Ensures that the cash receipts journal is updated for the amount actually deposited.

Cash Disbursements compares the payment voucher with the payroll register total and initiates appropriate bank transfers.

Ensures that the correct amount is transferred to the payroll imprest account and governmental authorities.

Shipping verifies that the goods received from Warehouse match the approved sales order, prepares a bill of lading, and sends the shipment to the customer.

Ensures that the correct goods are shipped.

Accounts Payable matches the approved vendor invoice with the AP file and issues a payment voucher to Cash Payments.

Ensures that the invoice is for goods actually received and that duplicate payment cannot be made.

Receiving also sends the receiving report to Accounts Payable for matching with the purchase order and purchase requisition and updating of the AP file.

Ensures that vendor accounts are current.

Purchasing receives a vendor invoice and remittance advice. The remittance advice is separated and filed. The invoice is matched with the purchase order and approved for payment. The purchase order is marked as closed, and the approval is forwarded to Accounts Payable.

Ensures that vendors are timely paid for goods received and that Purchasing can follow up on partially filled orders.

Function: cash receipts cycle Custody

Mail Room Cash Receipts

Employees register the start and end times of their workdays on clock cards.

Mechanically or electronically captures employee work hours.

Credit sends the approved sales order to Sales, Warehouse, Shipping, Billing, and Inventory Control.

Notifies these departments that a legitimate sale has been made.

Shipping forwards the packing slip and bill of lading to Inventory Control and Billing.

Notifies these departments that the goods have actually been shipped.

Inventory Control prepares a purchase requisition when inventory approaches the reorder point and sends it to Purchasing and Accounts Payable.

Predetermined inventory levels trigger authorization to initiate purchase transaction.

Sales receives the invoice from Billing and updates the sales order file.

Prevents double shipment of completed orders and allows follow-up of partially filled orders.

Mail Room opens customer mail. Two clerks are present at all times. Customer checks are immediately endorsed "For Deposit Only." Remittance advices are separated.

Reduces risk of misappropriation by a single employee.

Mail Room prepares a remittance listing of all checks received during the day and forwards it with the checks to Cash Receipts.

Remittance listing provides a control total for later reconciliation.

Purchasing sends the remittance advice with the check to Vendor.

Settles liability to Vendor.

Function: sales rec. cycle Custody

Shipping Warehouse

Upon receipt of an approved sales order, Sales sends an acknowledgment to the customer.

The customer's expectation of receiving goods reduces the chances of misrouting or misappropriation (присвоение).

Recording; payroll cycle

Time-keeping Cost Accounting Payroll Accounts Payable General Ledger

Accounts Payable also forwards the payroll register to General Ledger for posting of the total to the GL file.

Updating AP and GL files separately provides an additional accounting control when they are periodically reconciled.

Accounts Payable prepares a summary of all purchase orders issued that day and forwards it to General Ledger for posting of the total to the GL file.

Updating AP and GL files separately provides an additional accounting control when they are periodically reconciled.

The check register is also forwarded to General Ledger for posting of the total to the GL file.

Updating AP and GL files separately provides an additional accounting control when they are periodically reconciled.

Accounts Receivable prepares a summary of all invoices for the day and forwards it to General Ledger for posting of the total to the GL file.

Updating AR and GL files separately provides an additional accounting control when they are periodically reconciled.

Mail Room also sends the remittance listing to General Ledger for posting of the total to the GL file.

Updating AR and GL files separately provides an additional accounting control when they are periodically reconciled.

Cash Disbursements executes three bank transfers.

Use of an imprest payroll account allows idle funds to be invested and funds related to uncashed checks to be isolated. In the U.S., federal taxes withheld are transferred to the U.S. Treasury. In the U.S., state taxes withheld are transferred to the state government.

Custody; purchase payables cycle

Vendor Receiving Warehouse

Purchasing sends the purchase order to Vendor, Receiving, and Accounts Payable. Receiving's copy has blank quantities.

Vendor prepares merchandise for shipment. Receiving is put on notice to expect shipment. Accounts Payable is put on notice that liability to this vendor is about to increase.

segregation of duties--CFo/treasurer

cash receipts cash disbursements (расходы) credit

Step 1 Business Activity Sales receives a customer order for merchandise, prepares a sales order, and forwards it to Credit.

control: Reconciling sequentially numbered sales orders helps ensure that orders are legitimate.

authorization types

customer sales credit billing customer bank inventory control purchasing vendor HR production

segregation of duties--VP of human resources

human resources

segregation of duties--VP of administration

mail room

segregation of duties-VP of operations (6)

sales warehouse receiving shipping production purchasing

custody types

shipping warehouse mail room cash receipts vendor receiving warehouse cash payments cash disbursement bank