What is Internal Control in Accounting?
Internal Control in accounting refers to the process in which the company adopts different rules, policies or the procedure for ensuring correctness of the information about the accounting and finance, safeguarding the different assets of the business, promoting accountability in the business and preventing the occurrence of the frauds in the company.
Example of Internal Control in Accounting
- The protection of the cash of the company is a must as compare to the other assets as they can tamper more easily. Out of the total assets of the companyTotal Assets Of The CompanyTotal Assets is the sum of a company's current and noncurrent assets. Total assets also equals to the sum of total liabilities and total shareholder funds. Total Assets = Liabilities + Shareholder Equity, cash is the most crucial asset which can be easily stolen in the company, especially by the person who is managing it. Hence, it should be applied by the company for the protection of cash of an entity.
- A company can place different types of internal control in the cash department. First of all, it company can call for the system of segregation of duties in the cash department. In this, cash received from the customer and recording in the accounting system can be done by different persons. It means allotting different employees in the cash department for different activities.
- Furthermore, an entity can put more control systems. Especially a company working on a large scale, where they can appoint more employees within the chain of the cash working like separate employees for cash collection, for cash deposition in the bank, and record maintenance in the accounting systemAccounting SystemAccounting systems are used by organizations to record financial information such as income, expenses, and other accounting activities. They serve as a key tool for monitoring and tracking the company's performance and ensuring the smooth operation of the firm..
- With the help of simple segregation of duties, employees will perform their tasks properly and individually. It will eventually help in preventing fraud and errors as a single person will not be able to steal the cash and record fewer amounts of cash receiptsCash ReceiptsA cash receipt is a small document that works as evidence that the amount of cash received during a transaction involves transferring cash or cash equivalent. The original copy of this receipt is given to the customer, while the seller keeps the other copy for accounting purposes. in an accounting system. If someone tries, another employee will know and report to the management of the company.
The different advantages are as follows:
- It ensures the proper accounting of all the transactionsAccounting Of All The TransactionsAccounting Transactions are business activities which have a direct monetary effect on the finances of a Company. For example, Apple representing nearly $200 billion in cash & cash equivalents in its balance sheet is an accounting transaction. of the company.
- If proper internal controls are being placed in the organization, then it will lead to the smooth working of the organization and optimum utilization of the resources of the company, thereby reducing the misuse of the resources.
- It helps in preventing the financial irregularities arising in the business. If any occurs, then if the proper controls are in place, it helps in detecting them and correcting them as soon as possible.
- They help the business in implementing the policies of the management efficiently and effectively and thereby helping in achieving the various goals of the business.
- With the help of such control in the organization, staff work can be regulated properly and scientifically through the way of division of work properly among the different staff, which leads to the efficient and effective working of staff and puts the moral pressure on them.
- Chances of the non-compliances of the different statutory laws reduce, thereby reducing the chances of the various lawsuits.
- As there is the involvement of the human in placing the internal control in the company, human error may happen in doing so. Many times the person who is in charge of implementing the control does not get the proper understanding of the control and its purpose, or he forgets to follow the appropriate step, which might not fulfill the purpose of the whole of control. In these situations, it becomes hard to put in place the proper internal control system in the organization.
- Many times system control is not appropriately designed, where there is insufficient segregation of the duties, and people are allowed to interfere in the work of others. In those cases, it negatively affects the performance of the staff.
- Many times company has to incur considerable cost for the implementation of the proper internal control in the organization, which becomes problematic for the concerns, especially those who are having a small scale business.
Some essential points are as follows:
- A company can adopt different rules, policies, or procedures as their process. This process that will ensure- the correctness in the accounting and finance, safeguard assets of the business, promote accountability in the business, and preventing the occurrence of the frauds in the company is known as the “internal control.”
- With the help of such controls, work can be regulated properly and scientifically through the way of division of work among employees. These controls will lead to the efficient and effective working of staff and put the moral pressure on them.
- There is a different limitation, which includes the chances of human error as there is the involvement of the human in placing the internal control in the company, insufficient designing, massive cost involvement, etc.
Thus, in case of the internal control, the company adopts different rules, policies or the procedure with the motive of safeguarding the various assets of the organization, promoting the operational efficiency, checking of the accounting data, and following the different policies and procedures as prescribed by the management managerial of the company.
This has been a guide to what is internal control and its definition. Here we discuss an example of internal control in accounting along with advantages and limitations. You can learn more about accounting from the following articles –