Do You Know What Are Accounting Controls?
Accounting controls refer to the methods and procedures that a company or an accounting firm in Singapore would use to ensure the accuracy and validity of the financial statements. Business owners should apply these controls as protection for the company. These controls are not related to rules and regulations as well as the laws.
If a company has adopted the accounting controls, the controls should be able to increase the compliance and efficiency throughout the organisation. Also, it ensures the accuracy of the financial statements when the company presents them to bankers, auditors (Also see The Advantages and Limitations of Statutory Audit), investors, as well as its stakeholders. However, note that there are no control policies that are suitable for all the entities. The application of the accounting controls should suit the company’s needs, goals, types of business activities and other aspects.
There are three different types of accounting controls, which are preventive controls, detective controls and corrective controls.
Preventive controls are the controls (Also see An Overview of Internal Controls) that the company would apply daily to prevent errors mistakes or discrepancies from occurring. These controls are what the employees need to comply with when they are performing their tasks. As an instance, when a staff has issued an invoice, another person will review it and gives approval. Then, another team will make the payment. This is known as segregation of duties and such a system prevents a person from having the right to issue and pay the invoices at the same time.
Besides, companies may implement job rotation as one of the preventive controls. The company may transfer the staff from one department to another regularly. This will normally be practised by big firms and organisations. Job rotation helps to ensure that no one will be able to access any information for a long period. Thus, the staff will not be able to carry out illegal activities or thefts.
Another accounting control that business owner should adopt in their business is the detective control. These controls play a role in detecting any frauds, deviation and discrepancy from the policies that the company has applied. The company may also perform it as a measure of conducting integrity check. For example, the company may conduct a surprise check on the cash balance (Also see The Income Statement and the Balance Sheet) that the cashier has in hand and the cash balance recorded in the accounts. This is to check whether the cashier has performed his job properly, and this may also help in detecting if there are any accounting errors.
If both the preventive control and detective control have failed to prevent errors from happening, the corrective controls would be those that will come to rescue. When the accountants are doing the accounting tasks, they may post an adjusting entry to rectify any mistake, and this is an example of the corrective controls. Another example would be the auditors have found an error in the account (Also see An Overview of Suspense Account) books that should be corrected after a financial year, where the company has closed its books. In this case, the company may perform the corrective control by reopening the books and making the adjustments according to the requirement of the auditors.
An Overview of Internal Controls
Internal controls are the activities that a company would add on its normal operations with the intention of minimising the risks or errors and frauds, protecting its assets, as well as to make sure that it has conducted all operations by adhering to the rules or standards. Also, we can say that internal controls are the activities that business owners (Also see Poor Accounting Practices That Business Owners Should Avoid) need as these controls can help to reduce the types of risks as well as the risk levels that their business may be exposed to. The controls play a significant role in ensuring that the company can generate accurate financial statements (Also see What is a Financial Statement Review?) too.
Despite the advantages that internal controls could bring to a business, it has a significant drawback, that is, the control activities often cause the processes of the business to be slower. As a result, this may lower the overall productivity of the business. Hence, when the company’s management is developing the internal control system, they need to strike a balance between productivity and the reduction of risks. Sometimes, this may cause the management to take a certain level of risk to let the company compete with other competitors more efficiently. However, the company may suffer from some losses occasionally as the management has reduced the controls.
As the company continue to develop and increase in size, its internal control system will typically become more comprehensive too. This is crucial as the founders of the business will not have time to look into every control in all the business operations or processes. If a company chooses to go public, it will need to implement some extra financial controls, particularly if its shares will be listed on the stock exchange. Thus, in most cases, the cost incurred for maintaining the controls will increase as the company grows in size.
The management of a company can implement internal controls in many ways. For example, the board of directors should supervise the entire company and guide the management team. The company should also impose restrictions on the accessibility of computer records. This is to make sure that only the staff who needs those data to complete their tasks can access the information. This helps in minimising the risk of the important data being stolen or altered.
Most companies would hire an accounting firm in Singapore to conduct their annual financial statement audit （Also see Understanding the Differences between Review and Audit) , but do you know that you can conduct internal audits too? Internal audits are one of the most important ways to examine the internal controls that the company has implemented. The internal auditors (Also see The Advantages and Limitations of Statutory Audit) will assess all the processes and determine if there are any problems that the company could amend by improving the existing controls or introducing new controls. Although internal controls help in mitigating risks, it does not mean that the controls can remove the risks entirely. Some incidents will still cause the company to suffer from substantial losses, although it has implemented the necessary internal controls. For example, some unexpected circumstances have occurred, or some employees who want to commit fraud has done something to the controls or the related processes.
Poor Accounting Practices That Business Owners Should Avoid
Most business owners may not pay much attention to their accounting-related tasks when they first started running a business. This causes them to have some bad habits on accounting (Also see The Responsibilities of Accounting Department) without them knowing. Poor accounting practices can bring a huge blow to a rapid-growing company as business owners can hardly forecast the potential financial issues that will probably arise in the future and make necessary corrections to avoid them. This way, it is almost impossible for the company to reach its goals and achieve long-term success.
To avoid poor accounting practices from bringing fatal consequences to the company, business owners should consider hiring an accounting firm in Singapore. If you are one of them who prefers doing the accounting tasks on your own rather than handing them over to external accounting firms, here are some poor accounting practices you need to avoid.
To the untrained eye, cash flow and profit bring the same meaning. Thus, some business owners tend to record every deal as the profit earned as soon as it takes place before they complete their work. As time passes, this can bring serious impacts to the business if it needs longer time to complete the project or if the customers pay the company late. As business owners have recorded the profits, they may think that is the amount of cash they have in hand and can be used freely. Also, recording income (Also see How to Differentiate Revenue and Income?) right away can cause the financial condition of the business to be healthier than the real situation.
Mixing up personal and business finances is another common mistake that most business owners would commit, especially those who have just started running a new business. Some would think that there is no need to separate them as the money is flowing to the same place in the end. However, this makes expense tracking more difficult, and business owners may get audited by the authorities too. Hence, the correct way of handling finances is to have separate personal and business bank accounts.
Besides, some business owners do not have the habit of keeping the receipts. Although some of them use debit or credit cards for business expenses, the statement will not be able to provide sufficient data about the transaction. Instead of stuffing the receipts to nowhere, business owners should keep them neatly. Then, they should record how they use the items for the business and what benefit the company has obtained from those items. This will be very helpful when they forget what the transactions are all about.
Another mistake that business owners should never make is not to carry out bank reconciliation. They should make reconciliation one of their top priority as this makes sure that their books of accounts are always in sync. This helps in presenting the real financial situation of the company to the business owners too. If they carry out the bank reconciliation seriously, they will be able to know the amount of money they actually have in their accounts so that they can plan for their expenses.
The examples above are some of the bad practices that all business owners should never implement when they are dealing with their accounting (Also see What are Provision and Accrual in Accounting?) tasks. Good accounting practices should be systematic and consistent. This is to avoid confusion and mitigate the risks of committing mistakes. Also, this helps business owners in the process of generating financial statements (Also see What is a Financial Statement Review? ) so that they are well-informed of the performance of their business.
How to Differentiate Revenue and Income?
Most people think that both “revenue” and “income” mean the same, that is, a company has earned money. Some of the business owners may face the same problem, too; that is, they could not really tell the differences between them. However, these two terms are completely different in terms of concepts.
Revenue refers to the sum of money the company has generated by selling its products and services to the customers. Income, on the other hand, is the sum of money remaining after one has deducted all expenses a company has incurred from the sum of revenue generated. Both revenue and income are useful when you want to determine the financial position of your business.
If you want to calculate the sum of revenue your company has generated, you should multiply the prices of goods or services that you have sold with the number of units sold. This is the gross sales that your company has made. To calculate income, you need to subtract the sum of all expenses that the business has incurred in a given accounting (Also see Things You Should Know About Accounting Estimates) period from the total revenue it earned in that period. This is the total earnings of your company in that period.
For example, XYZ Corporation has sold 5,000 chairs in a year. The chairs cost RM80 each. Thus, we know that the sum of revenue it has generated is RM400,000. Then, in that accounting (Also see The Responsibilities of Accounting Department) period, XYZ Corporation has spent RM 300,000 on acquiring raw materials, maintenance of machines, paying employee salaries and so on. So, let us take RM300,000 as the total expenses incurred. To calculate the income that XYZ Corporation has earned, we need to subtract the total expenses from its sum of revenue. Thus, we get to know that its total income is RM100,000.
Both revenue and income (Also see What Can You Find in an Income Statement?) will appear in the profit and loss statement of your business. However, they will appear in different places, where revenue will appear on the top, and income will show up at the bottom of the statement. Hence, revenue is also called the “top line”, and the term “bottom line” refers to the company’s income. The amount of income that a company has earned is a subset of revenue. This means that income is included in the revenue of a company.
In short, revenue is the sum of money a business has earned from its sales. On the other hand, income is the total profit of that company. If you still find it challenging to differentiate revenue and expenses, please do not hesitate to hire an accounting firm in Singapore. The professionals will be able to help you with the accounting (Also see The Importance of Cost Accounting) tasks, and you do not have to worry about the mistakes that you may commit when you are recording the transactions on your own.
The Responsibilities of Accounting Department
Do you have an accounting department in your company? Instead of having one, most small businesses may choose to engage an accounting firm Singapore as hiring in-house accountants may be too costly, especially for start-up companies. Doing so can ensure that all the business books are well-organised, and all the financial statements are accurate and can represent the company’s financial position. However, as your business grows, you may consider establishing an accounting department in your company to cater to the increasing need of getting piles and piles of accounting tasks done quickly.
The responsibilities of the accounting department include a lot of administrative functions. Although these functions will be treated as “back office” activities, all the companies will need them so that they can run their business activities smoothly. Listed below are some tasks that the accounting department is responsible for:
– Accounting for payroll
The accountants who are responsible for payroll (Also see Essential Audit Objectives for Payroll Audits) should collect information from the company’s human resource department on the time that the employees have worked as well as their pay rates. Then, they need to calculate the tax and any other deductions that they should make from the employees’ pay before issuing the amount of net pay to the employees by using cheques, direct deposits or by cash.
– Accounting for taxes
The responsibilities of the tax accountants are to estimate the sum of taxable income (Also see Importance of Statement of Comprehensive Income) the company may earn and pay income (Also see What Can You Find in an Income Statement?) tax to the government regularly according to the amounts they estimated. Also, they need to issue tax fillings in other areas like sales taxes, property taxes, and so on.
– Collecting payments
The company’s accounting department should track the outstanding invoice payments from their client and collect the payments from them by using various methods such as attorney letters, phone calls, as well as emails.
– Billing invoices
This means that the accounting department should gather information from the sales department as well as the shipping department. Then, it needs to create invoices by using that information and send them to their clients.
– Generating financial statements
The reporting group in the accounting department should create adjusting entries so that the initial financial results of the company will comply with the applicable accounting frameworks. Also, it should write some footnotes and attach them in the financial statements (Also see What is a Financial Statement Review?), as well as release the company’s financial after each reporting period has ended.
– Internal reporting
The accountants in the department who are responsible for cost accounting should provide the management with considerable values. To achieve this, they should calculate the profitability of different client groups, products, services, product lines, stores, sales region and more. The management may change the areas of analysis regularly so that it can see the business from various aspects and at the same time, place the growth of the company’s financial results as the top priority.
– Settling the accounts payable
The accountants who are responsible for this should collect the supplier invoices as well as the employee expense reports. Then, they need to confirm that the amounts are authorised for payments before issuing them to the recipients on the dates they have planned for those payments. Also, they need to pay attention to any early payment discounts and determine whether taking those discounts will be economical for the company.
There is a high possibility that the company will integrate a lot of controls in the areas mentioned above.
What You Need to Know About Reserves in Accounting
In accounting (Also see What is the Purpose of Accounting?), reserves refer to the gains that a company allocates for specific purposes. Typically, companies will set up reserves for the procurement of fixed assets, to settle debts, to pay for repairs and maintenance as well as to pay bonuses to employees. After the company has decided on the types of reserves and their respective amounts, it needs to record them in the books of accounts and the financial statements. This is when it may need help from the accountants. If the business owners are unfamiliar with these accounting (Also see What are Provision and Accrual in Accounting?) procedures, they may choose to either employ an in-house accountant or hire an accounting firm in Singapore.
At the end of an accounting (Also see Things You Should Know About Accounting Estimates) period or a year, if a company has earned a profit, it may choose to retain part of the profit to prepare for the growth and development of the business or meet future demands. The sum of money that it keeps aside for this purpose is called reserves. Reserves would help a business in making sure that its financials are always in good condition. Also, the company can use the reserves to ensure that it can pay stable dividends to its shareholders. Some companies will expand their business or make investments by using the reserves.
Where are reserves in the financial statements (Also see What is a Financial Statement Review?) then? One would record reserves in the company’s balance sheet on the liability side under the “reserves and surplus” heading. In most cases, a company will not create reserves if it suffers a loss. Generally, there are three types of reserves, which are general reserves, specific reserves, as well as the revenue and capital reserves. In this article, we will look into the third type.
Business owners will create revenue reserves by using the gains that the company has earned from its business operations. This type of reserve will typically show up in the profit and loss appropriation account. While profit and loss account determines the net profit or loss of a company in a specific period, people would use profit and loss appropriation account to distribute net profit among partners, for the distribution of dividends, as well as to allocate reserves. Apart from distributing dividends, business owners can use the reserves to expand the business too.
For capital reserves, business owners would establish them by using capital profits but not the profits generated from the company’s business operations. Most of the time, they will not use capital reserves to distribute dividends to their shareholders. The premium that the company obtains from the issuance of shares and debentures is a type of capital reserve. Other examples include the gain acquired by selling the company’s fixed assets, capital redemption reserve, as well as the surplus after revaluing the assets and liabilities.