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Principles
of Financial
Accounting
May 3
2021
FAC101
Name: xyz
Id: xyz
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1
1 Table of Contents
1 Table of Contents ..................................................................................................................................... 1
2 Control principles to protect assets of a company ................................................................................... 2
2.1 Establishment of Responsibility ....................................................................................................... 2
2.2 Segregation of Duties ........................................................................................................................ 2
2.3 Physical, Electronic and Mechanical control principle; ................................................................... 3
2.4 Independent Internal Verification: .................................................................................................... 3
2.5 Creating a document trail; ................................................................................................................. 4
3 Banks reconciliation, objective and relevant procedures ......................................................................... 5
4 Depreciation methods and their impact on Income statement: ................................................................ 7
4.1 Relevant Terms: ................................................................................................................................ 7
4.1.1 Cost: ........................................................................................................................................... 7
4.1.2 Useful life: ................................................................................................................................. 7
4.1.3 Salvage value: ............................................................................................................................ 7
4.1.4 Carrying amount: ....................................................................................................................... 7
4.2 3 methods of depreciation: ................................................................................................................ 7
4.2.1 Straight-line method: ................................................................................................................. 7
4.2.2 Unit of production method: ....................................................................................................... 8
4.2.3 Double-declining balance method: ............................................................................................ 9
5 References: ............................................................................................................................................. 10
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2 Control principles to protect assets of a company
Most commonly used control principles used by companies to safeguard their assets from robbery,
unauthorized use and ensure the reliability and accuracy of its accounting records are as follows:
2.1 Establishment of Responsibility
In this control principle a certain task is assigned to particular individual and he is responsible for any
mishap. Because of responsibility, responsible person doesn’t misuse that asset himself and doesn’t even
allow others to do so because he will be held responsible for any happening to that asset. Examples are as
follows:
Banking sector; a cashier is responsible for collecting cash from depositors and issuing deposit slips. At
the end of day, if the total receipts issues don’t match with cash, he is the person to be held responsible and
penalized.
Textile industry; an operations manager is responsible for quality and design of cloth. If the desired is not
quality is not achieved or the cloth is miss-printed, that operations manager will be enquired and held
responsible.
2.2 Segregation of Duties
The foundation of segregation of duties is that the work of one employee must be evaluated by another
employee without any chance of duplication.
There are 2 applications for this control principle;
i. The work of related characteristics should be assigned to different workers.
ii. The task of record keeping of any asset must not be given to the worker holding the responsibility
of the custody of the asset. Examples are as follows:
Banking sector; cashier at the cash counter is there to accept customer’s deposits after accepting the
deposit he/she doesn’t reconcile cash with the recorded amount to reduce the chances of fraud. even, the
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cashier doesn’t record the amount, he only sign the receipt of receipt of deposit to the customer and
recording is done by someone else on the basis of receipts.
Fast Food Industry; If we look at the example of Fast food industry and visit KFC or MacDonald’s we
can clearly observe a segregation of duty the worker at the counter is only responsible to take orders from
the customers he/she will not prepare your order instead there will be other workers allotted to different
task which cumulatively results into preparation of your order.
2.3 Physical, Electronic and Mechanical control principle;
Here in this Control principle physical refers to the physical safeguarding of the asset while the Mechanical
and electronic refers to the safeguarding as well as the accuracy and reliability of the accounting records.
o For the Physical safeguarding of the asset usually vaults and safety deposit boxes for cash are used.
o Similarly locked warehouses for the protection of the inventory.
o Computers are protected with fingerprint scanners or pass keys.
o Or in case of employees working hours monitoring, time clocks are used.
Amazon; at amazon, locked warehouses for the protection of inventory are used and only designated
employees have the access to the warehouse which prevents chance of inventory theft.
Banking Sector; in banks Cash is protected in safe vaults that can be accessed with finger print and is only
designated to certain individuals of management.
2.4 Independent Internal Verification:
This control principle involves the process of verification and review of the data that prepared by the
employees. A routine is set (semiannually or quarterly) to verify the data. This verification process is done
by employees who are independent of the information generation. Then any error is reported to the higher
management level. Following are the examples:
Banking Sector; periodically a team from every bank’s HQ visits the bank branches to observe and review
the work that is done by the members of that bank.
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Amazon; Periodically a designated team visits warehouse and counter check the inventory level with the
books and reconciles with the sales ledger.
2.5 Creating a document trail;
In this control procedure a document trail is organized for each and every set of event because documents
provide evidences about transactions or events that have occurred. Each and every document is
renumbered according to the event or date. The source document for any accounting entries than forwarded
to the accounts department so that everything should be recorded timely. Examples are as follows:
Amazon; At Amazon each and every event is recorded whenever there’s a sales it recorded and source
document is forwarded to sales department similarly whenever there is a purchase it is recorded and
forwarded to purchase department.
Banking sector; bank is involved in many deposits, lending and investments etc. on very huge levels
involving millions of people which documenting a necessity for them. Loan application is received at a
branch is verified by branch manager, along with branch approval is end to regional headquarters and so
on.
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3 Banks reconciliation, objective and relevant procedures
Yes, bank reconciliation is part of internal control. 7 needs for the preparation of bank reconciliation and
procedures to ensure that needs are met are as follows (Bragg, 2021):
Need
To identify the errors in the Cash book and the
Pass book
To check on the Embezzlement of the Cash
Check the Accuracy of balances
Check the accuracy of entries passed in cash book
Identify unclear checks or any discrepancy
between the amounts of cleared checks.
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Identify unrecorded expenses or income and record
them
Update deposits in transit which can have
following two case:
1) Company hasn’t recorded some deposits which
are recorded by bank.
2) Bank hasn’t recorded some deposits which
company has recorded
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