Internal Controls in Accounting: Definition, Types & Examples

An error occurred trying to load this video.

Try refreshing the page, or contact customer support.

Coming up next: Safeguards & Controls of Banking Activities

You're on a roll. Keep up the good work!

Take Quiz Watch Next Lesson
 Replay
Your next lesson will play in 10 seconds
  • 0:01 Internal Controls
  • 0:37 Purpose
  • 1:43 Examples
  • 4:23 Lesson Summary
Add to Add to Add to

Want to watch this again later?

Log in or sign up to add this lesson to a Custom Course.

Login or Sign up

Timeline
Autoplay
Autoplay

Recommended Lessons and Courses for You

Lesson Transcript
Instructor: Rebekiah Hill

Rebekiah has taught college accounting and has a master's in both management and business.

Rules and regulations are a part of everything we do. In this lesson, you will learn about internal controls in accounting. You will learn what they are, why they are important and see examples.

Internal Controls

Can you imagine what life would be like if we lived in a world where there were no rules? People would do just what they wanted, how they wanted and when they wanted. It would be complete chaos!

Now, imagine if there were no rules in accounting. A company could report any amount of income and expenses that they wanted to, and we would never know how sound the company was. That's exactly why internal controls are important. Internal controls in accounting are procedures that are put in place within an organization to ensure business is carried out in an orderly, effective and accurate manner.

Purpose

There are four main purposes of internal controls in the accounting industry. The first of those is to safeguard the assets of a company from any form of loss. The loss could be an accidental loss, which occurs from honest mistakes being made by individuals, or it could be an intentional loss, which results from intended fraudulent activities.

A second purpose for internal controls is to ensure that financial information is accurate, reliable and timely.

A third and very important purpose of internal controls is to ensure compliance with federal, state and local business laws. To ensure compliance in the accounting industry, the Securities and Exchange Commission created a special group called the Financial Accounting Standards Board (FASB). The FASB sets the guidelines that all accounting professionals must follow. The guidelines that the FASB set are called Generally Accepted Accounting Principles (GAAP).

The fourth major purpose of internal controls is to provide a way for companies to monitor goals that it has set for itself.

Examples

Now that you know what internal controls are and what kinds of internal controls are most common, let's look at a few examples to increase your understanding.

Ted is a bookkeeper in the accounting department of a local department store. He notices that one of the clerk's registers is out of balance. Looking through the register information, he sees that the clerk charged the wrong amount of money for a product. Instead of charging $97.00 for a DVD player, she charged $79.00. This was a transposition in numbers error and was not an intentional loss.

Well, a few weeks later, Ted begins to notice a pattern of transposition errors with that one specific clerk. Upon investigation, he realizes that the employee is ringing up items with wrong prices for another employee. That's a loss due to intended fraudulent activity and a perfect example of the first major purpose of internal controls - protection of assets from loss.

At the end of every month, Ted is responsible for preparing monthly financial statements. He gives these financial statements to his managers for their review. They use the financial statements to get a mental picture of how well the company is doing and where changes may need to be made to maximize profit. Ted has to be sure that the information presented on the financial statements is valid, reliable and accurate, which is exactly what the second purpose of internal controls is.

While preparing all the necessary financial documents for company leaders, Ted also has to keep in mind that current and potential creditors and investors are also interested in this information. He knows that whether it's good or bad, he has to report information that is truthful and accurate. But why does it matter? Because the FASB and GAAP require that it be, which exemplifies the third purpose of internal controls.

To unlock this lesson you must be a Study.com Member.
Create your account

Register to view this lesson

Are you a student or a teacher?

Unlock Your Education

See for yourself why 30 million people use Study.com

Become a Study.com member and start learning now.
Become a Member  Back
What teachers are saying about Study.com
Try it risk-free for 30 days

Earning College Credit

Did you know… We have over 160 college courses that prepare you to earn credit by exam that is accepted by over 1,500 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? Study.com has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

Create an account to start this course today
Try it risk-free for 30 days!
Create An Account
Support