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Internal Controls in Managerial Accounting

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  • 0:03 Internal Controls
  • 1:02 Purchasing
  • 1:30 Inventory Control
  • 2:01 Cash Receipts & Disbursements
  • 2:53 Payroll
  • 3:30 Lesson Summary
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Lesson Transcript
Instructor: Tonya Brewer

Tonya has a Master of Science degree in Accounting.

In this lesson, we'll learn about internal controls in managerial accounting. Internal accounting controls govern a company's financial system, and are important when it comes to safeguarding a company's financial information.

Internal Controls

After such scandals as Enron and Tyco, everyone asked the same, perhaps infamous, question: 'How could this have happened?' These companies had accountants and auditors, so how is it possible that fraud occurred? The answer can be summed up in two simple words: internal control.

Internal controls can be broadly defined as everything that controls risks to a company. In order to accomplish this, there are a few general objectives of internal controls:

  1. Safeguard assets: This means protecting the company's tangible and intangible assets from misuse, fraud, and theft.
  2. Prevent and detect fraud: This can show any discrepancies that might be the result of fraud. It helps abnormalities to stand out.
  3. Accurate financial records: This ensures that all accounting transactions are recorded correctly and timely, and that all cost and revenue has been reported.

Purchasing

Since the expenditures in a company can greatly affect the financials, you want to have strong internal controls in place.

To safeguard the purchasing environment you need to have a strong process and segregation of duties. In order to achieve this, all purchases should be approved by a manager. In addition, someone from the Purchasing department should place the order and the manager should approve the invoices for payments. Finally, someone from Accounts Payable should enter the invoice after the manager's approval.

Inventory Control

Inventory is usually one of the largest expenses for a company. Because of this, it's very important to protect your inventory. You can track your inventory by maintaining a listing of exactly what's in your inventory with a tracking number so that you know if something is missing. In order to keep your inventory secure, use specialized locks, security codes, and limited access to inventory. In addition, it's a good idea to audit your inventory by periodically doing a full count to ensure the listing is correct.

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