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Slide 1What are internal controls?Internal Control Principle: Establish ResponsibilityInternal Control Principle: Segregation of DutiesInternal Control Principle: Documentation ProceduresInternal Control Principle: Independent Internal VerificationInternal Control Principle: Human Resource ControlsBank records (statement)Account typesAssetsLiabilitiesRevenuesExpensesCapital/Owner EquityAccount TypesFormulasFormulasAccounting Exam #3Practice Problems/TermsWhat are internal controls?•Help to safeguard assets and enhance accuracy and reliability of accounting records.Internal Control Principle: Establish Responsibility•Assign responsibilities to specific employees. Control is most effective when only one person is responsible for one task.Internal Control Principle: Segregation of Duties•Different individuals should be responsible for different activities.•The responsibility for record-keeping for an asset should be separate from the physical custody of that asset.Internal Control Principle: Documentation Procedures•Companies should use pre-numbered documents and all documents should be accounted for.•Employees promptly forwards source documents for accounting entries to the accounting department.Internal Control Principle: Independent Internal Verification•Companies should verify records periodically or on a surprise.•An employee who is not part of the personnel responsible for the information should make the verification.•Discrepancies and exceptions should be reported to management level that can take appropriate corrective action.Internal Control Principle: Human Resource Controls•Bond (insurance policy) employees who handle cash.•Require employees take vacations.•Conduct thorough background checks for all potential hires.Bank records (statement)•Deposits in Transit (deposits that are yet to be received but in route. Add those in to bank statement balance)•Outstanding checks (checks that have not cleared the account yet. Subtract those from the bank statement balance)**Note that this is different when comparing to company books balanceAccount typesAssets•Assets are things that you own such as cash, accounts receivable, bank accounts, furniture and computers•Normally a debit•Increase balance=debit•Decrease balance=creditLiabilities•Liabilities include things you owe such as accounts payable, notes payable and bank loans•Normally a credit•Increase balance=credit•Decrease balance=debitRevenues•Revenue is the money your business is paid for the sale of products or services•Normally a credit•Increase balance=credit•Decrease balance=debitExpenses•Expenses are considered the cost of doing business and include such thinks as office supplies, insurance, rent, payroll expenses and postage•Increase balance=debit•Decrease balance=creditCapital/Owner Equity•Account represents your financial interest in the business (you put money in the company as an owner)•Increase balance=credit•Decrease balance=debitAccount TypesAccount type When to Debit When to Credit Cash and bank accounts When depositing funds or a customer makes a payment When bills are paid Accounts receivable When a sale is made on credit When the customer pays Various expense accounts such as rent, utilities, payroll, and office supplies When a purchase is made or a bill paid When a refund is received Accounts payable When a bill is paid When entering a bill for future payment Revenue When a product is returned, or a discount is given When a sale is made (Revenue is recognized when earned, not upon the collection of cash)FormulasType How to calculate (formula) NotesCost of goods sold =Beginning Inventory + Purchases (add)-Ending Inventory (subtract)= COGS Inventory Turnover =COGS (divide by)Average Inventory (see Notes)Average Inventory Beginning Inventory+ Ending Inventory (add) thenDivide by 2Days in Inventory =# of days in period (divide by)Inventory turnover Year = 365 daysGross Profit Rate =Gross Profit (divide by) Net SalesORNet Sales-COGS (subtract then divideNet sales Net Sales = Gross Sales -Returns (subtract)-Allowances (subtract)-Discounts (subtract)FormulasExamples How to calculate (formula) NotesCost of goods sold = 45,000Beginning Inventory + Purchases (add)-Ending Inventory (subtract)= COGS Begin Inv=8,000End Inv=10,000Purchases=47,0008,000+47,000-10,000=45,000Inventory Turnover = 5COGS (divide by)Average Inventory (see Notes >>)Average Inventory Beginning Inventory+ Ending Inventory (add) thenDivide by 245,000 / 9,000 = 5(8,000+10,000)/2=9,000Days in Inventory = 73# of days in period (divide by)Inventory turnover 365/5 = 73Year = 365


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UWEC ACCT 201 - Accounting Exam #3

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