At the peak of the hierarchy of internal controls sits policies. Policies are written by the highest echelon of management for a company, its Board of Directors or Trustees. The upper tier and mid level management of a business develop procedures to carry out the policies of the company.
Fixed assets are large ticket purchases that have an extended utilization with life. They are not typically sold in the due course of business and as such they are allocated via depreciation to the income statement.
The fixed assets turnover rate is another activity ratio whereby an income statement financial characteristic is compared to a balance sheet asset section. In this case, comparing adjusted sales against historical cost of fixed assets. This financial business ratio is only effective for business operations that are fixed asset intensive. With service based industries like carpet cleaning, professional firms and medical practices this particular ratio is impractical.
A journal entry with multiple lines of entry affecting several different ledgers (accounts) is commonly referred to as a complex entry. Many bookkeepers shy away from them as they feel intimidated by the difficulty involved and do not want to make an error. This lesson helps the bookkeeper understand how to break the complex entry down into a series of standard entries.
Amortization is similar to depreciation whereby an asset’s cost is allocated to the expense over time. There are several differences with amortization. Amortization is used with intangible assets and the method is almost always straight line. As a bookkeeper it is your job to maintain the amortization schedules, report the information correctly and interpret the results for management.
When a small business purchases fixed assets two financially based opposing forces come into play. The first is the financial reporting desire to present information in a fair manner so management can make good financial decisions. The opposing force has to do with taxation. Here the business desires to report less profit to reduce the tax obligation.
Depreciation is the process of allocating the initial capital outlay for fixed asset purchases over time to the income statement. The basic principle with depreciation is that any fixed asset has a predetermined lifetime based on time, usage or fair market value. Therefore, a fair and equitable allocation of the initial purchase price is applied to each time period. Your job as the bookkeeper is to assign depreciation expense to the respective asset and record the entry as a function of daily operations.
Every now and then management authorizes the purchase of a long-term producing asset. This could be a vehicle, piece of equipment or real estate. These purchases are referred to as fixed assets. Recording of these entries is a little different and this lesson explains the entire recording process associated with fixed assets.
Every business owner, especially young entrepreneurs, must understand how long-term debt is used to finance the purchase of fixed assets. It is a basic principle especially for start-ups. There is a relationship that exists between the two. If created correctly, profitability is enhanced and cash flow is maximized.
Internal control is a subset of the accounting system to aid in proper reporting of existing assets and liabilities. Internal controls over fixed assets alleviate two distinct risks. The primary risk is physical in nature and relates to the asset getting lost, stolen or damaged thereby affecting the value as reported on the financial statements. The second risk is financial in nature related to errors in determining cost basis, useful life, and depreciation assigned; all of which can affect value.
Each risk uses a separate set of controls to minimize or eliminate the exposure and reduce management’s concern that the financial value as reported is incorrect. This article explains the standard set of controls for each risk group.