Internal control encompasses the policies and procedures that an organization establishes to ensure that it operates in accordance with management's intentions and that accountability is maintained for all transactions. This includes the methods adopted by the organization to safeguard its assets, to check the accuracy and reliability of its accounting data, to promote operational efficiency, and to encourage adherence to prescribed managerial policies. Show
This broad definition of internal control includes two different aspects of control: administrative control and accounting control. Administrative (or operational) controls are generally aimed at improving operating efficiencies or otherwise controlling the activities of the organization. These controls are in contrast to internal accounting controls, which are primarily directed at reliable financial reporting (i.e., ensuring the accuracy and reliability of the financial data and safeguarding assets.) Internal controls are usually developed and put into place to either prevent mistakes or detect them on a timely basis if they occur. For example, College departments use cash transmittal forms to deposit cash with the Business Office. Cashiers in the Business Office check cash transmittal forms to make sure that the deposit equals the amount shown on the form and that accurate account numbers are used. These cashiers are performing controls designed to prevent mistakes from entering the College's accounting system. To detect any mistakes that get through the process, the computer system has been designed do that it will detect (and not accept) out-of-balance transactions and invalid account numbers. The category (administrative or accounting) into which a specific internal control might fall is not particularly important. Far more relevant are the reasons why internal controls are established and the purpose they serve. Purpose of Internal ControlInternal controls are put into place largely to allow management to monitor operations, identify business risks, and generate pertinent financial and nonfinancial information. In short, internal controls are designed and implemented so that management can run the organization. Internal controls also ensure that responsibilities are met. Generally speaking, internal controls are established to provide reasonable assurance that:
Because cash is negotiable, readily spendable, and easily transported, it is important for proper internal controls to be in place to protect this asset. Accordingly, it is the policy of the College that the following internal controls over cash be implemented throughout the College:
Separation of DutiesThe internal control that most effectively assures the secure handling of cash is separation of duties. Having different people receive cash, prepare the transmittal, and reconcile the ledger sheets attain this. This allows each person to serve as a control over the others, catching mistakes and preventing the misappropriation of funds. In a small office where separation of duties is difficult, it is imperative that the supervisor review cash operations each day. Safeguarding of AssetsCash is prone to theft or misplacement. Accordingly, it is important to have internal controls in place to safeguard these assets so that assets to them is limited to authorized personnel. See section E-2-6 for additional information on security. A general ledger represents the record-keeping system for a company’s financial data, with debit and credit account records validated by a trial balance. It provides a record of each financial transaction that takes place during the life of an operating company and holds account information that is needed to prepare the company’s financial statements. Transaction data is segregated, by type, into accounts for assets, liabilities, owners’ equity, revenues, and expenses. Key Takeaways
1:37 General LedgerHow a General Ledger WorksA general ledger is the foundation of a system employed by accountants to store and organize financial data used to create the firm’s financial statements. Transactions are posted to individual sub-ledger accounts, as defined by the company’s chart of accounts. The transactions are then closed out or summarized in the general ledger, and the accountant generates a trial balance, which serves as a report of each ledger account’s balance. The trial balance is checked for errors and adjusted by posting additional necessary entries, and then the adjusted trial balance is used to generate the financial statements. How a General Ledger Functions With Double-Entry AccountingA general ledger is used by businesses that employ the double-entry bookkeeping method, which means that each financial transaction affects at least two sub-ledger accounts, and each entry has at least one debit and one credit transaction. Double-entry transactions, called “journal entries,” are posted in two columns, with debit entries on the left and credit entries on the right, and the total of all debit and credit entries must balance. The accounting equation, which underlies double-entry accounting, is as follows: Assets−Liabilities=Stockholders’ Equity\text{Assets} - \text{Liabilities} = \text{Stockholders' Equity}Assets−Liabilities=Stockholders’ Equity The balance sheet follows this format and shows information at a detailed account level. For example, the balance sheet shows several asset accounts, including cash and accounts receivable, in its short-term assets section. The double-entry accounting method works based on the accounting equation’s requirement that transactions posted to the accounts on the left of the equal sign in the formula must equal the total of transactions posted to the account (or accounts) on the right. Even if the equation is presented differently (such as Assets = Liabilities + Stockholders’ Equity), the balancing rule always applies. What Does a General Ledger Tell You?The transaction details contained in the general ledger are compiled and summarized at various levels to produce a trial balance, income statement, balance sheet, statement of cash flows, and many other financial reports. This helps accountants, company management, analysts, investors, and other stakeholders assess the company’s performance on an ongoing basis. When expenses spike in a given period, or a company records other transactions that affect its revenues, net income, or other key financial metrics, the financial statement data often doesn’t tell the whole story. In the case of certain types of accounting errors, it becomes necessary to go back to the general ledger and dig into the detail of each recorded transaction to locate the issue. At times this can involve reviewing dozens of journal entries, but it is imperative to maintain reliably error-free and credible company financial statements. A Balance Sheet Transaction ExampleIf a company receives payment from a client for a $200 invoice, for example, the company accountant increases the cash account with a $200 debit and completes the entry with a credit, or reduction, of $200 to accounts receivable. The posted debit and credit amounts are equal. In this instance, one asset account (cash) is increased by $200, while another asset account (accounts receivable) is reduced by $200. The net result is that both the increase and the decrease only affect one side of the accounting equation. Thus, the equation remains in balance. An Income Statement Transaction ExampleThe income statement follows its own formula, which works as follows. When a company receives payment from a client for the sale of a product, the cash received is tabulated in net sales along with the receipts from other sales and returns. The cost of sales is subtracted from that sum to yield the gross profit for that reporting period. The income statement will also account for other expenses, such as selling, general and administrative expenses, depreciation, interest, and income taxes. The difference between these inflows and outflows is the company's net income for the reporting period. What Is the Purpose of a General Ledger?In accounting, a general ledger is used to record all of a company’s transactions. Within a general ledger, transactional data is organized into assets, liabilities, revenues, expenses, and owner’s equity. After each sub-ledger has been closed out, the accountant prepares the trial balance. This data from the trial balance is then used to create the company’s financial statements, such as its balance sheet, income statement, statement of cash flows, and other financial reports. Is a General Ledger Part of the Double-Entry Bookkeeping Method?Yes, a company that uses a double-entry bookkeeping method uses the general ledger method of storing company financial data. Specifically, double-entry bookkeeping is when each transaction impacts at least one debit and one credit transaction. In other words, each transaction appears in two columns, a debit column and a credit column, whose totals must balance. Under this balancing rule, the following equation applies:
What Is an Example of a General Ledger Entry?Consider the following example where a company receives a $1,000 payment from a client for its services. The accountant would then increase the asset column by $1,000 and subtract $1,000 from accounts receivable. The equation remains in balance, as the equivalent increase and decrease affect one side—the asset side—of the accounting equation. What is the objective of general ledger?What Is the Purpose of a General Ledger? In accounting, a general ledger is used to record all of a company's transactions. Within a general ledger, transactional data is organized into assets, liabilities, revenues, expenses, and owner's equity.
What are general ledger controls?A control account is a general ledger account that only contains the balance of the associated subsidiary account or accounts. The details of a company's transactions are recorded in various subsidiary ledgers and then balanced and summarized into the corresponding control account.
What is a general ledger and reporting system?A general ledger (GL) is a set of numbered accounts a business uses to keep track of its financial transactions and to prepare financial reports. Each account is a unique record summarizing a specific type of asset, liability, equity, revenue or expense.
What is the importance of general ledger in accounting processes?It provides an accurate record of all financial transactions. It enables you to compile a trial balance, so your books balance. It makes filing tax returns easy because all expenses and income are in one place. It reports actual revenue and expenses so that you can stay on top of spending.
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