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Internal Controlsin in the Business World
Finance & Accounting
Pages 4 (1004 words)
Abstract In the business world companies must utilize accounting tools in order to implement mechanisms to prevent losses associated with theft and fraud. The use of internal control is the best way for companies to safeguard their assets. An accounting system is supposed to be precise and accurate.
Prepaid expenses are an asset that a company must reflect in its balance sheet. The prepaid asset reduces in value through consumption as time passes. The contract value of the prepaid insurance was $6000 a year. After the passage of three months the firm was supposed to record $1500 worth of depreciation of the prepaid insurance asset to recognize the consumption of the insurance. The adjusting entry that should have been recorded each month was a $500 debit to insurance expense and a credit of $500 to prepaid insurance. The credit is reducing the balance of the prepaid insurance asset. After three months the company’s financial statements are not accurate because the firm did not record the corresponding adjusting entry that was required. In the balance sheet of the company the current assets account is going be overstated by $1500. In the income statement the net income of the company is going to be overstated by $1500 due to the fact that insurance expenses for that amount were not recognized during the period. One of the most important assets which must be safeguarded with accounting internal control mechanisms is the cash of the company. ...
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