(this technical article will be useful to the students of AAT Level 4, Financial Statements unit and the students of ACCA paper F7, Financial Reporting).
IAS-2 is one of the oldest standards and is entirely based on the accounting concept of prudence. It stipulates that the closing inventory should be valued at the lower of the following:
a - cost
b - Net Realisable Value
The cost will include the following:
Cost of purchase, any input tax (if not claimable), transportation charges and any other charge which is necessary to bring to product to your premises
Cost of conversion/manufacturing including all the manufacturing overheads
While calculating the costs, you should not include the following:
These accounting procedures are carried out by all the accountants in all the organisations (for profit or non-profit). However, I do not know of a single accounting text book that shows the best practices.
Let us start with some clarifications:
What are the objectives?
When a business grows from being very small to being quite large, the span of control changes. The way a small business owner controls their business differs from the way a CEO would control their business. In a large business, there would be division of functions and responsibilities. There would also be hierarchy with levels of authority and responsibility. The work would be carried out delegation and functional responsibilities.
Internal control refers to checks and balances embedded in the business systems (including the accounting system) aimed at controlling resources of the business; preventing fraud and misappropriation and safeguarding overall economic interests of the business.
An effective system of internal control would employ various tools, procedures and policies to implement the above objectives. An effective accounting system with inbuilt checks and balances would be one of the tools (albeit a major one) of achieving those objectives.
How can an accounting system be designed to achieve internal control?
1 – Physical checks: Cash/Petty Cash should be checked at regular intervals including random checking. Inventory should also be checked at regular intervals including random checking. Shortfall and variances should be investigated.