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  • Writer's pictureAli Izadi

22 Balance Sheet Internal Controls

Your balance sheet accounts can become difficult to deal with if not monitored, managed and attended to on timely manner.

The only way to resolve the discrepancies is to prepare and review balance sheet schedules on (at least) a monthly basis.

Having accurate accounting data insures your financial and management reports are reliable and can be used for decision making.

Accounting data is nothing but the accumulation of all the transactions recorded on daily basis. Although that seems very basic and simple in the beginning, however if those entries are not reviewed and posted accurately, they can easily go unnoticed in trial balance unless we ensure adequate balance sheet controls.

We have put together 22 balance sheet controls for that reason.

Read through the following pages and see what controls you have in place and what controls you need to implement and practice in your company.



Property, Plant & Equipment


1. Asset Register and Asset Accounting

Maintain a comprehensive asset register that includes essential details about each asset, such as description, date of acquisition, cost, location, and depreciation schedule. Keep this register up-to-date and reconcile it with the general ledger regularly.


2. Depreciation and Amortization Controls

Implement controls to calculate accurately and record depreciation or amortization expenses for PP&E assets. Regularly review and validate the depreciation calculations to prevent errors.


3. Physical Security and Access Controls

Secure PP&E assets physically and restrict access to authorized personnel only. Install surveillance cameras and access control systems to monitor and limit access to sensitive areas.


4. Physical Verification and Tagging

Conduct regular physical verification of all PP&E assets to ensure their existence and condition. Tag each asset with a unique identifier to facilitate tracking and deter theft.



Cash and Bank


5. Dual Custody for Cash Handling

Implement dual custody for handling cash, especially for large cash receipts. Two authorized individuals should be involved in counting, reconciling, and depositing cash.


6. Voided and Cancelled Check Controls

Maintain strict controls over voided and canceled cheques. Require proper documentation and approvals for any cheques that need to be voided or canceled.


7. Petty Cash Controls

Establish clear policies and procedures for managing petty cash. Limit access to the petty cash fund and require detailed receipts for all disbursements.



Reconciliation


8. Balance Sheet Reconciliation

Reconciliation of each account on the balance sheet is an overarching control. It should be performed each month and reviewed monthly by the line manager. These include:

-Cash in Hand & Petty Cash

-Bank Reconciliation

-Intercompany Reconciliation

-Fixed Assets Deprecation

-Accounts Receivable with Customer Statements

-Receivable Aging Analysis

-Prepayments Amortization Schedule

-Accounts Payable with Vendor Statements

-Accounts Payable Aging Analysis

-Accruals Adjustments Schedule

-Short and Long-Term Borrowings Schedule

-Tax Account Reconciliation

-Equity & Investments Schedule


9. Bank Account Management

Maintain an updated list of authorized signatories for bank accounts and regularly review and update bank account access rights as needed. Keep bank account documentation secure and up-to-date, including account agreements and signature cards.



Receivables and prepayments


10. Credit Approval Policy

Establish a clear credit approval policy that defines credit limits, terms, and criteria for approving new customers.



11. Aging Analysis and Collections

Conduct regular aging analysis of accounts receivable to identify past due accounts. Implement a systematic collections process to follow up on overdue invoices promptly.


12. Amortization & Prepayment Limits

Properly account for prepayments by amortizing them over the appropriate periods. Establish a prepayment policy that outlines the maximum allowed prepayment amounts are permitted.



Payables and accruals



13. Vendor Approval and Verification

Establish a formal vendor approval process includes verifying new vendors’ legitimacy, checking their references, and evaluating their financial stability.


14. Aging Analysis and Payment Priority

Perform aging analysis of accounts payable to prioritize payment to vendors and take advantage of early payment discounts.


15. Accrual Process Documentation

Establish clear and comprehensive procedures for accruing liabilities, including guidelines for determining the timing and amount of accruals.


16. Reconciliation of Accruals

Regularly reconcile accrued liabilities to supporting documentation, such as invoices, contracts, and timesheets, to ensure accuracy and validity.


17. Estimates and Assumptions

Ensure that estimates used for accruing liabilities are based on reasonable and supportable data and clearly document the reasoning behind the estimates.



Deferred revenue


18. Deferred Income Reconciliation

Regularly reconcile the deferred income balance to ensure that all deferred revenue is recognized appropriately and accurately matches with delivered goods or services.



Borrowings


19. Authorized Borrowing Limits

Set clear and defined borrowing limits for short-term loans, specifying the amount and conditions under which borrowing is allowed. Ensure that any borrowing is within these authorized limits.


20. Loan Agreement Review

Review and understand the terms and covenants of short-term loan agreements to comply with payment schedules, interest rates, and other terms set forth in the agreements.



Dividends and tax


21. Dividend Declaration Process

Establish a transparent process for declaring dividends, including appropriate documentation and approval from the board of directors or relevant authorities.


22. Tax Compliance Review

Conduct regular reviews of tax compliance processes to ensure accurate calculation and timely payment of income taxes. Implement controls to verify the accuracy of tax calculations.






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