1 answer

Imagine that you are the new department manager of a corporation within your chosen field: You...

Question:

Imagine that you are the new department manager of a corporation within your chosen field: You discover that your predecessor had been using the cash basis of accounting, which has resulted in many errors and misinformation. What measures would you take to remediate the issue? Propose a high-level plan to implement a proper accounting system for your department using specific principles discussed in the course. For example, which financial statements would you investigate first? What sort of internal controls would you implement?


Answers

Under cash basis of accounting, transactions are only recorded when cash related to them is either received or issued.Thus, you would record a sale under the cash basis when the organisation receives cash from its customers, not when it issues invoices to them.

Inorder to remediate the issue, I would like to adopt accrual basis of accounting.

I would have done and implemented following internal controls for better accounting. I would investigate first previous year closing balancesheet and this year's profit and loss a/c to find the discrepanices.

1) Add accrued expenes: Add back all expenses for which the company has received a benefit but has not yet paid the supplier or employee

2) Subtract cash payments: Subtract cash expenditure made for expenses that should have been recorded in the preceding accounting period

3) Add prepaid expenses: Review expenses made during accounting period to see if there are any prepaid expenses and move the unused portion of these items into asset account.

4) Add accounts receivable: Record accounts receivable and sales for all billings issued to customers and for which no cash has yet been received from them.

5) Subtract customer prepayments: Record them under short term liabilties as the benefit has not been transferred to the customer yet.

6)Subtract cash receipts: Subtract previous years accounts receivable realised in current year as the income pertains to previous year.

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