Class Notes: Intermediate Accounting Chapter 3

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Chapter 3 continued... Every acct on adj trial bal is used only once in creating first 3 financial stmts. Point of closing is to bring RE up to date - in doing that, we zero out temp accts. 4 kinds of closing entries: 1) close out Revenue - debit Rev CR Income Summ (normal credit bal) (only exists long enough for closing entries) - companies may be closing hundreds of rev or exp accts 2) close out Expense accts - list every single acct DR Income Summ CR Exp accts 3) DR Income Summ CR Retained Earnings 4) DR Retained earnings - return of equity, has nothing to do with production (“Income” Summ does) CR Dividends (always has deb bal) Ex3-14: 1) DR Revenue 340,000 CR Sales discounts 8000 CR Sales RtA 13000 CR Income…show more content…
Also called “Treadway” Commission named after chairman. 5 basic elements outlined in COSO: 1) Tone at top - how does mgmt view its controls and ethics? 1 common feature among all large companies- top-level mgmt was aggressive, thought they were too great for acceptable behavior (enron, worldcom) documentary “Smartest People in the World.” 2) Risk assessment, need coherent system because risks change over time. Must be formal process of assessing risk and making changes to control systems 3) Monitoring - check if system is in place, modifying, essential to safeguarding company’s assets...taking stockholder’s money and buying assets, must take care of them 4) Communication, upper level mgmt should be listening with flow back and forth 5) Control activities - most of the work goes on here. Focus on cash bc it’s easiest asset to lose (cash rcpts, disbursements). Segregation duties - same people can’t work books and handle cash in same co. Lot more loss of cash in small cos. movie about that - “Rogue Trader” Duties should be rotated - treasurer, etc. Preferably no cash coming into bldg. Use night deposits. Voucher package - approval for payment for accts pay Bank stmts considered a form of control and shouldn’t go to person handling cash. Give bank stmts to accountant if I have small business. BRs should be done frequently, at least monthly. Hard part might not be the BR but making the journal entries. Bank bal +

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