Internal Accounting Control For Successful Risk Management

Last time we talked about freight-in costs and FOB (Free On Board) costs, which are two freight (or shipping) charges for normal sellers. Now, in this final post about selling knowledge and risk management, we will explode some useful accounting concepts about freight-out expenses (FoE), customer sales returns (CSR) and special allowances (SR), as well as internal accounting control (IAC).

What Are Freight-out Expenses (FoE), Customer Sales Returns (CSR) and Special Allowances (SR)?

Sellers sometimes may pay for freight-out or delivery costs, expecting that this can increase their seasonal sales. Such expenses, by definition, are generally known as freight-out expenses (FoE), and also called delivery expenses (DE). These expenses are listed as a kind of selling cost on financial income statement.

If a consumer is not satisfied with a product or service, he usually will return it to the seller. These return costs, by definition, are commonly listed on an account for customer sales returns (CSR) and special allowances (SR), which can provide the business management team a more reasonable estimation about what products (or services) should keep and also what should be discard of. For your information, this account typically deducts normal sales from financial income statement.

What is Internal Accounting Control (IAC)?

On the other hand, a merchandising company may experience big loss in overall profits or may have inaccurate financial records if they are not having proper accounting control. Top management must be the one responsible for enforcing a reliable system for proper internal accounting control (IAC). By definition, internal accounting control is a quality assurance policy (QAP) that top management shall put into action in order to ensure all financial records are reliable and trustable. This is actually an internal process control or risk assessment mechanism that top management must use for protecting their profits and assets. This accounting quality assurance system can also make sure that their employees are all conforming to related legal requirements and they are all doing their best job for full benefits of the company. As long as the responsible managers shall be in-charge-of the final business performance, they should report their business goals and annual progress to shareholders by listing them into the 'Report Management' section inside their company's annual financial report.

In order to minimize business risk(s) with successful internal accounting control (IAC), top management shall apply 5 key steps for internal quality control. These five important steps should be: Control Environment (CE), Risk Assessment (RA), Communication and Information Maintenance (CIM), Control Activities (CA), as well as Continuous Monitoring (CM).

5 Key Steps For Internal Accounting Control (IAC)

(i) Control Environment (CE). Control environment, by definition, is about the overall attitude or actual actions done by the concerned management system. Control environment also involves in management ethics, style, philosophy or integrity. For employees side, they must be highly knowledgeable and well-trained in the field they are currently participating in.

(ii) Risk Assessment (RA). Risk assessment, by definition, is about risk analysis of company administrative environment and also how to manage or monitor any associated business risk(s). Typical examples of risk assessment are: finding out thieves accurately inside a department store, or screening out employees who steal things inside a company etc.

(iii) Communication and Information Maintenance (CIM). Communication and Information Maintenance for internal accounting, by definition, is about establishing internal management information system, as well as reporting transactions of a company.

(iv) Control Activities (CA). Control activities, by definition, refer to restraints or rules that management decides to put in-place for ensuring proper implementation of management instructions.

(v) Continuous Monitoring (CM). Finally, by definition, continuous monitoring is about periodic assessment for ensuring proper enforcement of all related management policies for minimizing business risk(s).

These are the 5 key steps for good internal accounting control (IAC), hope you find them useful. Lastly, this post is the end of our article series about selling knowledge and risk management. We will explode other useful topics with you in our next blog post onwards.