Internal Control and Basic Bookkeeping
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Transcript of Internal Control and Basic Bookkeeping
Introduction to Financial and Internal Control Systems
The first part of the manual presents the theories on accounting and internal control systems to help the external and internal users of information appreciate the importance of a sound financial management system.
The second part presents the detailed guidelines and procedures for accounting funds.
A separate set of accounting books, record file and bank accounts are recommended to
be put in place. Minimum documentation procedures are introduced for guidance.
Based on this definition, accounting has for phases namely:
1. Recording
This is technically called bookkeeping which is only a part of accounting. In this
phase, financial transactions are recorded systematically and chronologically in the
proper accounting books.
2. Classifying
This is sorting and grouping of similar items under the same name of account.
3. Summarizing
After each accounting period, data recorded are summarized through financial
statements.
4. Interpreting
This is the analytical phase of Accounting. Interested groups can now interpret
the results of operation based on the financial statements which are one of the tools in
decision making.
What is an Internal Control?Internal controls are methods or procedures adopted in a business
Its objectives are as follows:
1. To safeguard the organization’s assets.
2. To check accuracy and reliability of accounting data and records.
3. Ensure compliance with all financial and operational requirements
4. To ensure operational efficiency and encourage adherence to prescribed
management policies.
Control procedures
Control procedures are the policies and procedures thathave been put in place to
ensure that owners andmanagers can take the correct action to ensure business
achieves its objectives. Procedures explain the how, why, what, where and when
of any set of actions. Some small business owners may think procedures are
unnecessary, however written procedures help train new staff by explaining why
they need to do what is asked of them. Written procedures reduce errors and help
staff understand the business quickly. It reduces the time taken
to train new staff.
Why Have Internal Controls?
Help align objectives of the businessTo ensure thorough reporting procedures and that theactivities carried out by the business are in line withthe business's objectives
Safeguard assetsEnsuring the business's physical and monetary assetsare protected from fraud, theft and errors
• Prevent and detect fraud and errorEnsuring the systems quickly identify errors and fraudif and when they occur
• Encourage good managementAllowing the manager to receive timely and relevantinformation on performance against targets
• Allow action to be taken against undesirable performance
Authorising a formal method of dealing with fraud ordishonesty if detected
• Reduce exposure to risksMinimising the chance of unexpected events
• Ensuring proper financial reportingMaintaining accurate and complete reports required bylegislation and management and minimising time lostcorrecting errors and ensuring resources are correctlyand efficiently allocated.
Each internal control procedure is designed to fulfil atleast one of these eight criteria:
Completenessthat all records and transactions are included in thereports of business• Accuracythe right amounts are recorded in correct accounts• Authorisationthe correct levels of authorisation, which cover suchthings as approval, payments, entry, computer access• Validitythat the invoice is for work performed and thebusiness has properly incurred the liability.• Existenceof assets and liabilities. Has a purchase been recordedfor goods or services that have not been yet received?• Error handlingthat errors in the system have identified and processed• Segregation of dutiesto ensure certain functions are kept separate.For example the person taking cash receipts does notalso do the banking• Presentation and disclosure
timely preparation of financial reports in conformitywith generally accepted accounting principles.
The following six internal control principles apply to most enterprises :
1. Establishment of Responsibility
An essential characteristic of internal control is the assignment of responsibility to specific individuals.
Control is most effective when only one person is responsible for a given task. Establishing responsibility includes the authorization and approval of transactions.
2.Segregation of Duties
Segregation of duties is indispensable in a system of internal control. The rationale for segregation of duties is that the work of one employee should, without a
duplication of effort, provide a reliable basis for evaluating the work of another employee.
There are two common applications of this principle:o The responsibility for related activities should be assigned to different individuals.o The responsibility for record keeping for an asset should be separate from the
physical custody of the asset.o Related Activities:
When one individual is responsible for all of the related activities, the potential for errors and irregularities is increased.
Related purchasing activities should be assigned to different individuals. Related purchasing activities include ordering merchandise, receiving goods, and paying (or authorizing payment) for merchandise.
Related sales activities also should be assigned to different individuals. Related sales activities include making a sale, shipping (or delivering) the goods to the customer, and billing the customer.
o Record Keeping Separate from Physical Custody The custodian of the asset is not likely to convert the assets to personal use
if one employee maintains the record of the assets that should be on hand and a different employee has physical custody of the assets.
Try to recall a trip to the bank. Does the teller receiving the money for deposit take the money to bookkeeping and record the deposit? Why not?
When a cashier at the grocery store ends a shift, does the cashier walk out and let someone else work out of the same cash drawer? What is the usual procedure?
Documentation Procedures–o Documents provide evidence that transactions and events have occurred.o Documents should be prenumbered and all documents should be
accounted for.
o Source documents for accounting entries should be promptly forwarded to the accounting department to help ensure timely recording of the transaction and event.
Why are checks and invoices sequentially numbered? What happens to voided checks?
3. Physical, Mechanical, and Electronic Controls – Physical controls relate primarily to the safeguarding of assets. Mechanical and electronic controls safeguard assets and enhance the accuracy and reliability of the accounting records. Use of physical, mechanical, and electronic controls is essential. Examples of these controls include:
Safes, vaults, and safety deposit boxes for cash and business papers. Locked warehouses and storage cabinets for inventory and records. Computer facilities with pass key access or fingerprint or eyeball scans. Alarms to prevent break-ins. Television monitors and garment sensors to deter theft. Time clocks for recording time worked.
Why do you receive a cash register receipt at a fast food restaurant, a grocery store, or a department store? Why do some stores post signs that say “If you do not receive a receipt, we will pay you $5”? What should a movie theater do with its Saturday night receipts?
4. Independent Internal Verification
Independent internal verification involves the review, comparison, and reconciliation of data prepared by employees.
Verification should be made periodically or on a surprise basis. Verification should be done by an employee independent of the personnel
responsible for the information. Discrepancies and exceptions should be reported to a management level that can
take appropriate corrective action. In large companies, independent internal verification is often assigned to internal
auditors.o Internal auditors are employees of the company who evaluate on a
continuous basis the effectiveness of the company’s system of internal control.
o They periodically review the activities of departments and individuals to determine whether prescribed internal controls are being followed.
Would the cashier count the money in the cash drawer at the end of the workday? Would the person writing the checks prepare the bank reconciliation? Why or why not?
5. Other Controls
Bonding of employees who handle cash. Rotating employees' duties and requiring employees to take vacations.
OR
An adequate internal control system must have the following basic attributes:
1. There must be segregation of duties. Authorizing or approval function must be
separate from cash custodianship function and recording to the accounting books
of accounts. Cashiering function must be handled by a person who is not doing
bookkeeping function.
2. There must be an internal check to be conducted by the designated staff or
officers on the propriety of a financial transaction.
3. All financial transactions must be with appropriate approval and authorization.
4. Management supervision must be exercised by the officer on the project
operations as well as on the financial aspects of the project. Financial reports
must be properly reviewed.
5. There must be an appropriate organizational structure wherein duties and responsibilities are clearly delineated among project staff.
Limitations of Internal Control
Internal control is designed to provide reasonable assurance that assets are properly safeguarded and that the accounting records are reliable.
The concept of reasonable assurance rests on the premise that the costs of establishing control procedures should not exceed their expected benefit.
The human element is a factor in every system of internal control. A good system can become ineffective as a result of employee fatigue, carelessness, or
indifference. Occasionally two or more employees may work together in order to get around prescribed controls (collusion).
o Collusion can significantly impair the effectiveness of a system of internal control because it eliminates the protection anticipated from segregation of duties.
The size of the business may impose limitations on internal control. A small company may find it difficult to apply the principles of segregation of duties and independent internal verification.
An important and inexpensive measure any business can take to reduce employee theft and fraud is to conduct thorough background checks. Two tips include:
Check to see whether job applicants actually graduated from the schools they list.
Never use the telephone numbers for previous employers given on the reference sheet; always
look them up yourself.
Consequences of Poor Internal
ControlsFraudMillions of dollars are lost every day in all businessenvironments due to fraud. Fraud can be committed byan individual, a number of staff and/or external parties.But fraud doesn't happen in a vacuum, fraud occurs dueto a perception that it is possible to avoid being caught.Bad decisions for the businessNot reconciling bank accounts regularly may result in overspending, and sudden cash shortfalls which can even leadto bankruptcy or insolvency.Wrong decisions are made by people illequipped to deal with a situationPeople without permission may authorise payment ofpetty cash without following procedures and end updisbursing cash for non-business expenses or not havingappropriate receipts for tax purposes.Not taking appropriate action in time tocorrect errorsSuch as failure to take action to collect the funds whenan invoice is paid twice.Not allocating resources of the businesscorrectly or most efficientlyTime is spent fixing problems that could have beenavoided. If you think your internal controls are fine,consider how many mistakes are made in your business.Most could usually be avoided if the procedures wereclearer or more thorough.
When internal controls are breached, changing personnelis a waste of time if:• defective internal control policies remain the same;
• management shies away from its responsibilities;• tough decisions are pushed further out into the future.
Positive Consequences of GoodInternal ControlsGood communicationWell-written documentation not only gets your messageacross, but also builds a picture of the culture andprocesses that have been established to ensure thefirm meets its aims.EducationThe existence of internal controls help new employeeslearn the right way to do their job and the correctprocedures needed to fulfil a task.Error reductionGood and clear internal controls procedures minimiseerrors and save time and money. It helps ensure businessinformation is correct and that staff are accountable fortheir actions. For example, staff should know how tocheck their own work to ensure it is accurate.
Protection and authorisationInternal controls give comfort to staff that they haveprotection if they have acted in the way prescribed by theinternal controls and within their authorisation limits. Thebusiness cannot blame you if you have acted in goodfaith and within the guidelines specified.(Whistleblowers Act)Perceptions of detectionThe existence of internal controls act as a deterrent forthose considering fraud increasing the risk they will bedetected (see case study).
Responsibility for Internal ControlsMany small business people don't think of internalcontrols as something they are responsible for, but rathera function of an auditor or an accountant. However, tobe effective, someone in the business must takeresponsibility for introducing and monitoringinternal controls.
It is the responsibility of all staff to ensure internalcontrols are operating properly. It takes time to explainthe importance of internal controls to your but it will betime well spent as it will help staff understand andappreciate why things are done ina certain way.Any breach in internal controls should be reported to youimmediately. With good communication established withyour employees, they should feel able to talk to you
about these issues.As the owner, you have ultimate responsibility andaccountability for the working and effectiveness ofinternal controls.
The General Accounting Framework presented in Chart 1 indicates the flow of financial
transactions from the original source documents to the book of final entry. Subsidiary
books, as well as general ledger, serves as the basis for the preparation of various
financial reports needed by the head office.
CHART 1 – Manual
Flow of accounting entries
Part 2
ACCOUNTING AND INTERNAL CONTROL SYSTEMS
Method of Recording- double entry method
This method of recording uses the rule of debit and credit
DEBIT (abbreviated Dr.) CREDIT (abbreviated Cr.)
1. Increase in assets 1. Decrease in assets
2. Decrease in liabilities 2. Increase in liabilities
3. Decrease in Equity due to: 3. Increase in Equity due to:
a. Increase in expenses a. Decrease in expenses
b. Decrease in income b. Increase in income
Components of the System
1. Books of Accounts to be Maintained
A. Journal of Collections & Deposits
B. Journal of Check Issued
C. Journal of Bills Rendered
D. General Journal
2. Chart of Accounts
3. Cash Receipts
A. Internal Control Guidelines
B. Minimum Documentations Required On File
C. Accounting Procedures
D. Illustrative Accounting Book Entries
E. Procedure Flow Chart
4. Cash Disbursement
A. Internal Control Guidelines
B. Minimum Documentations Required On File
C. Illustrative Accounting Book Entries
D. Procedures Flow Chart
Petty Cash Fund or Revolving Fund
Payment of Personnel Costs
Purchase of Goods and Services
Release of Operational Cash Advance
1. BOOKS OF ACCOUNTS
The following books of accounts shall be maintained:
Books of Original Entry
A. Journal of Collections and Deposits (JCD)
This journal shall be maintained to summarize collections and
deposits of collecting officers. Source of entries shall be the Official
Receipts, Reports of Daily Cash Sales, Collections, & Deposits, and
Remittance Advices. Provided under the credit column of collections is the
Revenue Account and Output VAT to take up collection of value added
taxes. The last column provides for recording deposits of the collected
amount. At the end of each month the journal shall be footed, balanced and
ruled and certified correct by the Chief Accountant. Postings to the general
and subsidiary ledgers shall be effected.
B. Journal of Checks Issued (JCI)
This journal shall be maintained to summarize all checks issued for
operational and capital expenditures. For each check, the date, check
number, payee and amount shall be entered in journal. Check number shall
be entered in numerical sequence on each journal sheet. At the end of each
month, the JCI shall be footed, balanced and ruled. All accounts shall be
recapitulated based on column totals of each account and on the summary
of accounts in the sundry ledger for postings to the General Ledger.
Likewise, postings to subsidiary records shall be made. A separate column
shall be provided in the debit column for Operating Expenses and Input VAT
representing payment of value added tax.
C. Journal of Bills Rendered
This journal shall be maintained to summarize all billing statements
issued to retailers as shown in the Report of Bills Rendered (RBR). The
billing statements issued are pre-numbered and shall be entered in the RBR
in numerical order. Voided bills shall still be recorded in the RBR such that
all numbers must be accounted for. At the end of each month, the RBR shall
be recapitulated to the extent necessary for posting in the General Ledger.
Subsidiary records for receivables and income shall be based on each bill of
charge issued.
D. General Journal (GJ)
This journal shall be used to record transaction not covered by the
special journals. Entries of General Journal shall be made based on proper
approved journal vouchers. Sufficient details shall be shown in the
subsidiary can be effected. Likewise sufficient explanation for each entry
must be included in the “Explanation” column so that it will not be necessary
to refer to the journal voucher to determine details of any entry. After entry,
journal voucher which are pre-numbered shall be entered in the General
Journal. At the end of each month, the general journal shall be balanced,
footed and ruled. The accounts entered in the general journal shall be
recapitulated then posted to the General Ledger and subsidiary ledger.
Books of Final Entry
A. General Ledger (GL)
This shall be maintained to summarize transactions which are
recorded in the different books of original entry.
B. Subsidiary Ledger (SL)
This shall be maintained to group in separate records similar
accounts relating to the same activity or object which should be in the
general ledger.
Subsidiary Records
A. Employee’s Earning Records
This contains the relevant data about the employee’s salary rate,
earnings, deductions and vacations and sick leave for ready reference in
payroll checking. This will form part of the employee’s 201 file.
B. Cash Advances Subsidiary Ledger
This ledger records operational advances to officers and staff and the
subsequent liquidation of these advances. One subsidiary ledger is to be
maintained for each individual.
C. Fixed Assets Register
This record shall contain the historical data of each property and
equipment (date of acquisition, cost, brief description of each item, rate
and periodic depreciation charges, etc.). Each fixed asset should have
each own register.
D. Accounts Payable Subsidiary Ledger
The ledger records all purchases of supplies and equipments on
account and the subsequent payments thereof. One ledger is to be
maintained for each supplier/creditor.
E. Stock Cards
This record controls the receipt and issuance of every type of
inventory and other expendable items and the remaining balances. A
separate stock card should be maintained for each kind of inventory.
2. CHART OF ACCOUNTS
Sample COA
DEFINITION OF THE ACCOUNT TITLE
3. CASH RECEIPTS
A. Internal Control Guidelines
SDNI shall observe or implement the following internal control guidelines on cash
receipts:
1. Official Receipt (OR) used should be pre-numbered. A separate OR booklet or
series shall be used for sales transactions. Cash receipts on refunds of advances
shall be supported by provisional receipts.
2. OR (used and unused) should be controlled by the accountant.
3. The cashier must issue OR for all cash or check collections made.
4. Cash or check collections must be kept in a secure place prior to depositing
these collections.
5. All collection for the day should be deposited intact to the bank not later than the
following banking day.
6. Surprise cash counts on un-deposited collections must be made periodically by
an authorized officer (Manager / Accountant / Internal Auditor) of the
organization.
7. The cashiering function should be assigned to a person other than the one
handling the bookkeeping function.
8. Bank reconciliation statement must be prepared by the bookkeeper or
Accountant on a monthly basis.
9. Use of Daily Sales, Collection, & Deposits Report
B. Minimum Documentations Required on File
1. Provisionary Receipts
2. Official Receipts
3. Bank validated deposit slips
4. Bank credit memo (for collections directly deposited to the depository bank of
SDNI)
5. Z-readings
6. Credit card or debit card slips
7. Surrendered/claimed gift checks
4. CASH DISBURSEMENTS
A. Internal Control Guidelines
1. All disbursements must be supported by a cash voucher
2. Cash Vouchers must be numbered
3. Cash disbursements, other than those from the Petty Cash Fund and/or
Revolving fund, should be made by check thru Check Voucher
4. Disbursements should never be made directly from cash collections.
5. Check/s must be payable to specific payee/s. Check/s payable to “Cash” or to
“Bearer” should be avoided.
6. Check/s should be countersigned. The signing and countersigning of check/s
should not be made without supporting documents.
Petty Cash and Revolving funds
Disbursements and Replenishments
A. Internal Control Guidelines
1. The Petty Cash and/or Revolving Fund may be maintained at an amount as
provided for by Spruce Memorandum Circular # 02-2009 for minor and
recurring expenses and/or advances. The amount of Petty Cash or Revolving
Fund shall depend on the nature and operational needs of a specific purpose.
2. A maximum single disbursement limit of P 1,000.000 must be set and all non-
recurring disbursement exceeding this limit must be paid by check.
3. The fund/s should be kept under the imprested system. At any given time, the
fund/s set-up should equal the sum of the un-replenished Petty
Cash/Revolving Fund Voucher (PCV/RFV), Un-liquidated cash advances,
plus the remaining cash in the fund/s.
4. The fund/s should not be mixed with the custodians personal and other cash
fund/s.
5. The PCV/RFV, together with supporting documents, should be stamped
PAID. With the date of payment indicated thereon to prevent, re-use of
supporting documents.
6. The Fund Custodian should keep the fund in a secured place.
7. Access to petty/revolving cash should be restricted to one person only. In the
absence of the assigned Petty Cash Custodian, the Management may
designate temporarily another staff to handle petty cash fund.
8. No subsequent cash advance shall be given to staff with un-liquidated cash
advances.
9. Petty Cash Custodian should be other than the Cashier.
B. Minimum Documentations Required on File
1. Approved petty cash voucher.
2. Original copy of supporting documents, i.e. invoice, official receipts (OR), bus ticket, meal allowance receipts, travel order or simulated invoices for items where invoice nor OR is not available.
3. Approved travel itinerary (for transportation expense.)
4. Any other supporting documents that may be secured.
C. Illustrative Accounting Book Entries
1. Setting of Petty Cash or Revolving Fund
Petty Cash Fund xxCash in Bank xx
2. Disbursements from Petty Cash Funds
None
3. Replenishment of Petty Cash Fund
Project expenses (Statement account titles) xxCash in Bank xx
Payment of Personal Cost
Disbursements and Replenishments
A. Internal Control Guidelines
1. Project personnel should have a Daily Time Record.
2. The Employee’s Earning Record (EER) containing pertinent data about
the employee’s salary rate, earnings, deductions, vacation and sick leaves
should be maintained by the Accountant for payroll checking.
B. Minimum Documentations Required on File
1. Approved Daily Time Record (DTR) for office staff.
2. Payroll Sheet duly signed by individual employee acknowledging receipt of
amount.
C. Illustrative Accounting Book Entries
1. Payment of Employee’s Salaries
Salaries and Wages xx Cash in Bank xx Withholding Tax Payable xx SSS, Payable xx PAG-IBIG Payable xx Philhealth Payable xx
2. To record employer’s share on SSS, PAG-IBIG, Philhealth Premium
SSS Contribution xx Philhealth Contribution xx PAG-IBIG Contribution xx
SSS, Philhealth and PAG-IBIG Payable xx
3. Remittances of Withholding Taxes and SSS, PAG-IBIG and Philhealth Contributions
SSS, Philhealth and PAG-IBIG Payable xxWithholding Tax Payable xx
Cash in Bank xx
Purchase of Goods and Services
A. Internal Control Guidelines
1. Purchases of equipment, supplies and other commodities should be based
on approved Purchase Requisition (PR).
2. Supplier selection procedures are required to ensure that goods of
satisfactory quality are acquired at reasonable price and term of payment.
3. A Purchase Order (PO) shall be prepared, whenever practicable and must
be approved.
4. Purchases should be made with the following guidelines:
A. Quantities and specifications ordered correspond to the quantities
specifications invoiced and received.
B. Goods of satisfactory quality are acquired at the lowest price.
C. All goods being paid for have been duly accepted in good order.
B. Minimum Documents Required on File:
1. Purchase Requisition (PR)
2. Quotations from at least three (3) suppliers on significant purchases.
3. Duly approved Purchase Order (PO), if practicable
4. Delivery Receipt of supplier (DR)
5. Sales invoice of supplier (SI)
6. For construction projects contracted to another party, the following
documents must be on file:
A. Notarized Contract between the Project proponent and Contractor
B. Bidding or quotations of all bidders
C. Applicable bonding requirement
C. Illustrative Accounting Book Entries
1. Cash purchase of equipment or materials
Equipment or Furniture xxCash in Bank xx
2. Cash purchase of supplies
Supplies/Administration (or any appropriate account title) xxCash in Bank xx
3. Purchase of equipment or supplies on account
Equipment & Commodities xxSupplies or Administration (Or any appropriate account) xxAccounts Payable xx
4. Payment of account to supplier
Accounts Payable xx Cash in Bank xx
5. To record depreciation of equipments
Depreciation xxAccumulated Depreciation – Equipment xx
Accounting for Disbursements on Cash Advances
1. All cash advances supported by a Request for Cash Advance with breakdown of
expenses shall be pre-audited by accounting personnel. Likewise, the liquidation
of these cash advances shall first be audited before the same is taken up in the
books of accounts.
2. No cash advance shall be given unless for a legally authorized specific purpose
with duly approved Request for Cash Advance by the Sales Director.
3. A cash advance shall be liquidated not later than seven (7) days after the
purpose for which it was given has been served. Liquidations made must be
supported with a Report of Expenses Incurred.
4. Cash advances which are no longer needed or have not been used shall be
returned to the Accounting Department for immediate deposit to bank upon
liquidation.
5. No additional cash advance shall be allowed to any employee unless the
previous cash advance given to him/her is first settled or a proper accounting
thereof is made for the full amount of cash advance.
6. No cash advance shall be granted for the purpose of liquidating a previous cash
advance.
7. A cash advance shall be granted only to responsible permanent employees.
Casual or contractual employees shall not be granted cash advance, except
under justifiable circumstances as may be determined by the management.
Furniture and Equipment
This account is charged with invoice cost of furniture, fixture and equipment, including
incidental incurred in acquiring them up to the time they are received by the office which
will use them. Depreciation is determined quarterly in accordance with approved rates.
A. Internal Control Guidelines
1. All purchase of furniture, fixtures and equipment shall have prior approval
by the Executive Director.
2. All procurement of furniture, fixtures and equipment as well as stationery
and supplies is centralized in Head Office. However, direct purchases by
provincial branches and agencies may be made subject to any of the
following conditions:
a. Emergency purchases to restore normal operations after damages
brought by fire, typhoon, etc.
b. Purchases necessary for immediate protection of the assets and
personnel.
c. Where direct purchases are advantageous for reason of:
1. Lower local prices in the face of comparable quality compared to
current prices in Cagayan de Oro City, plus handling and shipping
charges, and
2. Service guarantees and other sales features that would prolong
the life and usefulness of the assets.
3. Emergency purchases shall still be based on a canvass of at least three (3)
bonafide dealers.
4. All purchases amounting to 100,000 and above shall be subject to public
bidding and its requirements be complied with all respect, except those
items that can only be obtained from a sole manufacturer or exclusive
distributor.
B. Depreciation
The rates of depreciation are as follows:
Annual Depreciation Rate
1. Land -2. Building 4%3. Furniture & Fixtures 20%4. Office Equipment & Commodities 20%5. Motorcycle & Service Vehicle 20%
C. Straight Line Depreciation
Periodic provision for depreciation is necessary to cover the decline in value of
furniture and Equipment. For simplicity and ease of application, the straight-line
method of depreciation was adopted for furniture and equipment as a general
rule.
The computation based on the following formula:
Annual Depreciation = Cost – Residual or Salvage ValueNo. of Years Life
D. Items with Nominal and Residual or Salvage Value
All items of furniture and equipment have either:
a. A nominal value of P 1.00 each upon purchase or acquisition; or
b. A residual or salvage value at the end of its estimated service or useful life.
Determine as follows:
1. Items costing more than P 500.00 but less than P 999.00 each are carried at a
nominal book value of P 1.00 each for inventory and accountability purpose; the
difference is charged outright to depreciation expenses at the time of acquisition
or purchase. This will save a lot of time and effort in computing and booking the
monthly depreciation and balancing the subsidiary ledger accounts.
Items for consumption costing P 999.00 or less including gifts and give-away
items irrespective of Cost, are chargeable outright to Expense: Stationery and
Supplies, Promotional and Special Expenses or Miscellaneous Expense, as the
case may be.
2. All other items of furniture and equipment have a residual or salvage value
indicative of or proportionate to the cost of purchase price. This is 5% of the cost
or acquisition price, thus
Cost of Acquisition Price Nominal Value Residual/Salvage Value
P 1 to P 999.00 P 1 1
P 1,000.00 to P 1,999.00 - 50
P 2,000.00 to P 2,999.00 - 100
P 3,000.00 to P 3,999.00 - 150
P 4,000.00 to P 4,999.00 - 200
P 5,000.00 up - 5% of the amt.
E. Non-Depreciation items
The items without “wearing value” or not subject to monthly depreciation are
classified separately but under the same category as the items carried at P1 nominal
value and thus fully depreciated and carried at their residual or salvage value. These
non-depreciable items such as oil paintings, antiques, work of art, etc. may be booked
indefinitely at original cost, provided:
1. The original cost is at least P 5,000.00 or per set;
2. They are of lasting or permanent values of interest but excluding portraits of
officials.
3. They are salable or marketable at about the original cost or acquisitions cost.
F. Accounting procedures:
In booking depreciation expenses, the following procedure and guidelines are
observed:
1. The provision for depreciation is computed and booked monthly as usual for
all items of furniture and equipment except those carried at nominal and
residual value and the non-depreciable items.
2. The depreciation expense for each item per quarter should be in round
figure to the nearest peso, that is, without any centavos;
3. In the event, then original cost less salvage value is not exactly divisible in
pesos for the number of depreciable quarters or periods, the last one or two
depreciation periods shall cover the depreciable balance of the asset item to
be written off as “balloon” charge or charges, leaving the residual or salvage
value in round figures to the nearest peso as required.
4. As a general practice, then first depreciation charge on an asset item begins
with the next monthly period after acquisition or purchase.
5. The monthly depreciation allowance is deducted as before from the book
value by the crediting the amount to the subsidiary ledger account in which
the furniture and equipment items appear. There is no need to set up a
separate account. The Allowance for Depreciation is a valuation reserve.
Classification and Depreciation Rates
A. Land
This category belongs to the real estate properties of the organization specifically land.
B. Building – 4%
This category embraces building purchased or constructed by the company.
C. Office Equipment – 20%
This category embraces all office apparatus which are not mechanically operated. It
includes: cabinet, safe vaults, ledger, trays, racks, pigeonholes and paper cutters.
D. Furniture & Fixtures – 20%
This classification covers building accessories which are generally for the working
and/or convenience and comfort of office personnel and clients. Examples: chairs,
tables, sofas, top-glass, mirrors, carpets, shades, draperies, movable dividers, vases,
decorative boxes, frames, paintings, etc.
E. Service Vehicle – 20%
Included in this group are: automobiles, jeeps, buses, armored cars, ambulance and
pickups.
F. Nominal, Residual and Non-depreciable items
Items costing more than P 1.00 but less than P 999.00 each shall be carried at the
nominal book value of P1 each for inventory and accountability purposes, the difference
to be charged outright to depreciation expense at the time of acquisition or purchase.
A. All other items or furniture and equipment shall have a residual or salvage value
indicated of or proportionate to the cost of purchase price. This shall be 5% of the
cost or acquisition price.
B. The items without any “wearing value” or not subject to monthly deprecation are
classed separately but under the same category as the items carried at P1
nominal value and those full depreciated and carried at their residual or salvage
value. These non-depreciable items such as oil painting, antiques, work of art,
etc. may be looked indefinitely at original cost.
Reporting System
Based on the updated recordings to the books of accounts, the Accountant can
prepare the financial reports.
Summary of the financial transactions is presented in various financial report
formats. Bothe the management needs periodic financial reports that will assist in
evaluating the progress of the project.
Financial Reports Needed by the Management Monthly:
1. Trial Balance
2. Balance Sheet
3. Income Statement
4. Cash Flow
5. Bank Reconciliation
6. Accounts Receivables
7. Accounts Payable
8. Unliquidated Cash Advances