All businesses need the help of a bookkeeping and accounting system, but what makes things truly work and remain in order? To break it down further, we need to address controls, and more specifically, accounts payable internal controls. These policies are often overlooked, but necessary to minimize the risk of error, loss, and fraud.
Such internal controls also ensure that all supplier and vendor invoices are valid and properly recorded, to be later paid for by the business. The question now stands—how do you create a system that’s sustainable and highly effective? Fret not, we’ve come up with this quick and easy guide for you:
Section 1: What Should Be Part of Proper Internal Controls?
Policies and Procedures
A proper internal control simply cannot work without good policies in place. Everything must be well-documented and finalized, especially when it comes to procedures regarding accounts payable. With such a blueprint in place, all staff remains on the same page, thereby eliminating error, loss, and fraud.
Segregation of Duties
Apart from policies and procedures, proper internal control must also clearly state the separation of duties. This ensures that individuals dealing with the financial process are given separate responsibilities, as this ensures any error, fraud, or miscalculations are avoided.
One staff, for instance, must be tasked with receiving bills, invoices, and receipts from vendors. These must then be properly recorded in the accounting system. Any submission and approval of payments must then go through third-party software, which should be manned by yet another staff. Keep in mind that it’s always important to have these responsibilities separated.
Although the segregation of duties is indeed useful, keep in mind that not all businesses are capable of employing additional staff. It’s still paramount that your budgets be balanced and kept under control, especially since cash and inventory are always at most risk. For this reason, many businesses opt for the better road—enlisting the help of an accounting firm to submit payments for approval.
Section 2: Understanding the Process
1 – Receiving the documents and invoice
Purchase transactions must have three documents, which should include the purchase order, invoice from the vendor, and of course, the receiving report. Here the person in charge must take the invoice approval process into account and should focus on just receiving all invoices. Invoice prices, quantities and terms must match the receiving reports, and all invoice calculations must be checked for accuracy. Any duplicate invoices must also be filtered out, along with vendor addresses.
2 – Posting the journal and ledger
Once invoices are checked and submitted, the purchases journal and ledgers must be posted as soon as the transactions occur. Any unpaid invoices should be made before the due date, as it’s paramount to take advantage of early payment discounts and avoid late payment penalties.
Any unusual activity must also be analyzed and reported immediately, just to make sure that nothing unscrupulous ever escalates. More importantly, balances must always be reviewed and reported regularly.
3 – Payment preparation
Here, the person in charge must only make payments supported by original receipts and invoices. Doing so ensures that no duplicate payments ever occur, keeping the business’s finances intact. All amounts and dates on the invoices must also be approved with supporting documentation before making the final payment.
The Bottom Line
Creating a proper internal control system may sound daunting, but it’s a pursuit worth investing in. By implementing policies and procedures, your business will prevent fraud and error, as all financial information will remain accurate and up to date. With such financial data on hand, you’ll focus on what you do best—making sound business decisions for further growth and sustainability.
As previously mentioned, however, not all businesses are capable of simply just hiring away. Thankfully, Blueprint Accounting, Inc. exists to help business owners remain empowered. We offer you the best accounting and bookkeeping services in Canada, ensuring that your bookkeeping, accounting, and corporate tax needs are always met. Contact us today!