The importance of internal controls in accounting systems for small business.

Internal controls protect a company from fraud and also allow a company to be in compliance with Generally Accepted Accounting Principles, or more often referred to as GAAP.

What is internal control?

Overall, it a process implemented by a company's Board of Directors and Management, designed to provide reasonable assurance regarding objectives in the following areas:

1. Effectiveness and efficiency of operation in the business

2. Reliability of Reporting

3. Compliance with applicable rules, laws, and Regulations governed by GAAP, FASB, and GASP

Accounting systems provides businesses with a uniform way to use a company's data and financial information to strategize in the areas listed above.

There are five key elements of implementing internal control:

1. Environmental control

2. Risk Assessment

3. Control Procedures

4. Monitoring of all of the above - the overall system

The reason these issues are so important is that it ultimately protects the company from fraud and collusion. In addition to criminal injuries, good internal control is necessary to inform the management of abuses or inconsistencies vis a vie over-production, poor production, or inadequate production by both personnel and equipment. For example, manufacturing production controls must be stringently adhered to. If a machine is off by 5% in making a product, the ramifications of this downturn could be a disaster. Simiiarly with people. People in an organization need to know what is expected of them up front. This comes with good controls. It then becomes easier to monitor their commitment, production and success at their job. Numbers do not only belong in the front office. For a business to run successfully, all employees need to know production numbers, reality of achieving those numbers and can contribute mightily to enable production to increase based on their input.

In short, we could write pages about internal controls. Suffice to say that this is just a snippet of information about running a business. If you are a small business owner, an example of internal controls would be the issuance of a purchase order to your supplier, a receiving ticket created by you when product is received, and matched to an invoice when received. Although internal controls can sound sophisticated and overly-complicated, the bottom line is that you must know your business, understand all facets of your business, and in general ALWAYS control the money. Start with that and then we can go to using GAAP and FASB. Good luck!