Question

1. Why do companies have internal controls? Are internal controls just for large corporations, or should...

1. Why do companies have internal controls? Are internal controls just for large corporations, or should small businesses also have controls?

2. Why is it that the allowance method is used for financial statements instead of the direct writeoff method? Why are estimates allowed in accounting, such as required to do the allowance method?

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Answer #1

(1)

Companies have internal controls systems to prevent any fraud or error from happening. Prevention is better than cure. Other purposes are to safeguard assets, promote accountability, increase efficiency, etc

Internal controls are necessary for every entity, be it large corporations or small businesses. This is because all types of entities are prone to frauds and errors etc.

(2)

As per prudence/conservatism principle, all the possible losses must be provided for before they happen. Bad debts are estimated using some intelligent basis such as percentage of sales or aging method based upon prior experiences. Since these bad debts are only estimates they are not written off from the accounts receivable. They are recorded in balance sheet in the form of allowance for doubtful accounts.

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