Q3RQ - Horngren'S Financial And Managerial Accounting

Question

What is a critical element of internal control in the handling of receivables by a business? Explain how this element is accomplished.

Step-by-Step Solution

Answer

Answer

A critical element of internal control is the separation of duties related to managing cash and cash-accounting duties.

Step 1: Meaning of receivables

The sums that customers and other parties owe a business are known as receivables. Receivables are any assets that result from a company's core operations and any assets that reflect cash that needs to be collected from outside parties that owe the company money.

Step 2: Explaining critical element of internal control in the handling of receivables by a business

The division of responsibilities for handling and accounting for cash is an essential component of internal control. The company must uphold the Separation of responsibilities, and the credit department shouldn't have access to money for effective internal control over cash collections from receivables. Additionally, those who deal with cash shouldn't be able to give customers credit.