Definition: The control principle is the concept that accounting systemsmust have procedures and processes in place to help managers monitor and regulate business activities. These processes are traditionally called internal controls.
What Does Control Principle Mean?
The purpose of the control principle is to make sure the accounting system is working properly and business events are being recorded accurately. Obviously, managers can’t oversee every single employee, so there is a possibility that some errors will occur or some fraud could take place. The internal controls are put in place to make sure accounting errors are reduced, company assets are protected, and employees aren’t able to commit fraud.
There are several different types of internal controls including segregating duties, mandatory employee rotation, and automated controls.
Segregation of duty controls requires that separate employees handle and record cash. No single employee should be in charge of handling cash, recording cash receipts, depositing cash, and recording the bank reconciliation. This eliminates the ability of one person to steal cash and cover it up by recording it improperly.
Mandatory employee rotation or vacation time is put in place to catch fraudulent schemes like kiting where a regular system is required to maintain it. If bookkeepersswitch out responsibilities every other week, one person will not be able to run a consistent system.
Automated controls are probably the most common internal control because it protects the company and increases efficiency at the same time. Automated time clocks are a good example. Employees punch their time clock when they arrive and punch out when they leave for the day. The automated time clock eliminates the possibility of employees cheating their hours.
All of these internal controls accomplish the goals of the control principle. Once the controls are in place, managers don’t have to activity monitor each employee. They can periodically review the controls to make sure they working properly and focus on managing the business activities.