Part 1
Theft and fraud is a big concern for companies. However there are methods that have been proven to reduce or prevent theft and/or fraud within a company. One method is to know your employees. By learning about your employees, you can find out things that can help you to find out who is committing the thefts or fraud. Having written policies and examples explaining what is considers theft as well as fraud is another effective internal control used by companies. The policies should also include the consequences for employees that have been accused and/or found guilty of theft and/or fraud. Bank statement controls are also another way of ensuring that theft or fraud is minimized. By making employees take vacations, you can review their work habits and review their performance enabling you to determine if they are committing fraudulent acts or stealing from the company. Various industries use specific types of internal controls to help reduce theft and fraud.
For example, in the U.S. retail industry background checks can help company determine character of employees as well as identify if they have criminal record. A tip line can also be used to report thefts or fraud anonymously.
Part 2
Paying off debt can be one of the hardest things that anyone or company has to do. The most common ways of paying debts is by direct write-off and allowance method. The direct write-off method involves recording the amount of the bad debt and deciding if it can be collected. If the debt cannot be collected the company, the company records the facts why and considers it a loss that is placed in the company’s accounting books for tax purposes. Unfortunately, this creates disadvantages for the company including failing to match expenses with earnings at the given time and “receivables not stated at the estimated realizable value.” (Mursau, 2012)
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The allowance method on the other hand is based on the percentages of sales and receivables that “represents a composite amount rather than a specific amount.” (Mursau, 2012) This allows the company to create an account called the allow doubtful account that states that any debt that was not collected in the present year will not be collected in the following year. This is a more advantageous method for companies because there is “no impact on the income statements and net realizable value of receivables on the balance sheet. Also bad debt entries are also reduced on both the allowance accounts and related receivable” (Mursau, 2012) creating a more balance accounts of the company’s finances.
I do not believe that estimating the allowance for doubtful accounts distorts gross income. Companies estimate sales figures all of the time to determine the profits, therefore they should also project what will happen if they losses. This allows them to give more critical thought to different scenarios that could happen to the company resulting in an increase of problem solving skills. This increase will allow the company to be more strategic in finding ways of gaining revenue that will off-set any losses or write-offs they may have.
I also believe that a loss will not cause a business to go bankrupt and possibly a better way of balancing their books is similar to how we balance our checkbooks or think about losses of dividends in the stock market. Record the loss as is and find ways of making up for the loss. Most businesses can do this by generating more business through sales and new customers. They can also do this by maybe finding a way to make the loss a charitable donation that can be claimed as a tax deduction for the company.
- Mursau, A. (2012, October 14). Accounts Receivable Bad Debt Expense (Direct Write Off Method Vs Allowance Method). YouTube. YouTube.
- Farrell, J. (2011, October 16). Prevent Employee Theft in Your Business. YouTube. YouTube.
