Reference no: EM131537230

Question: Posting transactions from a journal to both the general ledger and subsidiary ledgers presents opportunities for errors. Hobby Shack can fail to record a sales transaction to a customer's account. If the customer does not pay the amount owed, Hobby Shack may never collect the accounts receivable. To avoid errors and their resulting losses, businesses should institute effective internal controls. Internal controls may be categorized in three phases:

(1) preventive,

(2) detective, and

(3) corrective.

A preventive control prevents the individual from making the error. Establishing and following consistent procedures for posting transactions is a preventive control. A detective control detects or finds the error. Preparing a trial balance is a detective control. A corrective control restores the business back to normal if an error occurs. Insurance, such as a fidelity bond on a cashier, is a corrective control. Businesses with an adequate number of employees should split duties among several employees to reduce the chances of error. This segregation of duties enables one employee to check the work of another. For example, one employee should post transactions to the general ledger while another employee should post transactions to the subsidiary ledger.