Authorization in accounting refers to the process of granting approval or permission to perform specific financial activities or transactions. It is an essential component of internal control systems within organizations, as it helps maintain accountability, reduce the risk of fraud and errors, and ensure that transactions are in line with company policies and procedures.
Authorization typically involves a hierarchy of roles and responsibilities within an organization, with different individuals granted various levels of authority based on their job duties. Examples of activities that may require authorization include approving purchase orders, signing checks, authorizing expense reimbursements, or adjusting financial records.
By having a clear and well-defined authorization process, organizations can strengthen their financial controls and ensure that transactions are reviewed and approved by appropriate individuals, promoting the accuracy and integrity of financial records.
Example of Authorization
Let’s consider an example of authorization in the context of a purchasing process within a company:
A department manager identifies the need for office supplies and prepares a purchase requisition. The manager does not have the authority to approve the purchase directly; instead, they must seek authorization from a higher-level employee, such as the head of the department or a financial controller.
The head of the department reviews the purchase requisition, ensuring that it is in line with the company’s budget and policies. If they deem the purchase necessary and appropriate, they authorize it by signing the requisition form or approving it electronically.
Once the purchase is authorized, the purchasing department can proceed with placing the order with the supplier. Upon receiving the goods, the department manager verifies that the delivered items match the order and submits an invoice for payment.
The payment request is then reviewed by the accounting department, which checks that the purchase was properly authorized and that the invoice matches the delivered goods. If everything is in order, an authorized person, such as the financial controller, approves the payment.
In this example, the authorization process involves multiple steps and individuals with different levels of authority, ensuring that the company’s financial transactions are properly reviewed and approved, reducing the risk of fraud and errors.