3. Chapter 8 (1)
3. Chapter 8 (1)
•
Purpose of accounting information
Recording transactions
• External reports
• Users of financial statements
The role of accounting • Professional accountancy bodies
• Financial accounting v management accounting
• External auditors
• Internal audit department
• The regulatory system
• Effective systems & procedures
• Integrated accounting software
• Databases
• Spreadsheets
Syllabus learning outcomes
The purpose of accounting information
Nature, principles and scope of accounting
The regulatory system
Internal and external financial information
Control over business transactions
The main business financial systems
Manual and computerized accounting systems
Databases and spreadsheets
The purpose of accounting information
• Accounting is a way of recording, analysing and summarising transactions of a business
• It is used outside the finance function, by other departments to make decisions
• The accounting system must be adequate to fulfil these functions
Recording transactions
Transactions
Recorded in 'books of prime
entry'
Transactions are
summarised in
financial statements
An appropriate accounting system
Will depend upon:
• Size of the organisation
• Type of organisation
• Structure of organisation
• Legal jurisdiction of the organisation
History
• Luca Pacioli wrote the first explanation of double entry bookkeeping in 1494 – his
description of the methods was widely influential
Double entry
Debit Credit
FINANCE DIRECTOR
(reports to CEO/Board of
directors)
Qualified –
Unqualified –
Issues in
All fine
accounts
Internal audit department
• Many organisations also have an internal audit department
• Designed to alleviate the risks of error and fraud
• Checks internal control systems operate effectively
• Reports to audit committee
• Employees of the company
Other departments and sections
Department Accounts section Relationship
Purchases Payables ledger (PL) PD advises PL of purchase orders
Dept (PD) Cashier (C) PD indicates valid invoices
C informs PD and PL of payment
HR dept Payroll Personnel gives details of wage rates, starters
and leavers to payroll
Sales Dept Receivables ledger SD advises RL of sales order
(SD) RL might give CC information about overdue
Credit control debts and about debtors ageing
(CC)
Operations, Cost accounting staff Operations give details of movements of
inventory inventory so accounts staff can value
controllers inventory and provide costing reports
Senior Financial accounting Produces aggregate information for decision
management & cost accounting making and control throughout business
The regulatory system
Factors affecting the regulatory system:
• Company law
• Accounting concepts and individual judgement
• Accounting standards
• European Union
• Other international influences
• Generally accepted accounting practice (GAAP)
Business transactions
Effective systems & procedures
Are essential to ensure that:
• Relationships with customers are effectively managed
• Relationships with suppliers are effectively managed
• Office functions interrelate properly and are not duplicated
Outputs:
Inputs into a payroll Payslips
system: Payroll
Clock cards
processing Payroll analysis
Time sheets
Bonus details Income tax reports
Salary systems Confirmation of
payment
Payroll controls
Will be needed to ensure the correct amounts are paid to employees and the tax
authorities.
Examples of controls:
• Segregation of duties
• Authorisation to change standing data
• Reconciliations between total pay and deductions
• Comparing budgeted payroll with actual
Purchases and sales cycle
• Purchasing is an important area to control, especially for high value items.
• Only properly authorised purchases should be made.
• Documents should be matched at all stages of the process to ensure the organisation
gets what is ordered and only pays for what it orders and receives.
• The payables ledger makes it possible to know how much is owed to each supplier.
Payables ledger system
Controls over purchasing
Will be based around:
Buying – authorisation
Accounting – recordings
Goods inwards – custody
Ordering control
ORDERING
GOODS
RECEIVED
ACCOUNTING/
RECORDING
– Segregate duties of
accounting and checking
– Record purchase/returns
promptly
– Compare supplier
statements to payables
ledger
– Check payment properly
authorised
Sales cycle 1
• Only properly authorised sales should be made.
• Businesses only want to give credit to customers who will pay their debts.
• Documents should be matched at all stages of the process to ensure the customer gets
what it ordered, is invoiced for the correct goods and amounts and pays for what it
orders and receives.
• The receivables ledger makes it possible to know how much is owed by each customer.
Sales cycle 2
Controls will be based around:
Selling – authorisation
Accounting – recordings
Goods outwards – custody
Receivables ledger system
Selling controls
SELLING
GOODS
OUTWARDS
– Authorisation of despatch of
goods
– Check condition of goods
returned
– Check signature of delivery
notes
– Match sales invoices with
despatch and delivery notes
and sales order
Accounting/recording controls
ACCOUNTING/
RECORDING
– Segregate duties of
accounting and checking
– Record sales sequentially
– Match cash receipts to
invoices
– Prepare regular receivables
statements
– Retain customer remittance
advice
– Review and follow up
overdue accounts
Controlling cash
Controls over cash receipts will include:
• Receipts must be promptly banked
• Records of receipts must be complete
• Loss of receipts through theft or accident must be prevented
Controls over payments
• Documentary evidence of reason
• Authorisation of payment
• Restricting authority to make payment to specified individuals
Bank reconciliations
• Used to compare cash book to the bank statement.
Differences can be classified as:
• Timing differences due to unpresented cheques
• Timing differences due to uncredited lodgements
• Standing orders and direct debits not entered in the cash book
• Bank charges not entered in cash book
• Funds received by transfer and not recorded in cash book
Manual v computerised accounting systems
• The principles behind computerised accounting are the same as those of manual
accounting
• Computerised accounting tends to rely on accounting packages which comprise several
modules (eg sales ledger, purchase ledger)
• Manual systems are usually inferior to computerised systems
Disadvantages of manual system
Disadvantage Comment
Productivity Lower, particularly in routine or operational situations such as
transaction processing
Slower Processing is slower where large volumes of data need to be
dealt with
Risk of errors Greater, especially in repetitive areas, such as payroll
Less accessible Generally restricted to one user at a time
Quality of output Less consistent and not as well designed often. Some
handwritten records may be illegible
Bulk Paper based systems are very bulky to handle and store
But
Integrated accounting software
Has automatic links between separate accounting modules
Advantages Disadvantages
One entry updates others Greater computer memory
needed
Users specify reports Fewer facilities than specialist
modules
Users' workload is simplified
Example of an integrated accounting system
Databases
• A database is a 'pool' of data, which can be used by any number of applications.
• Its use is not restricted to the accounts department.
Examples:
• Non-current assets database
• Customer database
• Supplier database
Database approach
* The range of applications which make use of a database will widely, depending on what data is held in the
database files.
Advantages and disadvantages of database
Advantages Disadvantages
No duplication of effort/data Breakdown, especially if
complex
Easy to manage updates Access issues
Conflicts between
departments who use
inconsistent data are avoided
Spreadsheet
• Is essentially as electronic piece of paper divided into rows and columns with a built in
pencil, eraser and calculator. It provides an easy way of performing numeric
calculations
• Used in financial accounting and cost accounting
• Used to create financial models
Spreadsheet extract
A B C D E
1 BUDGETED SALES FIGURES
2 Jan Feb Mar Total
3 £'000 £'000 £'000 £'000
4 North 2,431 3,001 2,189 7,621
5 South 6,532 5,826 6,124 18,482
6 West 895 432 596 1,923
7 Total 9,858 9,259 8,909 28,026
Specimen paper 1
The major purpose of the International Accounting Standards Board (IASB) is to ensure
consistency in ____________.
(1 mark)
Which two words complete the sentence above?
A. Financial control
B. Corporate reporting
C. External auditing
Specimen paper 1 Solution
Answer: B
1 2 3 4
A. SOFP SOPL SOPL SOFP
B. SOPL SOFP SOFP SOPL
C. SOPL SOFP SOPL SOFP
D. SOFP SOPL SOFP SOFP
(2 marks)
Specimen paper 3 Solution
Answer: D
The key correctly matches the information required to the particular financial statement
in which they are found.
Chapter 8 – Summary 1
ASB IASB
Internal Companies
Users Act
Accountin
External Co g
Law concepts
Nature, principles
Purpose of accounting UK Regulatory
and scope of
information system
accounting
• Recording
• Analysing Financial Management Accountin GAAP EU
• g
Qualities Summarisin standards
g
• Relevance
• Reliability
• Objectivity
• Completeness
Role of
'True and fair Structure
• Timeliness view' accounting
• Comparability
Chapter 8 – Summary 2
Spreadsheet Drawbacks of
s manual
systems
• Financial
controls
Accountin Integrated Databases
g software • Procedures
• Advantages
packages
•
Disadvantage
Modular s