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3. Chapter 8 (1)

Chapter 8 discusses the purpose and importance of accounting information, detailing how transactions are recorded, analyzed, and summarized for both internal and external users. It covers the roles of various accounting systems, including manual and computerized methods, and emphasizes the need for effective financial control procedures. Additionally, the chapter highlights the regulatory framework and the qualities of good accounting information.

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0% found this document useful (0 votes)
7 views61 pages

3. Chapter 8 (1)

Chapter 8 discusses the purpose and importance of accounting information, detailing how transactions are recorded, analyzed, and summarized for both internal and external users. It covers the roles of various accounting systems, including manual and computerized methods, and emphasizes the need for effective financial control procedures. Additionally, the chapter highlights the regulatory framework and the qualities of good accounting information.

Uploaded by

phuonglam0624
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Chapter 8 •


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 analysed &


posted to ledgers

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

Every transaction has a dual effect that balances to zero


External reports
• The information provided by the accounting system will be used internally and
externally.
• Companies will want to avoid sharing too much information externally, but must
produce:
• Statement of profit or loss
• Statement of financial position
• Statement of cashflows
Users of financial statements and accounting information

• Managers of the company


• Shareholders
• Trade contracts
• Providers of finance
• Tax authorities
• Employees
• Financial analysts and advisors
• Government and their agencies
• The public
Requirements to prepare accounts
Financial statements have to be produced as a result of requirements of:
• Law (companies legislation)
• Tax authority requirements
• Banks (if providing finance to the company)
• Employee reports
Professional accountancy bodies
• Produce accounting standards with which all published accounts are expected to
comply
Non-commercial undertakings
• It is not only companies that need to prepare accounts.
• Charities and clubs are also required to maintain accounts and prepare financial
statements.
• Donors may wish to scrutinise charity accounts to see where funds have been spent.
Qualities of good information
• Accurate – free from error
• Completeness – must include all transactions
• Comparability – produced on consistent basis
• Unbiased
• Relevance – for the decision/use
• Appropriately detailed
• Timeliness
• Easy to use
ACCURATE
Design of accounting function
• Typically large organisations structure their accounting functions on the lines of:

FINANCE DIRECTOR
(reports to CEO/Board of
directors)

TREASURER FINANCIAL CONTROLLER MANAGEMENT ACCOUNTANT


(responsible for cash (responsible for routine (responsible for budgets/ cost
flow control) accounting) accounting)
Financial accounting v management accounting

• External • Forward looking


• Historical • Used to make
• Reports what has decisions internally
happened • Change plans by
looking forward
External auditors
• The statutory annual accounts of a company, subject to a minimum size requirement,
need to be audited by an independent qualified person.
• Auditors prepare an audit report.

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

Policies and procedures may be grouped together into a policy manual.


Financial control procedures
Exist to ensure that:
• Transactions are correctly recorded
• Business assets are safeguarded
• Production of accurate and timely information
Examples of financial control procedures
• Cheques/bank transfers over a certain amount need two signatures
• Authorisation limits on purchase orders
• Authorisation of expense claims
• Effective credit control procedures
• Effective computer security and access levels
Weaknesses may be signalled by
• Cash or cheques going missing
• Excessive bad or doubtful debts
• Customers not paying within credit terms
• Suppliers not being paid on time
• Unauthorised purchases being made
• Failure to produce accounts or other reports at the specified time
Function
There are a number of functions to be managed within a business:
• Purchasing
• HR
• Finance
• Sales and marketing
• General administration
Controlling payroll
Key controls over payroll cover:
• Documentation and authorisation of staff changes
• Calculation of wages and salaries
• Payment of wages and salaries
• Authorisation of deductions
Payroll system

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

– Use certain suppliers only


– Obtain authorisation
– Use prenumbered forms
Goods received

GOODS
RECEIVED

– Compare goods received


note with purchase order
– Check condition of goods
received
– Check supplier invoice
correct
– Record goods returned
Accounting/recording

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

– Segregate duties of credit


control, invoicing and
despatch
– Obtain authorisation for
credit terms for customers
– Use prenumbered forms
Goods outwards controls

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

The ISAB aims to promote consistency in corporate reporting by creating financial


reporting standards to which major businesses are expected to adhere.
Specimen paper 2
The system used by a company to record sales and purchases is an example of which of
the following?

A. A transaction processing system


B. A management information system
C. An office automation system
D. A decision support system
(2 marks)
Specimen paper 2 Solution
Answer: A

A transaction processing system enables all sales and purchase transactions to be


recorded by volume and category.
Specimen paper 3
Malachi has been asked by his manager to obtain information about ABC Company,
which is bidding for a contract offered by Malachi's company in the near future. The two
statements which he will use as his sources are the statement of financial position (SOFP)
and the statement of profit or loss (SOPL). The information he is required to obtain is as
follows:
1. The equity of the company
2. Operating costs as percentage of turnover
3. Long-term borrowings
4. Liquidity
Specimen paper 3 (cont'd)
Which of the following currently matches the above items of information with the
financial statements in which they would be found?

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

Manual and computerised Control over business


accounting systems transactions

• Financial
controls
Accountin Integrated Databases
g software • Procedures
• Advantages
packages

Disadvantage
Modular s

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