chapter 7 Flashcards
Accounting system:
a collection of source documents, records, procedures, management policies and data processing methods used to transform data about economic transactions and events into information useful for decision making
Businesses require more sophisticated accounting system for
two reasons:
Procedure of manual accounting system may be too time-consuming for rapid data processing and timely
reporting
- Volume of transactions may be so great that the accounting staff cannot process the data manually in a cost- effective and timely manner
Many transactions are repetitive and so can be handled more efficiently by classifying them into related groups - Special journals can be used for repetitive transactions such as sales, purchases, cash receipts and cash
payments
Operation of an accounting system
Input
- Transactions recorded as they occur, on source documents - From source documents, transactions entered into journals
Processing
- Journals become chronological record of transactions
- Journals posted to general ledger periodically
- General ledger represents permanent record of assets, liabilities, equity, income and expenses
Output
- Financial statements prepared from data in general ledger
- Statements provide useful info for decision making and evaluation of the entity by parties outside entity and
insiders
Development of an acct system
system analysis - understanding information req. and sources of information
system design - determining personnel requirements, source docs, acct records and procedures, reports and report formats
systems implementation and review - implementing systems, training staff, prep manual, test run, evaluation and review
Compatibility
- Accounting system must be compatible with the organisational and personnel characteristics of the business
- System should be appropriate to the size an nature of the business operations
Flexibility/Adaptability
- Accounting system must adapt to growing businesses
- Should be able to accommodate the higher volume
- Should be able to be used in different states/countries
Internal control
System must provide mechanisms for protection of assets of business
- Must ensure info provided is timely, reliable and relevant to decision-making needs of management and external
users
Internal control systems:
the overall procedures adopted by a business to safeguard its assets, promote the reliability of accounting data, and encourage compliance with management policies
Principles of internal control systems
Clearly established lines of responsibility
- Cornerstone of a good internal control system is employment of competent personnel and assignment of responsibilities to them
Separation of record keeping and custodianship
- Responsibility for initiating business transactions and for custody of entity’s assets should be separated from responsibility for maintaining accounting records
Division of responsibility for related transactions
- Minimise possibility of errors, fraud and theft
Adequate insurance
- Insurance of entity’s assts to protect them against loss, theft or damage
Mechanical and electronic devices
- Devices designed to protect assets and to improve accuracy of the accounting process should used
Internal auditing
- Internal auditors are employees of the entity who are responsible for continuing review and study of the internal control system
Programming controls
Controls must attempt to limit unauthorised and unintentional interference in the system
Physical controls
- Relate to safeguarding of physical assets
Limitations of internal control
Not possible to obtain absolute assurance that assets are safeguarded and accounting data reliable - Costs of establishing such a system would exceed benefits expected to be derived
- Size of entity’s operations influence effectiveness of internal controls
- Good internal controls can break down because of tiredness, indifference to work, or carelessness of employees
- Heavy reliance on segregation of duties
- Controls can be negated by collusion of two or more employees
- Result in misappropriation of assets and accompanying adjustment of records to conceal the crime
• Difficulties in detecting computer fraud
Advantages of using a Subsidiary Ledger:
- Relieves general ledger of mass of detail
- Allows division of labour among accounting staff in maintaining ledgers
- Provides effective internal control through periodic comparison of total of schedule of subsidiary ledger with
balance in control account
Subsidiary Ledgers and Control Accounts
- Subsidiary ledgers used when a large amount of detailed information is required
- The total balance of the related subsidiary ledgers is recorded in a control account
Advantages of Sales and Purchases Journal:
Each transaction recorded on a single line
Entries do not require a narration as all transactions involved are the same and detailed information is documented on a reference invoice
Posting efficiency achieved
- ‘Like’ transactions are grouped, and postings reduced
issues w/ control accs
Abnormal balances
- Found in subsidiary ledgers
- Credit balances in accounts receivable
- e.g. deposit paid by customer prior to sale - Debit balances in accounts payable
- e.g. deposit paid to supplier prior to purchase
Account set-offs
- Buying and selling from the same customer/supplier
- Set off greater figure against smaller figure, net them off and have only one account
- Need legal right to set-off
Electronic spreadsheets:
- Can be used to analyse business data and solve every day business problems
