Business Leadership Series 001

..Closing the financial knowledge gap.

Accounting Systems Design and Internal Control

Adesina Adedayo

Linkgates Consulting
Tel: 01-4322888, 08033005344,08074495469
E-mail:linkgatesconsulting@yahoo.co.uk
Website: www.aaps-ng.com
Acknowledgements………………………………………………………………………

Background………………………………………………………………………………..

Part 1

Chart of Accounts……………………………………………………………………

Overall Responsibility…………………………………………………………………

Management of the Computer System…………………………………………………

Accounts Receivable……………………………………………………………………...

Accounts Payable…………………………………………………………………………

Part 2

Order Entry………………………………………………………………………………

Cost Accounting………………………………………………………………..

Monthly Reporting

Inventory Control

Payroll

Part 3

Internal Accounting Control

Fixed Assets

Bank Reconciliation Statement

Budgeting & Financial Planning

Acknowledgement
I want to acknowledge the support from my friends and loved ones who
encouraged me consistently by saying, “ Ade, you need to download some of
these things, so that fresh ideas can come back into your system”. I want to say I
have complied by effectively downloading them.

I will also want to allay the fear of my friends, who are of the opinion that by
putting the set up of accounting system in a booklet form, it may end up
depriving them of the secrecy of the trade. The truth is by putting these on paper,
we will end up with the spread of knowledge and gain the respect of members of
the public who will come to appreciate the uniqueness of the Professional
Accountant and understand that we don’t just keep books, we add value through
financial analysis and planning based on solid accounting systems and sound
internal controls.

I am appreciative of my family and friends who have never given up on me in

terms of belief in my competency and knowledge. I am indeed humbled by your
faith in my ability even though at times I am scared of the enormous
responsibility that comes with such absolute reliance on my opinions.

I pray that God will continue to imbibe me with the Spirit of the Oracle and not
that of the Orator.

While I acknowledge that there is still room for improvement, I am encouraged

to publish this booklet based on my conviction that perfection and improvement
comes with time. We can safely conclude that this publication can be considered
as my step of faith. Other professional publications will follow in quick
succession.

We are conscious of the truth that says, “The People Perish for Lack of
Knowledge” and that is why our mission statement is very simple:

“We want to close the financial knowledge gap”.

Background

What is Accounting?

The simple definition of accounting is "A precise list or enumeration of financial

transactions." For the most part, that's all that accounting is a list of financial
transactions in your business. It's a method for you to track the money coming
into your business and the money going out.

Why is Accounting Important?

Obviously, accounting is important because you want to know if your business is

making a profit. Also, the business owner wants to be able to look at sources of
income and expenses and make decisions based on that information.

Using accounting software, the business owner can generate reports on "profit
and loss", "cash flow", the "balance sheet" and dozens of other reports that can
help him/her get an overall picture of how the business is doing now or in the
past.

Also, the Tax Authorities require tracking of money for value added taxes,
payroll and income tax purposes. In fact, a good accounting system can make the
filing of tax returns much easier and less time consuming.

How do I Setup My First Accounting System?

Pick An Accounting Method

The first decision to be made is which type of accounting method to choose, there
are 2 choices:

The Cash Method (or Cash Basis) - this means that you count income when you
actually receive it (either as cash, credit card charges or cheque) and your
expenses are counted when you actually pay them. This is the most common
method for small businesses, especially those that take immediate payment for a
product or service (credit card, cheque, cash, etc.)

The Accrual Method (or Accrual Basis) - this means that you count income
when a sale is made (regardless if you actually receive the money for it) and
expenses are counted when you actually receive the good or service (instead of
paying for it immediately). This method is common for larger businesses or small
businesses that utilize "invoicing" and frequently deliver a product or service
before being paid for it.

Choosing a Method

You are free to pick either method provided you have less than N5 million in
annual sales OR you maintain inventory (in that case, then you must use the
accrual method).

The accrual method is generally considered to give you a more accurate picture
of your company's financial situation but requires you to take extra steps like
maintaining accounts receivable and accounts payable records. The cash method
is generally easier to maintain and is the preferred method for small businesses.

Choose a Method for Recording Transactions

After you've decided on an accounting method, the next step is to decide how
you are going to record transactions. You have basically 2 choices:

Hand-Recording Transactions - you actually hand-write each transaction in a

ledger.

Software - you enter transactions in a software program which then automates

many routine tasks.

By far the most popular method is software. There are dozens of accounting
software packages and most of them will help you maintain your books as well
as automate things like payroll and reports.

Differences between Manual and Automated Ledgers.

Think of the G/L as a sheet of paper on which transactions from all four
categories of accounts-assets, liabilities, income, and expenses-are recorded.
Some of them flow up from various sub ledgers, and some are entered directly
into the G/L through a general journal entry. An example of such a direct entry
would be the payment on a loan.

The same concept of a sheet of paper holds for each sub ledger that feeds the
general ledger.

A computerized accounting system works the same way, except that the general
ledger and sub ledgers are computer files instead of sheets of paper. Entries are
posted to each and summarized, then the summary is sent up to the G/L for
posting.

Set up Your "Chart of Accounts"

After choosing a method for recording transactions, it's time to setup your "chart
of accounts". A "chart of accounts" is simply a listing of all the various accounts
in your accounting system. There are income accounts, expense accounts, asset
accounts, etc.

As noted above, an accountant can be of great assistance in setting up your initial

chart of accounts. Also, some accounting software programs include a "wizard"
that will customize a "chart of accounts" for your business.

Components of the Accounting System

Think of the accounting system as a wheel whose hub is the general ledger
(G/L). Feeding the hub information are the spokes of the wheel. These include
• Accounts receivable
• Accounts payable
• Order entry
• Inventory control
• Cost accounting
• Payroll
• Fixed assets accounting

These modules are ledgers themselves. We call them subledgers. Each contains
the detailed entries of its specific field, such as accounts receivable. The
subledgers summarize the entries, then send the summary up to the general
ledger. For example, each day the receivables subledger records all credit sales
and payments received. The transactions net together then go up to the G/L to
increase or decrease A/R, increase cash and decrease inventory.

We'll always check to be sure that the balance of the subledger exactly equals the
account balance for that subledger account in the G/L. If it doesn't, then there's a
problem.

Learning and Maintaining Your Accounting System

Once you've chosen your accounting system, the next step is learning and
maintaining your accounting system. Learning the system will obviously depend
on what solution you've adopted, but maintaining the system is accomplished
primarily by 2 things:
1. You Have to Use the System - once you've taken the time and energy to setup
an accounting system, you have to actually utilize it properly. This means
entering every transaction, cheques, bill, charges or refund.

2. Reconcile Your Bank Statement - the best way to maintain your accounting
system is by reconciling your bank statement with your accounting system every
month. This means that you compare each transaction from your bank account or
accounts with your accounting system and make sure that they balance. This
process alone will force you to properly account for the company's money.
Part 1
Accounting Concepts and Principles
1. Accounting Entity

Accountants treat a business as distinct from the persons who own it. Then, it
becomes possible to record the transactions of the business without the
proprietor also. The concept of separate business entity is applicable for all types
of organizations like sole proprietorship, partnership etc. where the business
affairs are free from the private affairs of the proprietor or partner.

2. Money Measurement

Accounting records normally those transactions which are being expressed in

monetary terms. Measurement of business events in monetary terms helps in
understanding the state of affairs of the business in a much better way.

This is definitely informative and useful.

3. Going Concern Concept

It is assumed that the business will exist for a long time and transactions are
recorded from this point of view. Based on this concept, the accountants, while
valuing assets, will not consider the forced sale value of assets (market value),
but the assets, normally, will be reflected at the cost of acquisition minus
depreciation. Similarly, depreciation is provided based on the expected life of the
assets. The concept, however, does not imply the permanent continuance of the
business.

The underlying presumption is that the business will continue in operations long
enough to charge against income the cost of fixed assets over their economic lives
and to pay the liabilities when they fall due. This concept is applicable to the
business as a whole and not for a particular division or branch. Merely closing of
a branch or division may not adversely affect the ability of the enterprise to
continue other businesses normally.

Once the business goes into liquidation or becomes insolvent, this concept does
not apply. In other words, the going concern status of the concern will stand
terminated from the date of appointment of a receiver.
4. Accounting Period Concept

According to this concept, the life of a business is divided into appropriate

segments of time, say 12 months, for studying the results. While the life of a
business is considered to be indefinite, according to the going concern concept,
the measurement of income and studying the financial position of the business
after a very long time would not be helpful in taking corrective steps at the
appropriate time.

Therefore, it is necessary that after each segment of time interval the

management should review the performance. The segment of time interval is
called accounting period, which is usually a year. At the end of each accounting
period, an income statement and a balance sheet is prepared. The income
statement discloses the profit or loss made by the business during an accounting
period. The balance sheet discloses the state of affairs of the business as on the
last date of the accounting period. The term “conventions” includes those
customs or traditions which guide the accountants while preparing the
accounting statements.

5. Cost Concept

Transactions are entered in the books of account at the amounts actually

involved. An asset is ordinarily recorded at a price at which it has been acquired.
For example, a plot of land purchased by a firm for N5,000,000 would be
recorded at this value irrespective of its current market price.

Cost concept has the advantage of bringing objectivity in the presentation of the
financial statements. In the absence of this concept, the figures shown in the
accounting records would have to depend on the subjective view of a person.

6. Realization Concept

Accounting is a historical record of transactions. It only records what has

happened. It does not anticipate events, though anticipated adverse effects of
events that have already occurred are usually recorded.

For example, A places an order on B for supply of certain goods. Upon receipt of
the order, B procures raw material, employs labor, and produces and delivers the
goods to A. In this case, the sale transaction will be recorded in the books of B
only when the goods are delivered and not upon the receipt of an enforceable
purchase order from A.

7. Expenses Recognition

Cost is the total outlay or expenditure on acquiring resources required for the
production of goods or rendering of services. Cost of resources utilized and lost
during a particular period is termed as the expired cost or expense and is
charged to the revenue of the period to obtain information about income. Costs
of the resources remaining unutilized or unexpired at the end of the period are
carried forward to the next accounting period and are termed as assets.

8. Accrual Concept

The accrual system is a method whereby revenue and expenses are identified
with specific period of time like a month, half year or a year. It implies recording
of revenue and expenses of a particular accounting period whether they are
received/paid in cash or not. Under the cash system of accounting, the revenue
and expenses are recorded only if they are actually received/paid in cash
irrespective of the accounting period to which they belong. But under accrual
method, the revenue and expenses relating to that particular accounting period
only are considered.

9. Disclosure

Apart from the statutory obligations, good accounting practice also demands
that all significant information should be disclosed fully and fairly. The financial
statements have to be prepared honestly and should disclose the information
which is of material interest to the owners, present and potential creditors, and
investors.

Whether something should be disclosed or not will depend on whether it is

material or not. Materiality depends on the amounts involved in relation to the
assets group involved or profits. In the case of financial statements of a limited
company, the practice followed is to append the notes to the accounts and
disclose significant accounting policies. This is in pursuance of the convention of
full disclosure.

10. Dual Aspect Concept

Each transaction has two aspects. With every increase in the money owned to
others, there should be an increase in assets or loss. Thus, at any time the
accounting equations is as follows:
Assets = Liabilities + Capital, or alternatively

Capital = Assets - Liabilities

For example, a proprietor brings in N100,000 in cash as capital to start a small

business.

N100,000 is the capital and corresponding amount of N100,000 will appear as

cash in hand (assets).

11. Verifiable Objectivity

According to this concept, all accounting transactions should be evidenced and

supported by objective documents. These documents include invoices, contracts,
correspondence, vouchers, bills, pass books, cheque books etc. Such supporting
documents provide the basis for making accounting entries and for verification
by the auditors later on. This concept also has its limitations. For example, it is
difficult to verify internal allocation of costs to accounting periods.

12. Materiality

According to this convention, the accountant should attach importance to

material details and ignore insignificant details. This is because otherwise
accounting will be unnecessarily overburdened with minute details. The
question “what constitutes material details” is left to the discretion of the
accountant. Moreover, an item may be material for one purpose while immaterial
for another.

The term materiality is a subjective term. The accountant should regard an item
as material if there is a reason to believe that knowledge of it would influence
decision of the informed investor. According to Kohler, “Materiality means
characteristic attaching to a statement, fact or item whereby its disclosure or
method of giving it expression would be likely to influence the judgment of a
reasonable person.

13. Consistency

The accounting practices should remain the same from one year to another. For
example, consistency in valuation of stock in trade or in method of charging
depreciation. If the stock has been valued by adopting the principle of cost or
market value, whichever is less, the same principle has to be consistently
followed year after year.
 Similarly, the method of charging depreciation, either straight line or written
down value method, has to be consistently followed. This is necessary for the
comparison of results. However, consistency does not mean inflexibility. In the
case of change in law or from the point of view of improved reporting, this
convention is broken and then adequate disclosure, as to the impact on the profit
due to such change, has to be mentioned in the notes appended to the accounts.

14. Conservatism

Financial statements are usually drawn up on a conservative basis, especially in

the initial stages when the anticipated profits, which were accounted, did not
materialize. This results in less acceptability of accounting figures by the end-
users. Therefore, accountants follow the rule “anticipate no profits but provide
for all possible losses.” Similarly, based on this convention, the inventory is
valued at cost or market price whichever is less.

Necessary provision for bad and doubtful debts is made in the books of account.
Window-dressing, i.e. showing a position better than what it is, is not permitted.
It is also not proper to show a position substantially worse than what it is. In
other words, secret reserves are not permitted. Therefore, this convention has to
be applied with reasonable caution and care.

15. Timeliness

Financial reports should be timely to have any usefulness for decision makers.
Timeliness in financial reporting requires estimation of depreciation, provision
for bad and doubtful debts, provision for discount etc. to prepare the financial
statements of different accounting periods.

16. Industry Practice

Sometimes, practice prevailing in a particular industry is given precedence over

generally accepted accounting principles. For example, valuation of gold on the
basis of market price, agriculture products on the basis of minimum support
price determined by the government,etc.

17. Substance over Form

The accounting treatment and presentation in the financial statements of

transactions and events should be governed by their substance and not merely
by their legal form. Hence, when goods are purchased on hire-purchase basis,
the property in goods is transferred to the buyer on the payment of the last
installment only. However, the buyer for all practical purpose uses the goods as
if he is the owner of the goods in question from the date of acquisition.
This aspect is reflected in the books of the buyer, normally by recording the asset
at its cash price at the time of payment of initial amount (down payment). Hence,
substance should always override the legal form. To quote Shiv Khera, “Attitude
can make or break you. Success is vital but not without a feeling of fulfillment,
like good looks are worth nothing without goodness. So, always choose
substance over form. Never the reverse.”

Accounting Standard

Accounting communicates the financial results of business to various parties by

means of financial statements which have to exhibit a “true and fair” view of the
state of affairs. Like any other language, accounting also has complex set of rules.

However, these rules have to be used with a reasonable degree of flexibility in

response to specific circumstances of the business and also in line with the
changes in the economic environment, social needs, legal requirement and
technological developments. Thus, these rules, though not rigid, cannot be
applied arbitrarily. They normally operate within the boundary of rationality.

Accounting standards are defined as the policy documents issued by a

recognized expert accounting body relating to various aspects of measurement,
treatment and disclosure of accounting transactions and events.

Chart of Accounts
Your financial records are meant to track all of your transactions for the purpose
of keeping them in balance as well as providing useful data for management
reports and to use as decision making tools. The chart of accounts is the key to
this data.

There must be an account number that covers every type of transaction,

including the source of your income and the type of expense you incur. At the
end of any designated period (month, year), you will total the naira amount in
each category, and that will provide you with the numbers to create a tax return
or a profit and loss statement.

First, you must learn the major categories that create the chart and then you can
work on the subheadings that will give you the detail you require. The accepted
accounting method numbers them from 100(or 1000) to 600(or 6000). However,
this may be extended to 700(or7000) and 800(or 8000) as well for purposes of
additional detail.

The meaning of each category is as follows:

100-Assets

This will include current assets such as cash and accounts receivable(which is
considered to be liquid because it converts to cash as accounts are collected).

Current assets are numbered 110 -149. Fixed assets such as furniture, fittings,
machinery, equipment and real estate are numbered 150 -199.

200- Liabilities

This will include current liabilities such as accounts payable, taxes due, and the
current portion (one year’s worth of payments) of any loan, and these will be
numbered 210 -249.

Your long term liability such as the noncurrent portion of any loan and any other
nonmaturing note will be numbered 250-299

300- Equity Account

The amount of equity, meaning the difference between assets and liabilities, will
be covered in this account number with one exception. Retained earnings have
an account prefix of their own, 400.

400- Retained Earnings

500- Income

This is where you will categorize the various types of revenue that are received
by your company that will be primarily income derived by sales. If you collect
value added tax on certain types of sales but not all, here is where you can track
that information so that you can report the numbers accurately.

600- 800 Expense

Each type of expense (material, labor, rent, utilities and so on) will have its own
account number. For the purpose of utilizing data for tax returns, separate
accounts will be established for expenses that are not deductible such as payment
of personal expense and the principal portion of any loan payments.

Overall Responsibility
Responsibility accounting systems generate financial and related non-financial
information about the actual and planned activities of a company's responsibility
centers--organizational units headed by managers responsible for a unit's
performance. The principal components covered are budgets, performance
reports, variance reports, and transfer prices.

The responsibility center's actual performance is compared to its planned

(budgeted) performance and explained how resources can be transferred from
one center to another. It also explains the management planning and control
process.

Responsibility accounting is an underlying concept of accounting performance

measurement systems. The basic idea is that large diversified organizations are
difficult, if not impossible to manage as a single segment, thus they must be
decentralized or separated into manageable parts. These parts, or segments are
referred to as responsibility centers that include: 1) revenue centers, 2) cost
centers, 3) profit centers and 4) investment centers.

This approach allows responsibility to be assigned to the segment managers that

have the greatest amount of influence over the key elements to be managed.
These elements include revenue for a revenue center (a segment that mainly
generates revenue with relatively little costs), costs for a cost center (a segment
that generates costs, but no revenue), a measure of profitability for a profit center
(a segment that generates both revenue and costs) and return on investment
(ROI) for an investment center (a segment such as a division of a company where
the manager controls the acquisition and utilization of assets, as well as revenue
and costs).

Controllability Concept

An underlying concept of responsibility accounting is referred to as

controllability. Conceptually, a manager should only be held responsible for
those aspects of performance that he or she can control. In my view, this concept
is rarely, if ever, applied successfully in practice because of the system variation
present in all systems. Attempts to apply the controllability concept produce
responsibility reports where each layer of management is held responsible for all
subordinate management layers.

Responsibility accounting has been an accepted part of traditional accounting

control systems for many years because it provides an organization with a
number of advantages. Perhaps the most compelling argument for the
responsibility accounting approach is that it provides a way to manage an
organization that would otherwise be unmanageable. In addition, assigning
responsibility to lower level managers allows higher level managers to pursue
other activities such as long term planning and policy making.

It also provides a way to motivate lower level managers and workers. Managers
and workers in an individualistic system tend to be motivated by measurements
that emphasize their individual performances. However, this emphasis on the
performance of individuals and individual segments creates what some critics
refer to as the "stovepipe organization."

Information flows vertically, rather than horizontally. Individuals in the various

segments and functional areas are separated and tend to ignore the
interdependencies within the organization. Segment managers and individual
workers within segments tend to compete to optimize their own performance
measurements rather than working together to optimize the performance of the
system.

Management of the Computer System

The main reason you are in business is to ensure the maximum possible revenue
with the minimum possible cost in terms of resources so as to add value to the
business.

The Need for Computerization of Operations

Business technology is continuously changing names and changing roles.
In the 1970s, business technology was known as data processing (DP). DP’s
primary role was to support the existing business. It was primarily used to
improve the flow of financial information.
In the 1980s, business technology changed names to information systems (IS).
The role changed from supporting the business to doing business.

Things started to change as the 1990s approached. Businesses shifted to using

new technology on new methods. Technology’s new name became information
technology (IT) and its role became to change business.

In the mid 1990s, we started moving away from information technology toward
knowledge technology (KT). Knowledge is information charged with enough
intelligence to make it relevant and useful. KT will change the traditional flow of
information from an individual going to the database to the data coming to the
individual. KT will “think” about the facts based on an individual’s needs,
reducing the time spent finding and getting information. Then businesspeople
can spend more time doing what’s important: deciding how to react to problems
and opportunities.

Use of Computer in data capture

Perhaps the most dynamic change in recent years is the move away from main
frame computers that serve as the center of information processing toward
network systems that allow many users to access information at the same time.
Networks connect people to people and people to data.
Networks have three major benefits:
–They save time and money.
–Networks provide easy links across functional boundaries.
–Companies can see their products more clearly.

Computer software( programs) provide the instructions that enable you tell the
computer what to do. It’s important to find the right software before finding the
right hardware (equipment).
Business people most frequently use software for five major purposes:
–Writing (word processors)
–Manipulating numbers (spreadsheets)
–Filling and retrieving data (databases)
–Presenting information visually (graphics), and
–Communicating.

Today’s software can perform all five functions in one kind of program known
as integrated software or suites.
 Word Processing Programs: Businesses use word processors to increase office
productivity. Standardized letters can be personalized quickly, documents can be
updated by changing only the outdated text and leaving the rest intact, and
contract forms can be revised to meet the stipulations of specific customers.
Example: Microsoft Word.
 Spreadsheet Programs: This is simply the electronic equivalent of an
accountant’s worksheet. A spread sheet is a table made up of rows and columns
that enables a manager to organize information. Example- Microsoft Excel
 Database Programs: This allows you to work with information you normally
keep in lists: names and addresses, schedules, inventories, and so forth. Simple
commands allow you to add new information, change incorrect information, and
delete out of date or unnecessary information. Example: Microsoft Access.
 Graphics Programs: Can use data from spreadsheets to visually summarize
information by drawing bar graphs, pie charts, and line charts.
 Communications software makes it possible for different brands of computer to
transfer data to each other. The software translates data into ASCII American
Standard Code for Information Interchange), the common standard all computer
manufactures have agreed to adopt.
Accounts Receivable
The main reason you are in business is to provide goods or services to your
customers. Success is a sale, and once that transaction takes place, your
accounting system goes into action. The value of that sale becomes income to the
company and is posted to the income subledger. If the sale is cash, it is posted to
the cash account. If the sale is made on credit, it is posted to the accounts
receivable.

Posting a Sale to Account Receivable

The first step here is to post the sale to income and then to the customer account
card. In each case, you will want to identify the transaction by a date and invoice
number that will allow you to refer to the source document.

Then you will need to add the current charge to any previous balances to get the
current amount owed by that customer. This detailed record is critical for the
effective collection activities of your business.

A computerized system will automatically update receivable balances; on a

manual system, you will have to make sure that the step is done. Your accounts
receivable total balance will show up as an important line item on the asset side
on your balance sheet.

Posting Payments and Other Credits to Receivable

When a payment has been received, it will be credited against the existing
balance on your customer’s account receivable card. The important step here is
making sure that the payment is credited against the exact invoice being paid.
At the end of the month, you will want to determine the age of all of your
outstanding customer accounts so that you can determine what monies are due
from invoices that are over 30,60,90 days and longer. If you don’t post the
payment against the proper invoice

Making Collections.
By looking at receipts from past billing cycles, it is often possible to detect
recurring cash flow problems with some clients, and to plan accordingly. Small
business owners need to examine clients on a case-by-case basis, of course. In
some instances, the debtor company may simply have an inattentive sales force
or accounts payable department that needs repeated prodding to make its
payment obligations. But in other cases, the debtor company may simply need a
little more time to make good on its financial obligations. In many instances, it is
in the best interests of the creditor company to give such establishments a little
slack. After all, a business that is owed money by a company that files for
bankruptcy protection is likely to see very little of it, whereas a well-managed
business that is given the chance to grow and prosper can develop into a valued
long-term client.

Methods Of Collecting.

A good way to improve cash flow is to make the entire company aware of the
importance of accounts receivable, and to make collections a top priority. Invoice
statements for each outstanding account should be reviewed on a regular basis,
and a weekly schedule of collection goals should be established. Other tips in the
realm of accounts receivable collection include:

• Do not delay in making follow-up calls, especially with clients who have a
history of paying late
• Curb late payment excuses by including a prepaid payment clause with
each invoice
• Get credit references for new clients, and check them out thoroughly
before agreeing to do business with them
• Know when to let go of a bad account; if a debt has been on the books for
so long that the cost of pursuing payment of it is proving exorbitant, it
may be time to consider giving up and moving on (the wisdom of this
depends a lot on the amount owed, of course).
• Collection agencies should only be used as a last resort.

Accounts Payable - AP
An accounting entry that represents an entity's obligation to pay off a short-term
debt to its creditors. The accounts payable entry is found on a balance sheet
under the heading current liabilities. Accounts payable are often referred to as
"payables".
Another common usage of AP refers to a business department or division that is
responsible for making payments owed by the company to suppliers and other
creditors.

Accounts payable are debts that must be paid off within a given period of time in
order to avoid default. For example, at the corporate level, AP refers to short-
term debt payments to suppliers and banks.

Payables are not limited to corporations. At the household level, people are also
subject to bill payment for goods or services provided to them by creditors.

Each demands payment for goods or services rendered and must be paid
accordingly. If people or companies don't pay their bills, they are considered to
be in default.

Accounts payable is the term used to describe the amounts owed by a company
to its creditors. It is, along with accounts receivable, a major component of a
business's cash flow. Aside from materials and supplies from outside vendors,
accounts payable might include such expenses as taxes, insurance, rent (or
mortgage) payments, utilities, and loan payments and interest.

For many businesses, the significance of every overdue payment can often be
greatly magnified. For this reason, it is absolutely essential for entrepreneurs and
business owners to deal with the accounts payable side of the business ledger in
an effective manner. Bills that are unpaid or addressed in a less than timely
manner can snowball into major credit problems, which can easily cripple a
business's ability to function.

By making informed projections and sensible provisions in advance, the

business can head off many credit problems before they get too big. Obligations
to creditors, ideally, should be paid off concurrently with the collections of
accounts receivable. Payment cheques should also be dated no earlier than when
the bills are actually due. In addition, many companies will find that their
business fortunes will take on a cyclical character, and they will need to plan for
accounts payable obligations accordingly.

Prioritizing and Monitoring

This is especially true for fledgling business owners who are often stretched
pretty tightly financially. Entrepreneurs who find themselves struggling to meet
their accounts payable obligations have a couple of different options of varying
levels of attractiveness. One option is to "rest" bills for a short period in order to
satisfy short-term cash flow problems. This basically amounts to waiting to pay
off debts until the business's financial situation has improved. There are obvious
perils associated with such a stance: delays can strain relations with vendors and
other institutions that are owed money and over-reliance on future good
business fortunes can easily launch entrepreneurs down the slippery slope into
bankruptcy.

Another option that is perhaps more palatable is to make partial payments to

vendors and other creditors. This good-faith approach shows that an effort is
being made to meet financial obligations, and it can help keep interest penalties
from raging out of control. Partial payments should be set up and agreed to as
soon as payment problems are forecast, or as early as possible. It is also a good
idea to try to pay off debts to smaller vendors in full whenever possible, unless
there is some clear benefit to be had in making installment payments to them.

Usually, signs of cash flow problems will start to show up well before the
company's financial fortunes become truly desperate. One key concern is aged
payables. Bills should never be allowed to "ripen" more than 45 to 60 days
beyond the due date, unless a special payment arrangement has been made with
the vendor in advance. At 60 days, a company's credit rating could be
jeopardized, and this could make it harder to deal with other vendors and/or
loaning institutions in the future.

Outstanding balances can drive interest penalties way up, and this trend is
obviously compounded if many bills are overdue at the same time. Such
excessive interest payments can seriously damage a business's bottom line.
Business owners should keep in mind, however, that it is in the best interest of
vendors and other creditors to keep the fledgling business solvent as well.
Explaining current problems and their planned solutions to creditors can deflect
ill feelings and buy more time. Some—though by no means all—creditors may be
willing to waive, or at least reduce, growing interest charges, or make other
changes to the payment schedule.

It is crucial to the success of a small business that accounts payable be monitored

closely. Ideally, this aspect of the firm's operations would be supervised by a
financial expert (either inside or outside the company) who is not only able to see
the company's financial "big picture," but is able to analyze and act upon
fluctuations in the company's cash flow.

This also requires detailed record keeping of outstanding payables. Reports

ought to be checked on a weekly basis, and when payments are made, copies
should be filed along with the original invoices and other relevant paperwork.
Any hidden costs, such as interest charges, should also be noted in the report.
Over a period of time, these reports will start to paint an accurate cash flow
picture.

Internal audits of accounts payable practices can be an effective method of

addressing this issue, especially for expanding companies. Accounts payable is
one of a series of accounting transactions covering payments to suppliers’ owed
money for goods and services.

Business organizations which have become too large to perform such tasks by
hand, or who prefer not to do them by hand will generally use accounting
software on a computer to perform this task. Accounts payable is classified as a
liability account and as such normally has a credit balance. Accounts payable is
classified as a Current Liability because the obligation is generally due within 12
months from the initial transaction date.

Reconciliations

One of the most difficult and time-consuming tasks can be reconciling company
records of invoices and payments against vendors' statements of outstanding
invoices. If the two companies have applied invoices to different sets of credit
memos and checks, and the situation has been going on for a long time, it can
become very difficult to untangle. For instance, if a company cuts a cheque for
invoice #3, and the vendor applies the cheque to invoices #1 and #2, the vendor
may continue asking for a payment for invoice #3. If this situation is multiplied
over hundreds of invoices, it can take hours or days to resolve the discrepancies.

Expense administration

Expense administration is usually closely related to accounts payable, and

sometimes those functions are performed by the same employee. The expense
administrator verifies employees' expense reports, confirming that receipts exist
to support airline, ground transportation, meals and entertainment, telephone,
hotel, and other expenses. This documentation is necessary for tax purposes and
to prevent reimbursement of inappropriate or erroneous expenses. Airline
expenses are, perhaps, the most prone to fraud because of the high cost of air
travel and the confusing nature of airline-related documentation, which can
consist of an array of reservations, receipts, and actual tickets.
Petty cash is also usually paid out by AP personnel in the form of a check made
out to an employee, who cashes the check at the bank and puts the cash in the
petty cashbox.

Internal controls

A variety of checks against abuse are usually present to prevent embezzlement

by Accounts Payable personnel. Separation of duties is a common control.
Nearly all companies have a junior employee process and print the checks and a
senior employee review and sign the checks. Often, the accounting software will
limit each employee to performing only the functions assigned to them, so that
there is no way any one employee – even the controller – can single handedly
make a payment.

Some companies also separate the functions of adding new vendors and entering
vouchers. This makes it impossible for an employee to add himself as a vendor
and then cut a check to himself without colluding with another employee.

In addition, most companies require a second signature on checks whose amount

exceeds a specified threshold.

In accounts payable, a simple mistake can cause a large overpayment. A common

example involves duplicate invoices. A invoice may be temporarily misplaced or
still in the approval status when the vendors calls to inquire into its payment
status. After the AP staff member looks it up and finds it has not been paid, the
vendor sends a duplicate invoice; meanwhile the original invoice shows up and
gets paid. Then the duplicate invoice arrives and inadvertently gets paid as well,
perhaps under a slightly different invoice number.

Audits of accounts payable

Auditors often focus on the existence of approved invoices, expense reports, and
other supporting documentation to support checks that were cut. In the real
world, it is not uncommon for some of this documentation to be lost or misfiled
by the time the audit rolls around. An auditor may decide to expand the sample
size in such situations.
Part 2
Order Entry
This is the process of entering order information to a fulfillment system. It is also
the recording of an order placed or received.

Initial input system of the order processing system. Marketing is responsible for
taking orders. Accounting is responsible for billing the customer and collecting
payments.

The most important objectives of order entry are speed and accuracy so that
customers can receive what they have ordered as quickly as possible and
marketers can determine which promotions are working best.

In addition to product and customer information, order entry must also capture
a key code and payment type (cash, credit, credit card). The order entry process
may also include entry of demographic information gathered on the order form,
such as occupation or age. If the order is taken over the telephone, the order
entry clerk can act as a salesperson by trying to increase the size of the order.

Cost Accounting
Background

Cost accounting has long been used to help managers understand the costs of
running a business. Modern cost accounting originated during the industrial
revolution, when the complexities of running a large scale business led to the
development of systems for recording and tracking costs to help business owners
and managers make decisions.

In the early industrial age, most of the costs incurred by a business were what
modern accountants call "variable costs" because they varied directly with the
amount of production. Money was spent on labor, raw materials, power to run a
factory, etc. in direct proportion to production. Managers could simply total the
variable costs for a product and use this as a rough guide for decision-making.

Some costs tend to remain the same even during busy periods, unlike variable
costs which rise and fall with volume of work. Over time, the importance of
these "fixed costs" has become more important to managers.

Examples of fixed costs include the depreciation of plant and equipment, and
the cost of departments such as maintenance, tooling, production control,
purchasing, quality control, storage and handling, plant supervision and
engineering. In the early twentieth century, these costs were of little importance
to most businesses.

However, in the twenty-first century, these costs are often more important than
the variable cost of a product, and allocating them to a broad range of products
can lead to bad decision making. Managers must understand fixed costs in order
to make decisions about products and pricing.

For example: A company produced railway coaches and had only one product.
To make each coach, the company needed to purchase N60 of raw materials and
components, and pay 6 laborers N40 each. Therefore, total variable cost for each
coach was N300.

Knowing that making a coach required spending N300, managers knew they
couldn't sell below that price without losing money on each coach. Any price
above N300 became a contribution to the fixed costs of the company. If the fixed
costs were, say, N1000 per month for rent, insurance and owner's salary, the
company could therefore sell 5 coaches per month for a total of N3000 (priced at
N600 each), or 10 coaches for a total of N4500 (priced at N450 each), and make a
profit of N500 in both cases.

Cost Benefit Analysis

Cost/Benefit Analysis is a powerful, widely used and relatively easy tool for
deciding whether to make a change.
To use the tool, firstly work out how much the change will cost to make. Then
calculate the benefit you will from it.

Where costs or benefits are paid or received over time, work out the time it will
take for the benefits to repay the costs.

Cost/Benefit Analysis can be carried out using only financial costs and financial
benefits. You may, however, decide to include intangible items within the
analysis. As you must estimate a value for these, this inevitably brings an
element of subjectivity into the process.

Benefit-cost analysis is simply rational decision-making. People use it every day,

and it is older than written history. Our natural grasp of costs and benefits is
sometimes inadequate, however, when the alternatives are complex or the data
uncertain. Then we need formal techniques to keep our thinking clear, systematic
and rational. These techniques constitute a model for doing benefit-cost analysis.
They include a variety of methods:

 identifying alternatives;
 defining alternatives in a way that allows fair comparison;
 adjusting for occurrence of costs and benefits at different times;
 calculating dollar values for things that are not usually expressed in
dollars;
 coping with uncertainty in the data; and
 summing up a complex pattern of costs and benefits to guide decision-
making.

It is important to keep in mind that techniques are only tools. They are not the
essence. The essence is the clarity of the analyst's understanding of the options.

General administrative and overhead costs

When a large organization, like a government, analyzes many possible

investments over time, it may have a problem deciding how to treat general costs
that are not specific to a particular project. Such costs are sometimes called
overhead costs or general and administrative costs. These are more or less fixed
costs. One additional project will often make little difference. The standard
practice in benefit-cost analysis is to take the marginal or incremental approach
to counting costs and benefits, but this approach ignores most of the program
and overhead costs. The problem with this as a standard practice, therefore, is
that it is too generous to the investments and overstates the true returns. In the
extreme, overhead costs never get counted anywhere in the organization's
decision-making process.

If the organization only occasionally makes major investments, it may be

reasonable to ignore program and overhead costs - in essence, letting them be
borne by the run-of-the-mill operations of the organization. In this case, it is
reasonable to take a marginal-cost approach. In contrast, if the organization
makes many investments, it is preferable to include an 'average' allowance for
overhead in the costs, although any single investment has little effect on
overhead at the margin. If all investment options bear overhead equally, this
factor is unlikely to influence the choice among them very much. Even so, it is
preferable to have a realistic picture of investment returns, including overhead
costs, than to have an unrealistically rosy picture.
Monthly Reporting
Clear financial reporting to the Board of Directors is essential for good financial
management in any organization. Budgets and accurate day-to-day financial
records are of limited use if the information they contain is not communicated
clearly to the Board and those people responsible for managing the organization.

The essential elements of good financial reporting are:

• All information must be relevant.

• Financial information must be understandable.
• The information presented must be reliable.
• Financial information must be timely to be useful.

Reported information must be relevant

The Finance Committee and/or Board of Directors should determine what

financial information they require to monitor the organization’s financial
progress. Information should include a summary of results of operations
(revenues received and expenses incurred), financial position (assets and
liabilities) and key statistical data to help the Board determine the financial
outlook for the future. Specifically, monthly financial reports should at a
minimum include totals for:

• Revenue from principal activities and other sources.

• Salary and benefits expenses.
• Fixed costs, if significant.
• Other expense information as the Board considers necessary.
• A summary of significant assets at the end of the month including cash,
accounts receivable, accounts payable (outstanding invoices).

The above information should give you an idea of the organization's current
financial status and progress since the last Board meeting.

A comparison of actual with budgeted results is also very useful. Actual-to-

budget comparisons will enable the Board to determine whether approved
financial policies are being followed (Is the centre operating at a break-even level
as directed by the Board?) and whether corrective action needs to be taken. The
actual-to-budget analysis is most useful when accompanied by a brief narrative
explaining significant variations.
Some Boards require monthly as well as year-to-date information for actual and
budgeted revenues and expenses. The amount of detail reported is, of course, up
to the Board of Directors.

Reported information must be understandable

Your monthly financial reports should neither be so summarized as to be

superficial nor so detailed and voluminous as to be unintelligible. The ideal
amount of information reported to the Board will be a function of the culture of
the Board members together with the level of their involvement. Some Boards
require reams of detail while other Boards prefer a simple one page summary
assuming that all of the details have been taken care of by the staff. The ideal
amount of information reported usually lies somewhere between these two
extremes.

One strategy to determine the appropriate amount of information is to start with

a fairly summarized report and then add information as requested by Board
members. For example, if your Board wants details of advertising and
professional development expenses reported each month then expand your
initial summarized version of the report to include these amounts. If your Board
requests a copy of the monthly bank reconciliation then attach that to the
statement of financial position presented. You might want to revisit the content
of monthly financial reports with each newly appointed Board of Directors.

Reported information must be reliable

Financial reports to Boards of Directors are only useful if the information is

reliable. You do not have to have a monthly audit to achieve reliability. It is
generally sufficient that the bank be reconciled to the accounting records each
month and that the reconciliation be reviewed periodically by the Finance
Committee. The Finance Committee might also periodically (once or twice a
year) make sure that amounts reported actually agree with those in the financial
records.

While bank reconciliation will help ensure that all cash transactions are reported,
it will not guarantee that all transactions have been classified properly.

In summary, to help ensure that data reported is reliable you should:

• On a monthly basis reconcile all bank account balances with those

reported to the Board of Directors.
 • Compare actual to budgeted amounts and explain variations. This
procedure will help determine whether significant expense or revenue
transactions have been misclassified.

• Periodically (twice a year) compare amounts reported to the Board with

those in the underlying accounting records.

Reported information must be timely

Reporting the results of operations and financial position on time is essential if

corrective action is to be taken by the Board. For example, if you report
September activity in January it may be too late to adjust salary expenses and/or
fees to avert a pending financial crisis resulting from a drop in enrolment. Timely
financial reports are essential!

Reporting financial information more than two months in arrears should raise
warning flags for the Finance Committee and/or Board of Directors. Steps
should be taken immediately to make sure that financial information reported is
no more than one month old.

Inventory Control
Inventory Control is the process of managing the timing and the quantities of
goods to be ordered and stocked, so that demands can be met satisfactorily and
economically.

Inventories are accumulated commodities waiting to be used to meet anticipated

demands. Inventory control policies are decision rules that focus on the trade-off
between the costs and benefits of alternative solutions to questions of when and
how much to order for each different type of item.

The possible reasons for carrying inventories are: uncertainty about the size of
future demands; uncertainty about the duration of lead time for deliveries;
provision for greater assurance of continuing production, using work-in-process
inventories as a hedge against the failure of some of the machines feeding other
machines; and speculation on future prices of commodities.

Some of the other important benefits of carrying inventories are: reduction of

ordering costs and production setup costs (these costs are less frequently
incurred as the size of the orders are made larger which in turn creates higher
inventories); price discounts for ordering large quantities; shipping economies;
and maintenance of stable production rates and work-force levels which
otherwise could fluctuate excessively due to variations in seasonal demand.

The benefits of carrying inventories have to be compared with the costs of

holding them. Holding costs include the following elements: cost of capital for
money tied up in the inventories; cost of owning or renting the warehouse or
other storage spaces; materials handling equipment and labor costs; costs of
potential obsolescence, pilferage, and deterioration; property taxes levied on
inventories; and cost of installing and operating an inventory control policy.
Inventories, when listed with respect to their annual costs, tend to exhibit a
similarity to Pareto's law and distribution. A small percentage of the product
lines may account for a very large share of the total inventory budget (they are
called class A items).

Continuous-review and fixed-interval are two different modes of operation of

inventory control systems. The former means the records are updated every time
items are withdrawn from stock. When the inventory level drops to a critical
level called reorder point, a replenishment order is issued. Under fixed-interval
policies, the status of the inventory at each point in time does not have to be
known. The review is done periodically.

Uncertainties of future demand play a major role in the cost of inventories. That
is why the ability to better-forecast future demand can substantially reduce the
inventory expenditures of a firm. Conversely, using ineffective forecasting
methods can lead to excessive shortages of needed items and to high levels of
unnecessary ones.

Payroll
Background

Employee compensation is one of the largest operating costs for many

organizations. The long term success of a firm-perhaps even its survival –may
depend on how well it can control employee costs and optimize employee
efficiency.

In fact, some experts believe that figuring out how to best pay people has
replaced downsizing as the human resources challenge.
Objectives.

(1) Make prompt payment in the proper amount to all persons entitled to be
paid, in compliance with applicable laws, regulations, and legal decisions.

(2) Prepare adequate and reliable payroll records promptly.

(3) Make prompt accounting for and disposition of all authorized deductions
from gross pay.

(4) Maintain adequate control over, and provide for proper retention and
disposition of all payroll-related documents.

(5) Maintain individual pay records to show gross compensation (including

allowances) by type and amount, deductions (including allotments) by type and
amount and net pay for each pay period.

Who is an Employee?

An employee is somebody engaged in a contract of service.

The determining factors separating an employee from a self employed person are
as follows:

1) The work the employee is carrying out is an integral part of the system.

2) The employee have fixed hours of work.

3) The employer supplies the tools.

4) The employee cannot delegate his duties under the contract

5) The employee is entitled to receive holiday pay or sick pay or any such
benefits, which enhance his/her well being.

Remunerations

Remunerations are rewards for work done or service rendered. The basis of the
remuneration can be measured work and/or unmeasured work.

Relevant factors to consider when choosing a type of remuneration include:

1) Efficiency in production: Volume or quality predominates

2) Effect on workers: Motivating?

3) Incidence of Overheads: Fixed remuneration or variable?

4) Ease of understanding and computation: less misunderstanding and bickering.

Types of Remuneration Systems

• Salary Systems are systems of fixed compensation computed on weekly,

biweekly, or monthly pay periods (e.g. N15,000 per month or N5,000 per
week).

It’s probable that many people who graduated from the university will be
paid a salary.

• Hourly wage or day work is the system used for most blue collar and
clerical workers. Often, employees must punch a time clock when they
arrive at work and when they leave. Hourly wages vary greatly.

• Piecework means that employees are paid according to the number of

items they produce rather than by the hour or day. This system creates
powerful incentives to work efficiently and productively.

• Commission plans are often used to compensate salespeople. They

actually resemble a piecework system; the commission is based on some
percentage of sales.

• Bonus plans are used for executives, salespeople, and many other
employees. They earn bonuses for accomplishing or surpassing certain
objectives.

• Profit sharing plans give employees some share of profits over and above
their normal pay.
Compensation Schemes

 Compensation refers to ways of mitigating losses suffered by workers,

usually as a consequence of the work they do or for loss of office.

 A compensation method or type depends on the payroll policy of an

organization, collective agreement with labour or legal and regulatory
requirements.

 Compensation can take any of the following:

 Insurance Scheme

 Cash payment

 Redundancy/Lay off

 Others

Payroll Related Problems

- Payroll related expenses forms a large chunk of most organization’s total

cost, especially in service organizations.

- Some problems that bedevil payroll administration are:

• Ghost Workers
• Fraudulently inflated pay packets
• Under payments
• Delayed payments to earn bank interest

- Causative factors of payroll problems include:

• Lack of requisite experience
• Frequent transfers or staff turnover
• Lack of motivation
• Lack of supervision
• Poor employment practices
• Tone at the top

Some ways of managing payroll problems are:

 Segregation of duties
 Use of passwords
  Use of checks such as , completeness test, hash totals, key verification,
range check.
 Training of staff
 Good recruitment practices-background screening of staff
 Ethical and transparent tone at the top
 Vacation at least once a year.

The Role of Trade Unions

 The impact of unions is felt through the collective bargaining process.

 According to the International Labour Organization(ILO), collective

bargaining is “the negotiation of working conditions and terms of
employment between employers or group of employers on one hand and one or
more representative workers organization on the other with a view to reviewing
employment related agreement”.

 ILO recognizes the following conditions as conducive for effective

bargaining:
 Freedom of Association

 Stability of workers organization

 Recognition of trade unions

 Willingness of negotiating parties to give and take

 Ability of parties to negotiate skillfully

 Willingness to observe the collective agreement.

Trade Unions generally negotiate and ask for:

 Pay Rise
 Compensations
 Removal of Officers
 Retention of Officers
 Improved working conditions-tools, hours of work, environment, etc.
 Non-casualisation of workers.
Part 3
Internal Accounting Controls

1. Authorization And Approval Limits

Signing of cheques
Authorized signatories to cheques shall be as follows:

Signatory A and Signatory B:

Capital Expenditure
All capital expenditure above a certain amount must be approved by a
certain level of Management/Board of Directors.

Petty cash
Imprest amount should be reasonable. Single payment from the float
must not exceed a certain amount.

Loans and Advances

The sum advanced to all staff should not exceed the gratuity/fixed
entitlement of the employee.

Stock
To write off obsolete stock, the approval of the Board must be sought.
The difference arising between the values shown in the financial records
and the valuation obtained from the physical stocks check will be
adjusted by amending the financial records to agree with the physical
valuation after proper investigation by management.

Fixed assets revaluation

Revaluation of any fixed asset will require the prior approval of the Board
and may only be done by suitably qualified and independent valuers.
Following the revaluation, the depreciation charge will be adjusted to
reflect revised asset values.
 Finance Committee
This committee is responsible for authorizing and approving all payments
to be made by the company. At least two of the above must endorse a
payment before the funds are released.

2. Income and Debtors

Control requirements

(1) Payment for goods is to be made by cheque or Bank draft. All

customers’ cheque/ bank drafts must clear before goods are
supplied.

(2) Sales must be made strictly on Cash and Carry basis except in the
case of accredited credit customers.

(3) Down payment on order will be determined by Top Management

before commencement of contracts and service jobs.

(4) Documented/Written Instruction to sell on credit must come from

the Chairman.

(5) Service contract must be signed before service is rendered.

Investment Income

Investment income comprises:

1) Interest earned from any fixed deposit account with financial
institution and any other income from investments.

2) Interest shall be earned when the company invest her income on

fixed deposits or any financial instruments through the financial
houses. Authority to invest in these instruments must be granted
by the Board of Directors/Executive Chairman or Chief Operating
Officer and the management of these investments should be done
by the Accountant.

3. Purchases And Creditors

This section describes the documentation flow and procedures used in
authorising, processing and accounting for purchases of goods and
services.

The objectives of the procedures for the control of creditors and purchases
are to ensure that:
- Goods purchased are actually needed and are of the
type normally consumed by the company.

- Goods are received in good condition and services are

properly performed.

- Capital and revenue expenditures are correctly

distinguished and accounted for. Purchases in this
regard will include the procurement of fuel and
lubricants, spare parts, stationary and office supplies,
electricity bills etc.

Control requirements

i) The company will operate a central buying system in order to

enjoy the benefit of efficient purchasing.

ii) All purchase requisitions should be properly authorised by the

Managing Director on the basis of the recommendation of the
finance committee

iii) To ensure quality assurance of items to be purchased, the head of

the requisitioning department should provide actual specifications
of the items needed when the Purchase Requisition is raised.

iv) The Chief Operating Officer/Project Director is responsible for

approving release of funds for cash purchases.

v) All local purchase order must be approved by the C.O.O/Project

Director in accordance with the company’s authorization
guidelines and approval links.

vi) Local Purchase Orders will only be raised for purchases other than
those made by Staff for Cash Purchases.
 vii) The Admin. Manager ensures that all purchase documents are duly
approved. He is responsible for recommending a suitable supplier
and maintaining up-to-date records of purchases.

viii) The Admin. Manager should liaise with the Supplier to ensure the
prompt delivery of the items requisitioned.

ix) Suppliers should deliver the materials ordered directly to the store.
A Goods Received Voucher (GRV) will be issued by the
Storekeeper to evidence the receipt of the materials.

x) Suppliers should send their invoices directly to the accounts

department.

xi) Invoices relating to goods should not be processed into the books
of accounts until they are matched with relevant copies of the local
purchase orders, good received notes, stock discrepancy/refund
notes and waybills.

xii) Supplier’s statements should be reconciled each month with the

relevant creditors’ account as shown on the creditors aged-analysis
report.
Goods/materials could be procured locally or if unavailable locally,
imported.

4.0 Stores

Objectives

The procedures for accounting and control of stock are to ensure:

- the accuracy and completeness of stores records.

- that all items of stock (particularly items of high value) are properly
received, stored, issued and controlled.

- that physical quantities are compared with books quantities for

management reporting purposes.

- that adequate physical control exist to minimize loss arising from

theft, misappropriation, pilferage and poor handling.
 - that stock-out does not occur.

Control Requirements

1. The Stores Officer is responsible for the day-today control of the

store. (This could be an officer or clerk from the Sales/Marketing
Section of the company).

2. The Store Officer who is responsible for the custody of the stock
should be totally independent of the stock procurement function
which is the exclusive preserve of the Admin. Manager.

3. All Stock items purchased must be documented, recorded and

posted in computer system.

4. Regular stock taking exercise should be organised by the

Accountant and carried out by responsible officials who are
independent of the stock function.

5. Regular reconciliation should be carried out between:

a) physical stock quantity (from stock count)

b) bin card balance, and
c) stock ledger balance

5.0 Cash And Bank Procedures

It describes the steps to be followed in the balancing of the cash book and
the reconciliation of the cash book to the statement on monthly basis.

Control Requirements

1. The Company will operate and maintain a cash book and bank
accounts.

2. Daily collections (cash, cheques and drafts) must be banked before

the close of business or in the morning of the day following the
collection day. Collection must be banked intact.
 3. A daily bank position statement must be issued by the Accountant and
distributed to the Managing Director and Financial Controller.

4. Monthly bank reconciliation statement must be prepared by the

Accounts Finance Mgr. and reviewed by Internal Auditor.

5. All cheque signatories must initial both the supporting documents

and cheque payment vouchers when signing cheques.

6. A register of cheque booklets should be maintained by the Fin. Mgr.

7. Blank cheque books and payment vouchers must at all time be

under the custody of the Accountant and kept under lock and key.

8. An out-going cheque register will be maintained to record all

Cheque Payments by the Company. The register will contain the
following information:

• Date of cheque
• Name of Payee
• Particulars of payment
• Cheque Number
• Cheque amount
• Name of cheque collector
• Date of collection of cheque
• Signature of cheque collector

9. Cash forecast statement should be prepared by the Accountant and

reviewed by the Managing Director and Financial Controller.

10. The Accountant will recompute the following on monthly basis to

ensure their correctness and appropriateness:

- Commission on turnover charged by banks.

- Interest charged on overdraft accounts.

- Interest receivable on bank deposits.

He should notify the Managing Director. in case of discrepancies.

The Finance Mgr should follow up such discrepancies with the
banks.
 11. An in-coming cheque register will be maintained to record all
cheque received by the company. The register will contain the
following information.

• Date of cheque
• Name of Payer
• Particulars of receipt
• Cheque Number
• Cheque amount

The register shall be maintained by the Secretary to the Managing

Director.

Petty Cash Procedures

Summary of the system

The main features of the petty cash system are as follows
(a) Cash cheques are drawn to replenish the petty cash
(b) All payments are made on the basis of approved petty cash
vouchers.
(c) The transactions entered in the petty cash payment vouchers are
summarized at the end of each day using the petty cash summary
sheet and the journal vouchers.

Petty Cash advance is limited to a certain amount. Where the expenditure

exceeds this amount, it is batched along with others and paid for by
cheque. The petty cash routine should start with an agreed cash float
which is re-imbursed from time to time for the amount expended by
cashed cheque in order to return the float to the initial amount.

Forms Used
The principal forms used are as follows
(a) Petty Cash Voucher
(b) Petty Cash Summary Voucher/Analysis Sheet
(c) Journal Voucher

6.0 Salaries And Wages Procedures

Objectives

These procedures are to ensure that:

 * Staff employment is properly documented
* Remuneration are properly authorised and paid to the relevant
staff.
* Deductions from salaries are properly accounted for pending
payment to beneficiaries.

Control Requirements

The following internal controls are important:

1. Written authority is required for the engagement and dismissal of

employees.

2. The use of personal history records for staff and where necessary,
the keeping of time records for time worked.

3. The maintenance of attendance records for staff.

4. Occasional head count of staff by the Admin/HR Mgr.

7.0 Fixed Assets

A fixed assets is any item of capital expenditure, the benefit of which the
Company will enjoy for more than one accounting period. The
capitalisation policy shall be set by the Board of Directors.

Objectives

- To account fully for all items of fixed assets.

- To ensure physical control of fixed assets by means of frequent
updating of the Fixed Assets Register and physical check for existence.
- To maximize efficiency in the utilization of fixed assets.

A register should be maintained for each major class of fixed assets.

Due to the usually larger sums involved, the authorisation of the purchase
of fixed assets is done at the Board level. Major acquisitions should be
duly budgeted for because of the impact on the liquidity of the company.
 Control Requirements

1. There shall be a capital expenditure procedure to be established by

the Board of Directors. This procedure must be followed whenever
an asset is to be acquired.

2. All company assets must be registered and maintained in the name

of the company.

3. All assets of the company shall bear unique identification numbers.

4. Access to all company assets shall be restricted to only persons

authorised by the management.

5. Any disposal of company’s assets must be done with the express

approval of the Board.

6. All assets must be physically inspected at least once a year.

8.0. Management Information Reports

Management information reports that will be prepared will include:

a) Daily Cash position

b) Monthly Trial Balance
c) Monthly Profit and loss account
d) Monthly Manpower report
e) Half yearly stock taking report
f) Monthly balance sheet
g) Monthly sales report
h) Report on the Accounts.

a) Daily/Weekly Cash Position

The report should be prepared at the end of every working day by the
officer in charge of the main cash book.

The report should show:

i) The opening balance of each bank account (per the company’s cash
book)
 ii) All lodgments into the bank during the day (per the bank paying-
in-slip)
iii) All cheque payments during the day; and
iv) The closing balance in each bank account.

A copy of this report shall be reviewed by the Accountant and distributed

to:

- Managing Director

- General Manager.

b) Monthly Trial Balance

Individual posting on daily, weekly and at the month end are

processed to relevant accounts in the general ledger through journal
vouchers. The cumulative balance (DR or CR) in all ledger accounts at
the end of each month is simply the Trial balance.

These balances must agree i.e. total DR must equal to total CR. If not,
review posting and trace the difference.

The total accounts in the Trial balance comprise both balance sheet
and profit and loss items.

c) Monthly Profit and Loss Account

Basic accounting data needed for the preparation of this account will
be derived from Monthly trial Balance. The profit and loss account
provides information on turnover, expenses and profit. The
comparative figures could be the budget in which case the account will
indicate how management has performed. This could also be
compared with prior year figures on YTD and monthly basis.

d) Monthly Manpower Report

All manpower statistics generated by the personnel department (e.g.

recruitment, dismissals, suspensions etc) must be sent to the Accounts
Department. During the preparation of monthly Accounts, manpower
data could be used in assessing the performance of the company i.e.
turnover per employee, profit per employee etc. Manpower statistics
should be on departmental basis.
e) Half –yearly stock taking

The Account Officer will have responsibility for reporting to the

Accountant the consolidated result of stocktaking during the six
monthly periods. This report will highlight stocks at hand, in quantity
and value, surpluses and shortages with explanations and general
comments on stock management.

f) Monthly Balance Sheet

This is a follow-up of (b) and (c) above. The balance sheet will show
the total assets and liabilities of the company. Appropriate notes to the
accounts should highlight key area to management.

g) Monthly Sales Report

At the end of every month, the Accountant will prepare statistical

reports with variances (Budget/Actual) for the following:

- Turnover (Unit/Value)
- Expenses (direct/overhead)
- Profit

h) Report on the Accounts

At the end of the company’s financial year, the Accountant should

prepare the management accounts and report on the Accounts. The
report should focus on significant and exceptional matters that needed
to be brought to the attention of management. Comparison of actual
results with budget should also be provided.

Concentration shall be in areas of performance evaluation:

- Turnover
- Profitability
- Market share
- Liquidity and
- Other relevant statistics
Fixed Assets
Fixed assets management is an accounting process that seeks to track fixed assets
for the purposes of financial accounting, preventive maintenance, and theft
deterrence.

Fixed Assets Register

A Fixed Asset Register (FAR) is an accounting method used for major resources
of a business.

Fixed Assets are assets such as land, machines; office equipments, buildings,
patents, trademarks, copyrights, etc. held for the purpose of production of goods
or rendering of services and are not held for the purpose of sale in the ordinary
course of business.

Fixed assets constitute a major chunk of the total assets in the case of all
manufacturing entities. Even in the case of service entities such as hotels, banks,
financial institutions, insurers, mobile / telephone service providers etc. it has
become imperative to invest heavily in furnishing, equipment, and technology to
attract, and retain customers.

Just as it is important for a person investing in the Capital Market to know those
investments, so it is important for a business entity to have a list of its fixed
assets. A Fixed Asset Register is that list of assets.

Objectives in maintaining a Fixed Asset Register (FAR)

A FAR must be kept in order to be in compliance with legislation governing

corporations, companies, etc. It allows a company to keep track of details of each
fixed asset, ensuring control and preventing misappropriation of assets. It also
keeps track of the correct value of assets, which allows for computation of
depreciation and for tax and insurance purposes. The FAR generates accurate,
complete, and customized reports that suit the needs of management.
A FAR also allows a company to keep track of fixed assets that are not under
simple, direct control of the company. This means owned and leased assets,
assets under construction, and imported assets.

Making entries in the FAR

Not all assets are capitalized. Keeping in view the concept of materiality, a
company may have a policy to capitalize only those assets which cost more than
a specified amount. Similarly, fixed assets which have a useful life of less than
one year are not capitalized.

In some companies, improvements or alterations made to an asset are capitalized

separately in the FAR. This is not correct. If such mistakes are made, it is highly
probable that the auditors while undertaking physical verification of assets will
notice irreconcilable differences. Where improvements or alterations made to an
existing asset justifying capitalization, such additions should be made to the cost
of the original asset.

The format of FAR Entries

The format / details to be provided in a FAR generally depends upon the

following factors:

• a) Nature of assets.

i. If moveable assets constitute a significant portion of total fixed

assets, details will be necessary on their movement from one
department / cost center / people to another.
ii. ii. Cost of assets. Greater control and security is required for costly
equipment.

• b) Customized Reports on fixed assets required by management.

• c) Disclosure norms / regulatory compliances as per statutory laws
applicable to the entity.
• d) Extent of owned, and assets taken on lease / hire purchase.
• e) Requirements of insurance company.
• f) Location of fixed assets. If fixed assets are located at numerous
locations, greater details will have to be given. In the case of a
construction company, the assets are located at different work sites. These
work sites maybe in different cities / countries / continents.
• g) Maintenance costs. Some fixed assets require regular servicing to keep
them running in an efficient and satisfactory manner. It would be
necessary to keep a tab on the maintenance costs, dates of servicing etc.
during a stated period.
Maintenance of a FAR in a Multi-National Corporation (MNC) can be onerous
and complex due to different regulatory and compliance requirements in each
country and different currencies.

Generally, a MNC sets up a subsidiary in the country in which it intends to start

operations. Maintenance of FAR is decentralized. The FAR is maintained per the
company’s policy, and regulatory requirements which are country specific.

If consolidation of holding company and its subsidiaries (whether domestic or

foreign) is required by the law applicable to companies, and relevant Accounting
Standards, the task may become a bit complex. The crucial point is related to
selection of exchange rate for conversion of fixed assets. Most companies either
use average annual rate or year-end exchange rate.

Identification of a fixed asset

In a large corporation, the task of identifying and locating a specific fixed asset
can be difficult unless numbering is scientific, systematic, and up-to-date. A
common problem in most companies is the improper maintenance of the FAR.
Physical verification of fixed assets becomes a futile exercise unless the FAR is
properly maintained.

It would be advisable to use a scientific numbering technique to identify fixed

assets. The process of numbering fixed assets is called tagging. An identification
number (combination of alphabets, and numbers) is written on the asset.
Engraving the identification number on the asset is advisable in the case of Plant
& Machinery where there is heavy wear and tear.

A tag verifies the existence of assets and their location, aids in maintenance,
provides a common ground for communication between the Accounts
Department and the end-users and recording the net book value of asset in case
of sale / scrapping.

It is not necessary to tag all fixed assets. Land, buildings and vehicles all have
independent systems of tracking in registration papers and survey numbers.

Bank Reconciliation
Term used when settling differences contained in the Bank Statement and the
cash account in the books of the bank's customer. Rarely do the ending balances
agree. To reflect the reconciling items, bank reconciliation is required. Once
completed, the adjusted bank balance must prove to the adjusted book balance.
When it does, it indicates that both records are correct. Journal entries are then
prepared to update the records and to arrive at an ending balance in the cash
account that agrees with the ending balance in the bank statement.

The bank balance is adjusted for items reflected on the books that are not on the
statement. They include Outstanding Cheques(Unpresented Cheques),
Uncredited Lodgments(Deposits in Transit), and bank errors in charging or
crediting the company's account.

The book balance is adjusted for items shown on the bank statement that are not
reflected on the books. They include bank charges, collections made by bank on
the customer's behalf (e.g., collected notes receivable), interest earned, and errors
on the books.

Bank Reconciliation Process

Step 1. Adjusting the Balance per Bank

The first step is to adjust the balance on the bank statement to the true, adjusted, or
corrected balance. The items necessary for this step are listed in the following
schedule:

Balance per Bank Statement on Dec, 31.

Step 1.
2007
Adjustments:
Add: Uncredited Lodgments
Deduct: Unpresented Cheques
Add or Deduct: Bank errors
Adjusted/Corrected Balance per Bank

Uncredited Lodgments are amounts already received and recorded by the

company, but are not yet recorded by the bank

Because uncredited lodgments are already included in the company's Cash in

Bank account, there is no need to adjust the company's records. However,
uncredited deposits in transit are not yet on bank statement. Therefore, they need
to be listed on the bank reconciliation as an increase to the balance per bank in order
to report the true amount of cash. A helpful rule of thumb is "put it where it
isn't." An uncredited lodgment is on the company's books, but it isn't on the bank
statement. Put it where it isn't: as an adjustment to the balance on the bank statement.
Unpresented cheques are cheques that have been written and recorded in the
company's Cash In Bank account, but have not yet been presented and cleared in
the bank account. Cheques written during the last few days of the month plus a
few older cheques are likely to be among the outstanding checks.

Because all cheques that have been written are immediately recorded in the
company's Cash In Bank account, there is no need to adjust the company's
records for the unpresented cheques. However, the unpresented cheques have
not yet reached the bank and the bank statement. Therefore, unpresented
cheques are listed on the bank reconciliation as a decrease in the balance per bank.
Recall the helpful tip "put it where it isn't." An unpresented cheque is on the
company's books, but it isn't on the bank statement. Put it where it isn't: as an
adjustment to the balance on the bank statement.

Bank errors are mistakes made by the bank. Bank errors could include the bank
recording an incorrect amount, entering an amount that does not belong on a
company's bank statement, or omitting an amount from a company's bank
statement. The company should notify the bank of its errors. Depending on the
error, the correction could increase or a decrease the balance shown on the bank
statement. (Since the company did not make the error, the company's records are
not changed.)

Step 2. Adjusting the Balance per Books

The second step of the bank reconciliation is to adjust the balance in the
company's Cash account so that it is the true, adjusted, or corrected balance.
Examples of the items involved are shown in the following schedule:

Step
Balance per Books on Dec, 31 2007
2.
Adjustments:
Deduct: Bank service charges
Deduct: NSF cheque & fees
Deduct: Cheque book printing charges
Add: Interest earned
Add: Direct Lodgment into the bank
Add or Deduct: Errors in company's Cash in
Bank account
 Adjusted/Corrected Balance per Books

Bank service charges are fees deducted from the bank statement for the bank's
processing of the account activity (accepting deposits, posting cheques, mailing
the bank statement, etc.) Other types of bank service charges include the fee
charged when a company overdraws its current account and the bank fee for
processing a stop payment order on a company's cheque.

The bank might deduct these charges or fees on the bank statement without
notifying the company. When that occurs the company usually learns of the
amounts only after receiving its bank statement.

Because the bank service charges have already been deducted on the bank
statement, there is no adjustment to the balance per bank. However, the service
charges will have to be entered as an adjustment to the company's books. The
company's Cash In Bank account will need to be decreased by the amount of the
service charges.

Recall the helpful tip "put it where it isn't." A bank service charge is already
listed on the bank statement, but it isn't on the company's books. Put it where it
isn't: as an adjustment to the Cash account on the company's books.

An NSF cheque is a cheque that was not honored by the bank of the person or
company writing the cheque because that account did not have a sufficient
balance. As a result, the check is returned without being honored or paid. (NSF is
the acronym for not sufficient funds).

Often the bank describes the returned cheque as a return item. Others refer to
the NSF cheque as a "rubber cheque" because the cheque "bounced" back from
the bank on which it was written.) When the NSF cheque comes back to the bank
in which it was deposited, the bank will decrease the current account of the
company that had deposited the cheque. The amount charged will be the amount
of the cheque plus a bank fee.

Because the NSF cheque and the related bank fee have already been deducted on
the bank statement, there is no need to adjust the balance per the bank. However,
if the company has not yet decreased its Cash account balance for the returned
cheque and the bank fee, the company must decrease the balance per books in
order to reconcile.
Cheque book printing charges occur when a company arranges for its bank to
handle the reordering of its cheques. The cost of the printed cheques will
automatically be deducted from the company's current account.

Because the cheque printing charges have already been deducted on the bank
statement, there is no adjustment to the balance per bank. However, the cheque
printing charges need to be an adjustment on the company's books. They will be
a deduction to company's Cash In Bank account.
Recall the general rule, "put it where it isn't." A cheque printing charge is on the
bank statement, but it isn't on the company's books. Put it where it isn't: as an
adjustment to the Cash account on the company's books.

Interest earned will appear on the bank statement when a bank gives a company
interest on its account balances. The amount is added to the checking account
balance and is automatically on the bank statement. Hence there is no need to
adjust the balance per the bank statement. However, the amount of interest
earned will increase the balance in the company's Cash account on its books.
Recall "put it where it isn't." Interest received from the bank is on the bank
statement, but it isn't on the company's books. Put it where it isn't: as an
adjustment to the Cash account on the company's books.

Notes Receivables are assets of a company. When notes come due, the company
might ask its bank to collect the note receivable. For this service the bank will
charge a fee. The bank will increase the company's current account for the
amount it collected (principal and interest) and will decrease the account by the
collection fee it charges. Since these amounts are already on the bank statement,
the company must be certain that the amounts appear on the company's books in
its Cash account.
Recall the tip "put it where it isn't." The amounts collected by the bank and the
bank's fees are on the bank statement, but they are not on the company's books.
Put them where they aren't: as adjustments to the Cash account on the
company's books.

Errors in the company's Cash In Bank account result from the company entering
an incorrect amount, entering a transaction that does not belong in the account,
or omitting a transaction that should be in the account.

Since the company made these errors, the correction of the error will be either an
increase or a decrease to the balance in the Cash In Bank account on the
company's books.
Step3.Comparing the Adjusted Balances
After adjusting the balance per bank (Step 1) and after adjusting the balance per
books (Step 2), the two adjusted amounts should be equal. If they are not equal,
you must repeat the process until the balances are identical.

The balances should be the true, correct amount of cash as of the date of the bank
reconciliation.

Step 4. Preparing Journal Entries

Journal entries must be prepared for the adjustments to the balance per books (Step
2). Adjustments to increase the cash balance will require a journal entry that
debits Cash and credits another account.
Adjustments to decrease the cash balance will require a credit to Cash and a
debit to
another account.

Budgeting and Financial Planning

Financial Plan requires accurate and detailed projections of the business's

finances. The financial needs and anticipated revenues should be based on
realistic assumptions and projections. Questions to answer:

Budget: expenses

• How much money is needed to fund the business?

• How much money is needed to operate the business this year? Where will
you spend it?
• How much money is needed to operate the business for the next three to
five years? Where will you spend it?

Budget: income

• How much revenue do you expect this year?

• Where will the revenue come from? How many sales?
• When do you expect the revenue to come into the business? Will there be
more revenue in some months and less in others?

Cash flow statement

• Combine the expense and income budgets and projections

Break-even analysis

• Based upon your cash flow statement, at what point will the company's
expenses match the sales revenue?

If you are using the business plan for financing include:

Summary of financial needs

• How much money do you need? Why? For how long?

• How will you spend the money?
• When and how will you pay the money back?

If your company has been in business in the past include:

• Current balance sheet

• Current income (profit and loss) statement
• Other information and documents

Concluding Comment:
Organize your accounting system by function. Having too few people doing all
the accounting opens the door for fraud and embezzlement. Companies with
more people assign functions in such a way that those done by the same person
don't pose a control threat.

Having the same person draft the cheques and reconcile the bank account is a
good example of how not to assign accounting duties.

Assignment of Duties
Figure out who is going to do what in your new accounting system. The duties
and areas of responsibility you need to assign include

1. Overall responsibility for the accounting system

2. Management of the computer system (if you're using one)
3. Accounts receivable
4. Accounts payable
5. Order entry
6. Cost accounting
7. Monthly reporting
8. Inventory control
9. Payroll (even if you use an outside payroll service, someone must
be in control and responsible)
10. Internal accounting control
 11. Fixed assets
In many cases the same person will do many of these things. However, these are
the areas we'll be dealing with in setting up the accounting system. The person
you assign to be in overall charge of the system should be the one who is most
familiar with accounting. If you are just starting your company, you might want
to think about the background of some of your new employees. At least one
should have the capacity to run the accounting system.
 ABOUT THE AUTHOR

Adesina Adedayo is the Managing Partner of Adesina Adedayo & Co.

(Chartered Accountants) and Ade Adedayo Consulting (Chartered Tax
Practitioners)

He was the Chairman of Lagos District Society of The Chartered Institute

of Taxation of Nigeria between July 2005 and June 2006. He has been a
Council Member of The Chartered Institute of Taxation of Nigeria from
June 2007 to date.

Ade was educated at C.M.S. Grammar School, Bariga between the periods
1978 to 1983. He qualified as a Chartered Accountant in November 1992.
He is also a Fellow of The Chartered Institute of Taxation of Nigeria.

He has worked variously at Messrs Akintola Williams Deloitte, Adetona

Isichei & Co and Office of the Auditor General for the Federation.

Ade specializes in Financial Planning and Analysis with emphasis on

Budgeting and Strategy Formulation.

For further details, contact

The Chief Executive

Linkgates Consulting
Postal: P.O.Box 2102, Oshodi
Tel: 01-4322888, 08033005344,08074495469
E-mail:linkgatesconsulting@yahoo.co.uk
Website: www.aaps-ng.com