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Chapter 1:

Accounting
systems

1. Manual and computerised


systems
The

principles of computerised accounting


are the same as those of manual
accounting
Both manual and computerised systems
are intended to achieve the same results:

the recording of transactions, and


the production of accurate accounts

2. Computerised accounting
systems
2.1 What are accounting packages?
Software can be defined as computer programs
that tell the hardware what to do
Accounting packages are collection of
computer programs or software designed to
carry out specific accounting tasks. They may be
customised or bought off-the-shelf
An accounting suite is a set of accounting
modules or programs

Examples

of accounting packages: package for


payroll, sales and purchases packages
Small businesses are more likely to purchase
off-the-shelf packages b/c of cost effective
options
Larger organisations may developed bespoke
software
In principle, computerised accounting is exactly
as the same as manual accounting

2.2 Coding
Computers are used more efficiently if vital
information is expressed in the form of codes.
E.g., nominal ledger accounts will be coded
individually, perhaps by a 2 digit code:
05:
22:
41:
42:

P&L account; 15: purchases;


trade receivables ledger control a/c;
trade payables ledger control a/c;
interest

When an invoice is received from


supplier (code 1234) for $3,000 for
the purchase of raw materials, the
transaction may be coded for input to
Nominal ledger
Inventory
the computer
as
Supplier Debit
code

Credit

Value

Code

Quantity

1234

41

$3,000

5642

150

15

2.3 Using an accounting package


When a user begins to work with an a/c package,
he/she will usually be asked to key in a password.
Separate passwords can be used for different
parts of the system, e.g. different ledgers
prevent the access of unauthorised personnel
Activity 1: Give some examples of the use of
passwords?

2.4 Advantages + disadvantages of a/c packages


Advantages:
packages can be used by non-specialists
large amount of data can be processed very quickly
computerised systems are more accurate than manual ones
capable of handling + processing large volume of data
ability to integrate systems/modules prevents wasteful
repetition as one entry may update several records
Once data has been input, computerised systems can
analyse data rapidly to present useful control information for
managers

Disadvantages:
(a) the initial time and costs involved in installing
the system, training personnel and so on
(b) the need for security checks to make sure
that unauthorised persons do not access to data
files
the necessity to develop a systems of coding
and checking
(d) lack of audit trail
(e) possible resistance of staff

3. Accounting modules
3.1 What are they?
A module is a program which deals with one particular
part of a business accounting system
An accounting package might have separate modules
for: invoicing, inventory, sales ledger, purchase ledger,
nominal ledger, payroll, cash book, non-current asset
register, report generator
Linking modules in such a way that data input into one
module can then be transferred automatically to all
other relevant modules can efficiency + errors

3.2 Integrated software


Each module may be integrated with the others
data entered in 1 module will be passed
automatically/by simple operator request through
into any other module where the data is of some
relevance to form an integrated a/c system.
E.g. if there is an input into the invoicing module
authorising the despatch of an invoice to a
customer, there might be automatic links:

To

the sales ledger, by posting the invoice to


the customers account
To the inventory module, by:

(i) the quantity + value of inventory in hand,


(ii) recording inventory movement

To

the nominal ledger, by posting the sale to


the sales account
To the report generator, to update the sale
analysis + sales totals

Advantages of integrated software


Possible to make just 1 entry in 1 of the ledgers
which automatically updates the others
Users can specify reports, + the software will
automatically extract the required data from all
the relevant files
Both of the above simplify the workload of the
user, + the irritating need to constantly load +
unload disks is eliminated

Disadvantages of integrated software:


Usually, it requires more computer memory
than separate systems i.e. there is less
space to store actual data
As one program is expected to do
everything, the user will often find that an
integrated package has fewer facilities than a
set of specified modules

3.3 Accounting for trade receivables


A computerised sales ledger will be expected to
keep the sales ledger up to date, to be able to
produce certain output (e.g. statements, sales
analysis reports, responses to interrogations)
The output may be produced daily (eg daybook
listings), monthly (eg statements), quarterly (eg
sales analysis reports) or periodically (eg
responses to interrogations)

3.4 Data held on a sales ledger file


The

sales ledger file includes individual records for each


customer a/c.
Some of the data held will be standing data (ie change
infrequently): Customer a/c number, customer name,
address, credit limit, a/c sales analysis code, a/c type
Some data held on a customer record will change as
the sales ledger is updated: transaction data, transaction
description, transaction code, debits, credits, balance

Activity

2: what is the relationship b/w a file, a


field and a record?

3.5 Input to a sales ledger system


Amendments: to customer details, insertion of
new customers, deletion of old non-active
customers
Transaction data relating to: sales transactions,
customer payment, credit notes, adjustment
(debit/credit items)

3.6 Processing in a sales ledger system


The primary action is modifying the amount
outstanding on the customers a/c.
When processing starts, the balance on an a/c is
the brought-forward (b/f) balance
When processing has finished, the balance on
an a/c is the carried-forward (c/f) balance
A computer adds or subtracts whatever your tell
to from the b/f balance, and ends up with a c/f
balance same principle of manual accounting

3.7 Outputs from a sales ledger system


Day book listing
Invoices
Statements. End of month statements for customers
Sales analysis reports analyse sales by customer
or type of product sold, or by region or sales office
Trade receivables reminder letters
Customer lists
Responses to enquiries for fast response to customer
enquiries
Output on to disk file for other modules

3.8 The advantages of a computerised trade receivable


system
ability to assist in sales administration + marketing by
means of output, beside general advantages of
computerised a/c systems
3.9 Purchase ledger
A computersied purchase ledger will be expected to keep
the purchase ledger up to date, to be able to output various
reports requested by users
3.10 Inputs to a purchase ledger
Details of purchases recorded on invoices, of returns or
payment to suppliers, and adjustment

3.11

Processing in a purchase ledger system


The primary action in updating the purchase ledger is
adjusting the amounts outstanding on the supplier
accounts
The computer will adjust the b/f balance by
adding/deducting the value of transactions as you tell
it to
The c/f balance becomes the new balance recorded
on the suppliers account
This processing is identical to updating the sales
ledger

3.12 Outputs from a purchase ledger system


Lists

of transactions posted produced every time the system

is run
An analysis of expenditure for nominal ledger purposes
List of trade payables balances together with a reconciliation
b/w the total balance b/f, transactions for the month and the
total balance c/f
Copies of trade payables accounts
Details of payments. Eg remittance advices, cheques, credit
transfer listing
Other special reports for: costing purposes, updating records
about tangible non-current assets, comparison with budget

3.13 Nominal (or general) ledger


is an accounting record which summerised the
financial affairs of a business
contains details of assets, liabilities + capital, income
+ expenditure enable the profit/loss to be calculated
consists of a large number of coded accounts. A
business will choose its own codes for its nominal ledger
accounts. The codes given in the below table are for
illustrative purposes

Account code

Account name

100200

Plant and machinery (cost)

100300

Motor vehicles (cost)

100201

Plant and machinery depreciation

100301

Motor vehicles depreciation

300000

Total trade receivables

400000

Total trade payables

500130

Wages and salaries

500140

Rent and rates

500150

Advertising expenses

500160

Bank charges

500180

Telephone expenses

600000

Sales

700000

Cash

Some

nominal ledgers are separately structured,


but others are posted automatically from related
modules (eg sales ledger module, purchase
ledger module)
A computerised nominal ledger works in exactly
the same way as a manual nominal ledger, but
some different terminology. Eg, the sales and
trade receivables accounts were posted manually
from the sales day book (not the sales ledger);
but the sales day book is automatically produced
as part of the sales ledger module.

3.14 Inputs to the nominal ledger


In the integrated system, as data is put into the
sales ledger module, the relevant nominal ledger
accounts are updated
In the non-integrated system, the output from
the sales ledger module (and anywhere else) has
to be put into the nominal ledger. This is done by
using journal entries. Eg:

accounts
A/c 300000
A/c 600000

debit

Credit

3,000
3,000

Regardless

of if the system is integrated or not,


the actual data needed by the nominal ledger
package to update the ledger accounts includes:
date, description, amount, account codes
3.15 Outputs from the nominal ledger
The trial balance
Financial statements (FS)

4. The effect of business size


and structure

The main factors which affect the nature


and structure of accounting systems are
the business size and structure
The finance function is part of the
technostructure of an organisation

4.1 The finance function and authority


Line authority: the authority a manager has over
a subordinate
Staff authority: the authority one
manager/department may have in giving specialist
advice to another manager/department, over
which there is no line authority
Functional authority: a hybrid of line and staff
authority

Activity 3: what sort of authority is


exercised:
(a) by the financial controller over the
chief accountant
(b) by the production manager over the
production workforce
by the financial controller over the
production manager

4.2 Problems with authority


Problem

Possible solution

Technostructure may
undermine line managers
authority, by empire building

Clear demarcations of line, staff +


functional authority should be
created

Lack of seniority: middle line


managers may be more senior
in the hierachy than
technostructure advisers

Use functional authority (via


procedures). Experts should be
seen as a resource, not a threat

Expert managers may lack


realism

Technostructure planners should


be fully aware of operational
issues

Technostructure experts lack


Technostructure experts should be
responsibility for the success of involved in implementing their
their ideas
suggestions + should take
responsibility for their success

4.3 Dangers of a weak technostructure


Legal restructure might be broken by the
line managers
Increased risk: expert advice might be
ignored or not sought
Important work not directly involved with
day-to-day operations, such as personnel
planning, new technology and management
techniques might be ignored

4.4 Dangers of over-strong technostructure


Professional specialists sometimes have divided
loyalties b/w their organisation + their profession
Instability.
Technostructure introduces rules + procedures which
tend to hamper operations
Different departments/levels might have conflicting
expertise
It may be difficult to measure the benefits to the
organisation of various aspects of tecnhnostructural
work as these benefits are indirect

4.5 The accountants role


In many companies, the financial function is one of the
most important expert roles in the organisation. The roles
of the management accountant + financial accountant
are technostructural roles but are different.
The financial accountant is likely to play a less direct
role in the operational running of the business than the
management accountant, but is crucial to a companys
effective boundary management with shareholders

4.6 Information
The financial accountant classifies a/c information + is
responsible for presenting this to external shareholders
The published accounts are an important source of
communication with outsiders
Reported levels of profit determine the return that
investors can receive indirectly affect the companys
cost of capital by affecting the share price
published financial information thus affects the cost
of one of the organisations most important resources,
money.

The

management accountant is even nearer the policy


making + management process.
Internally, accountants provide information for planning
+ controlling the business: past cost information,
product profitability, cost/profit centre performance,
desirability of investments, competitors performance,
sensitivity analysis, alternative options
The accountant provides information essential to the
current management + decision-making of the business.
If line decisions are assessed in a/c terms, the
accountant will be involved. Accountants assess the
future financial consequences of certain decisions

Activity

4: Hotel example
4.7 Control and stewardship
Money and funds are a businesss lifeblood
monitoring their flows is a necessary precaution.
If the flow of funds dries up a business can fail
very easily
Proper financial control ensures that the
business is adequately financed to meet its
obligations