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OPERATION OF AN ACCOUNTING SYSTEM

CHAPTER 7 Accounting systems

PowerPoint Presentation by Matthew Tilling 2012 John Wiley & Sons Australia Ltd

DEVELOPMENT OF AN ACCOUNTING SYSTEM

IMPORTANT CONSIDERATIONS IN DEVELOPING AN ACCOUNTING SYSTEM Costs versus Benefits Compatibility Flexibility/Adaptability Internal Control
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INTERNAL CONTROL SYSTEMS

Efficient use and protection of an entitys assets is a primary management function All procedures adopted by an entity to control its activities and protect its assets are described collectively as an internal control system Consists of
Administrative Controls Accounting Controls
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PRINCIPLES OF INTERNAL CONTROL SYSTEMS

Organisational Culture Clearly established lines of responsibility Separation of record keeping and custodianship Division of responsibility for related transactions Mechanical and electronic devices Adequate insurance Internal auditing Programming controls Physical controls Other controls
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LIMITATIONS OF INTERNAL CONTROL SYSTEMS

Absolute assurance not possible Effectiveness influenced by size of entitys operations Good controls can break down due to tiredness, indifference or carelessness Heavy reliance on segregation of duties Difficulties in detecting computer fraud

EFFICIENT ACCOUNTING SYSTEMS

Subsidiary Ledgers and Special Journals
Most businesses have several of repetitive classes of transactions
Sales, Purchases, Cash Receipts and Cash Payments

Based on this a more streamlined and efficient accounting system can be created Computerised accounting systems often use a similar modularised approach

MANUAL ACCOUNTING SYSTEMS

Subsidiary Ledgers and Control Accounts
When a large amount of detailed information is required a separate subsidiary ledger is used The total balance of the related subsidiary ledgers is recorded in a control account Often used for a range of accounts including
Accounts Receivable, Accounts Payable, Inventory Plant and Equipment, Investments

General Ledger Accounts Receivable Control Date Nov 1 Nov 30 Nov 30 5 100 6 900 Debit Credit Balance 8 500 11 600 4 700 Date Nov 1 Nov 8 Nov 16

Subsidiary Ledger P. Able Debit 1 800 3 200 R. Baker Date Debit Credit 1 100 2 400 D. Cane Date Nov 1 Nov 12 900 2 600 Debit Credit Balance 2 200 3 100
10 500

Credit

Balance 3 200 5 000 1 800

Balance 1 100 0 2 400

Schedule of Accounts Receivable As at 30 November P. Able R. Baker D. Cane $1 800 2 400 500 $4 700

Nov 1 Nov 3 Nov 20

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MANUAL ACCOUNTING SYSTEMS SPECIAL JOURNALS

General journal inefficient where there are many transactions Group like transactions and record in a special journal
Category of Transaction Sales of inventory on credit Purchases of inventory on credit Receipt of cash (all receipts) Payments of cash (all payments) Special Journal Sales Journal Purchases Journal Cash Receipts Journal Cash Payments Journal

SALES JOURNAL
Records only credit sales of inventory Total posted to general ledger monthly Detail by debtor posted to subsidiary ledger daily Advantages
Each transaction recorded on a single line Entries do not require a narration Posting efficiency achieved
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SALES JOURNAL
Sales Journal Date Jan 2 5 7 9 19 21 26 29 Invoice No 401 402 403 404 405 406 407 408 Account R. Abbot D. Ball N. Camp R. Abbot A. Evans J. Ford A. Evans N. Camp Post Ref Sales 1 100 900 820 1 410 920 850 1 550 750 8 300 (400) GST Collections 110 90 82 141 92 85 155 75 830 (215)
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PURCHASES JOURNAL
Accounts Receivable 1 210 990 902 1 551 1 012 935 1 705 825 9 130 (104)
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Records only credit purchases Can be used for items other than inventory Total posted to general ledger monthly Detail by debtor posted to subsidiary ledger daily Advantages
as for sales journal

PURCHASES JOURNAL
Purchases Journal Date Date Record Invoice Jan 3 6 8 13 20 24 27 30 Account Terms n/30 n/30 n/30 n/30 2/10 n/30 2/10 n/30 2/10 n/30 n/30 Post Ref Purchases 1 900 1 200 1 410 1 820 820 900 2 810 900 11 760 (510) GST Outlays 190 120 141 182 82 90 281 90 1 176 (160)
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CASH RECEIPTS JOURNAL

Accounts Payable 2 090 1 320 1 551 2 002 902 990 3 091 990 12 936 (210)
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Jan 2 Kirby Ltd 4 Risk Ltd 8 Dunn Supply 12 Dunn Supply 18 CSR Ltd 24 Cooper Ltd 26 Risk Ltd 29 CSR Ltd

Records all receipts of cash Records each receipt and total banked Totals posted to general ledger monthly Detail (debtors only) posted to subsidiary ledger daily Columns set up for common receipts

CASH RECEIPTS JOURNAL

Cash Receipts Journal
Date Account 8 Sales 10 R. Abbot 20 D. Ball 20 Sales 31 Bank Loan 205 Post Ref 300 Cash at Bank 10 000 280 1 078 900 220 2500 14978 (100) 22 (511) 1 400 (400) 1 100 (104) 22 900 220 2 500 12 500 (x) 280 1 100 Discount Allowed Sales Accounts Receivable Other Accounts 10 000

CASH PAYMENTS JOURNAL

Records all payments of cash Records each payment and cheque number Totals posted to general ledger monthly Detail (creditors only) posted to subsidiary ledger daily Columns set up for common payments

Jan 3 Capital

NB: GST has been excluded from example to save space

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CASH RECEIPTS JOURNAL

Cash Receipts Journal
Date Account 4 Purchases 7 Rent Exp 14 Store Equip 28 Purchases 29 Prepaid Ins 30 Kirby Ltd 30 Cooper Ltd 110 1 240 (x) 510 1 900 900 2 800 (210) 1 520 (510) 516 170 320 410 840 Post Ref Other Accounts Accounts Payable Purchases 680 Cash at Bank 680 320 410 840 510 1 900 882 5 542 (100) 18 18 (401)
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USE OF THE GENERAL JOURNAL

Used for
Discount Received

Infrequent transactions Adjusting entries Closing entries Reversing entries Correcting entries

NB: Cheque number and GST have been excluded from example to save space

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OTHER ISSUES
Abnormal balances in subsidiary ledgers
Credit balances in accounts receivable Debit balances in accounts payable

ACCOUNTING SOFTWARE
Electronic spreadsheets
E.g. Excel

General ledger programs

ACCPAC, Attache, MYOB, QuickBooks, Sybiz Data input obtained from source documents Output produced by the program

Account set-offs
Buying and selling from same customer/supplier Need legal right to set-off

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AN INTRODUCTION TO MYOB

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AN INTRODUCTION TO QUICKBOOKS

COMPUTERISED ACCOUNTING ADVANTAGES

Reduction in processing costs Speed of processing Error reduction Automatic posting Automatic production of documents and reports Improved reporting and decision making Faster response time
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COMPUTERISED ACCOUNTING DISADVANTAGES

Failed systems Power failure Viruses Hackers Fraud

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