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 doAccounting 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 CodingComputers 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: P&L account; 15: purchases; 22: trade receivables ledger control a/c; 41: trade payables ledger control a/c; 42: 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 the computer as

Nominal ledger Inventory

Supplier code

Debit Credit Value Code Quantity

1234 15 41 $3,000 5642 150

2.3 Using an accounting packageWhen 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 personnelActivity 1: Give some examples of the use of passwords?

2.4 Advantages + disadvantages of a/c packagesAdvantages: packages can be used by non-specialists large amount of data can be processed very quicklycomputerised systems are more accurate than manual onescapable of handling + processing large volume of dataability to integrate systems/modules prevents wasteful repetition as one entry may update several recordsOnce 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 modules3.1 What are they?A module is a program which deals with one particular part of a business accounting systemAn 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 softwareEach 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 customer’s 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 softwarePossible to make just 1 entry in 1 of the ledgers which automatically updates the othersUsers can specify reports, + the software will automatically extract the required data from all the relevant filesBoth 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 dataAs 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 receivablesA 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 fileThe 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 typeSome 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 systemThe primary action is modifying the amount outstanding on the customer’s a/c. When processing starts, the balance on an a/c is the brought-forward (b/f) balanceWhen processing has finished, the balance on an a/c is the carried-forward (c/f) balanceA 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 systemDay book listingInvoicesStatements. End of month statements for customersSales analysis reports analyse sales by customer or type of product sold, or by region or sales officeTrade receivables reminder lettersCustomer listsResponses to enquiries for fast response to customer enquiriesOutput on to disk file for other modules

3.8 The advantages of a computerised trade receivable systemability to assist in sales administration + marketing by means of output, beside general advantages of computerised a/c systems3.9 Purchase ledgerA computersied purchase ledger will be expected to keep the purchase ledger up to date, to be able to output various reports requested by users3.10 Inputs to a purchase ledgerDetails 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 systemLists of transactions posted – produced every time the system is runAn analysis of expenditure for nominal ledger purposesList of trade payables balances together with a reconciliation b/w the total balance b/f, transactions for the month and the total balance c/fCopies of trade payables accountsDetails of payments. Eg remittance advices, cheques, credit transfer listingOther special reports for: costing purposes, updating records about tangible non-current assets, comparison with budget

3.13 Nominal (or general) ledgeris an accounting record which summerised the financial affairs of a businesscontains details of assets, liabilities + capital, income + expenditure enable the profit/loss to be calculatedconsists 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 ledgerIn the integrated system, as data is put into the sales ledger module, the relevant nominal ledger accounts are updatedIn 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 debit Credit

$ $

A/c 300000 3,000

A/c 600000 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 authorityLine authority: the authority a manager has over a subordinateStaff authority: the authority one manager/department may have in giving specialist advice to another manager/department, over which there is no line authorityFunctional 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 authorityProblem 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 responsibility for the success of their ideas

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

4.3 Dangers of a weak technostructureLegal restructure might be broken by the line managersIncreased risk: expert advice might be ignored or not soughtImportant 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 technostructureProfessional specialists sometimes have divided loyalties b/w their organisation + their professionInstability. Technostructure introduces rules + procedures which tend to hamper operationsDifferent departments/levels might have conflicting expertiseIt may be difficult to measure the benefits to the organisation of various aspects of tecnhnostructural work as these benefits are indirect

4.5 The accountant’s roleIn 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 company’s effective boundary management with shareholders

4.6 InformationThe financial accountant classifies a/c information + is responsible for presenting this to external shareholdersThe published accounts are an important source of communication with outsidersReported levels of profit determine the return that investors can receive indirectly affect the company’s cost of capital by affecting the share price published financial information thus affects the cost of one of the organisation’s 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 example4.7 Control and stewardship Money and funds are a business’s 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