The Accounting System

All the financial information of a company trickles down and takes the form of its “accounts”

The accounts of a company are produced to aid the management in planning, controlling and decision making.
Therefore the accounting system should be able to produce relevant information which would enable managers
to perform the aforementioned tasks.

For this very purpose the accounting systems may vary from company to company in order to capture information
which is relevant to that particular business.

The accounting system of a company be vary because of:

However it is important to note that the accounts of the company are regulated by certain rules (company law,
requirements for following IAS by stock exchanges etc.) which mean that the accounts of a company will have
to be prepared in a proper standardized and formal manner.

Users of Financial Information

MANAGERS OF THE COMPANY

SHAREHOLDERS OF THE COMPANY

K n S Institute of business studies P a g e 1 | 10 prepared by: Ahmed Ali

SUPPLIERS

CUSTOMERS

GOVERNMENT

PROVIDERS OF FINANCE

EMPLOYEES

FINANCIAL ADVISERS AND ANALYSTS

PUBLIC

The Finance/Accounting Department

In most companies, the head of the finance dept. would be the finance director. He would have a seat on the
Board of Directors & would be responsible for routine accountancy related matters as well as the broad financial
policy of the company.

K n S Institute of business studies P a g e 2 | 10 prepared by: Ahmed Ali

  Routine accounting
Financial  Providing accounting reports for
other departments
Controller  Cashiers' duties and cash control

 Cost Accounting
Finance Management  Budgets and Budgetary control
(variances)
Director Accountant  Financial Management of projects

 Raising funds by borrowing

 Investing surplus finds in various
Treasurer investment opportunities
 Cash flow control

Some companies that spend large amounts on capital projects might have a section assigned exclusively to
capital project appraisal (payback appraisal, DCF appraisal, sensitivity analysis, the capital budget).

An accounts function is depicted in the following diagram. People are grouped together by the type of work
they do. In an area structure, accounts staff might be dispersed throughout the different regions of an
organisation. Management accounting work is often decentralised to departments because it provides vital
information for management control purposes

K n S Institute of business studies P a g e 3 | 10 prepared by: Ahmed Ali

Additionally some companies may have an internal audit department. The main scope of its work is to ensure that
the internal controls of the organisation are operational along with reducing the risk of fraud and error. The internal
audit department would normally be kept separate from the finance dept. and would report directly to the audit
committee.

Financial vs Management Accounting

Financial Accounting Management Accounting

The External Audit

The annual accounts of a limited company must generally be audited by a person independent of the company.
In practice, this often means that the members of the company appoint a firm of registered auditors to
investigate the financial statements and report as to whether or not they show a true and fair view of the
company's results for the year and its financial position at the end of the year.

When the auditors have completed their work they must prepare a report explaining the work that they have
done and the opinion they have formed. In simple cases they will be able to report that they have carried out
their work in accordance with the Auditing Standards and that, in their opinion, the accounts show a true and
fair view and are properly prepared in accordance with company legislation. This is described as an unqualified
(or 'clean') audit report.

Sometimes the auditors may disagree with management on a point in the accounts. If they are unable to
persuade the management to change the accounts, and if the item at issue is large or otherwise important, it is
the auditors' duty to prepare a qualified report, setting out the matter(s) on which they disagree with the
management.

Business Uses Of Computers

Spreadsheet Application
A spreadsheet is essentially an electronic piece of paper divided into rows and
columns with a built in pencil, eraser and calculator. It provides an easy way of
performing numerical calculations

Spreadsheets have many uses within the business arena.

From creating balance sheets, income statements, financial accounts etc. but
also help develop an informed and structured decision.

K n S Institute of business studies P a g e 4 | 10 prepared by: Ahmed Ali

Database System
A database has many uses and consists of “pooled” data available to not only the accounts department but
usually the whole organisations.

A database should have 4 main objectives:

 Shared information. Different users within different departments should be able to access the same information
 The integrity of the database must be preserved.
 The database should meet the requirements of all users
 The database should be capable of evolving

Manual v Automated Systems

Manual Systems
Advantages Disadvantages

Low Capital Costs Slower At Performing Calculations

No Computer Experience Required More Likely To Make Calculations Errors

Analysis And Audit Of Information Is More Time-
Easy To Correct Errors (Whitening Fluid)
Consuming

Automated Systems
Advantages Disadvantages

Quicker Capital Cost

Can Perform More Complex Calculations Training Cost, Especially For Older Staff

More Security (Passwords) Less Easy To Correct Errors

Fewer Errors
Systems Can Crash
easier to sort and analyse data

Information Systems Used Within an Organization

There are five main types of information processing system:

K n S Institute of business studies P a g e 5 | 10 prepared by: Ahmed Ali

Transaction processing systems (TPS)
A transaction processing system gathers source data relating to individual monetary transactions (purchases,
sales, costs) and summarises them so that they can be reported on a routine basis. These systems represent the
lowest level in an organisation's use of information systems. They are used for routine tasks in which data items or
transactions must be processed so that operations can continue.

The function of transaction processing is concerned with recording, processing and communicating data relating
to the activities involved in converting input resources into goods and services to meet customers' needs.

Examples of common TPS are the purchase ledger, sales ledger and payroll systems.

Management information systems (MIS)

A Management Information system converts data into information which enables managers to make timely and
effective decisions.

Decision support systems (DSS)

A DSS provides information to support decision making especially if it involves complications. E.g would be a
system used by the marketing staff in planning corporate entertainment events. It shows a real-time weather
forecast for the region in which the event is to beheld.

Executive information systems (EIS)

Executive Information Systems (EIS) provide managers with flexible access to information at the tactical and
strategic levels, for monitoring operating results and general business conditions. They monitor both the internal
and external environment of the company and highlights information that the executive should be made aware
of. In some ways they resemble, in outcomes, the DSS, but whereas the DSS provided tools that required significant
expertise to use, the EIS is designed to help managers find the information they need whenever they need it, and
in the most appropriate format. For both DSS and EIS, the TPS/database will be the source of raw information.

Expert systems (ES)

A form of DSS that allows users to benefit from expert knowledge and information. There are many examples of
expert systems in such areas of business as credit control, engineering and recruitment. Even something as simple
as the control panel of a photocopier can be considered an expert system, as it allows the operator to diagnose
the cause of a machine breakdown and to fix the machine.

K n S Institute of business studies P a g e 6 | 10 prepared by: Ahmed Ali

The Accounting Standards

• The IASB produces international accounting standards

• The SAC consults with users of accounting standards and the accounting profession and advises the IASB as
to which areas require new or amended standards and on the timetable for developing new standards.
• The IFRIC gives guidance on (often topical) issues that are not covered in an accounting standard or where
the guidance is conflicting. Because the matters covered are quite narrowly defined, an interpretation can be
issued relatively quickly.

Main Business Financial Systems

Payroll System
(a) Standing data on each employee will include:
(i) Personal details (eg name, employee number, job grade, address)
(ii) Rate of pay
(iii) Details of deductions (including tax code)
(iv) Holidays

(b) Variable (transaction) data will include:

(i) Gross pay to date
(ii) Tax to date
(iii) Pension contributions etc

Inputs to a payroll system

The main inputs into a wages system (ie into a weekly paid payroll) are as follows.

(a) Clock cards or timesheets (sometimes both are used). Details of overtime worked will normally be shown on
these documents. Sometimes payroll might be directly linked to an electronic time recording system.

(b) Amount of bonus, or appropriate details if the bonus is calculated by the computer.

K n S Institute of business studies P a g e 7 | 10 prepared by: Ahmed Ali

Payable Ledger System

Receivable Ledger System

Cash System
In any business controls over cash receipts are fundamental if the company is to keep a healthy cash position.
Control over cash receipts will concentrate on three main areas.

 Receipts must be banked promptly.

 The record of receipts must be complete.
 The loss of receipts through theft or accident must be prevented.
 Every payment must be approved by an authorised person.
 A bank reconciliation should be done at least once a month.

K n S Institute of business studies P a g e 8 | 10 prepared by: Ahmed Ali

Questions
1. Which of the following describes a GAAP?

A A collection of accounting rules assembled from different sources

B An internationally agreed accounting standard

C A legally binding protocol governing the preparation of financial statements

D An advisory document issued by a body responsible for accounting standards

2. VTP Company has introduced a new budgetary control system. Managers have been asked to prepare budgets for their
areas of responsibility and have agreed these formally with senior executives. What is the next stage of the process?

A Reviewing outcomes in order to plan for the next period

B Measurement of actual business outcomes

C Analysis of variances between actual and budgeted performance

D Agreement on action to be taken on significant variances

3. Which of the following statements about users of accounting information is incorrect?

A. Management is an internal user.
B. Taxing authorities are external users.
C. Present creditors are external users.
D. Regulatory authorities are internal users.

4. In a typical finance function, preparation of budgets and budgetary control would usually be the responsibility of which
of the following roles?
A The Financial Controller B The Management Accountant
C The Treasurer D The Finance Director

5. Which of the following does company law require a statement of financial position to give?
A A true and fair view of the profit or loss of the company for the financial year
B An unqualified (or ‘clean’) report on the statement of affairs of the company as at the end of the financial year
C A true and fair view of the statement of affairs of the company as at the end of the financial year
D A qualified report, setting out matters on which independent auditors disagree with management

6. In which order do the main components of the sales cycle usually take place withrespect to credit transactions, after the
order has been received?

A. Goods dispatched, invoice sent, customer pays B. Invoice sent, goods dispatched, customer pays

C. Goods dispatched, customer pays, invoice sent D. Customer pays, invoice sent, goods dispatched

7. The accounting statements drawn up by a management accountant for monthly management meetings do not need to
comply with company law or accounting standards.

Is the above sentence true or false?

A. False B. True

K n S Institute of business studies P a g e 9 | 10 prepared by: Ahmed Ali

8. Which TWO of the following sources of financial information about a company are external reports?

A. Budgets B. Statement of cash flows

C. Variance reports D. Statement of profit or loss

9. The usual requirement for limited liability companies to keep proper records and books of account is dictated by which of
the following?

A. Auditing standards B.Generally accepted accounting practice

C. National legislation D. International accounting standards

10. Which TWO of the following are examples of standing data found on an employee's payroll file?

Leave entitlement

Rate of pay

Net salary

11. The payables ledger section of the finance team relies on the purchasing department to do which TWO of the following?
To confirm the validity of invoices received from suppliers

To inform them of payments received

To advise them of all purchase orders

12. Emma is preparing a budget which involves many calculations. Emma wishes to try out different data in different ways to
answer 'what if' questions about an uncertain future. Which type of computer software will be most suited for this purpose?
Spreadsheets

Database

13. Which of the following is an example of standing data recorded in a payroll system?

Total salary received in the year to date

Pension contributions deducted from salary

Total deductions from gross income each month

Tax reference number issued by the tax authority

K n S Institute of business studies P a g e 10 | 10 prepared by: Ahmed Ali