PHILIPPINE CHRISTIAN UNIVERSITY

GRADUATE SCHOOL

Management Accounting

“Accounting Records
and Systems”

Submitted by:
Justine Wilma S. Dagdagan
Emy Rose Q. Esposo
Sigit Himawan

Submitted to:
Professor William Co

January 2020
In this Chapter, the accounting procedures that are being used in real life practice
will be discussed. These procedures will provide means to make it easier to record
and summarize transactions. Although most organizations now are using
computer-based software in recording their transactions, procedures in the manual
system will be included in the discussion for better visualization of the basic steps.

I. RECORDKEEPING FUNDAMENTALS

In recordkeeping, we have what we call “The Account” or “T Account”. It is

the simplest form of account used in calculating the net change of an item
that appears on a balance sheet. In practice, a general item would include
subsequent transactions that may affect the amount reflected on the
records. These transactions can either increase or decrease the reflected
amount. In these cases, instead of erasing the old amount of an item every
time there is a transaction, the net change from the increases and
decreases are periodically calculated. This mechanism saves effort. An
example of an item using a T-account is shown below.

Imagine a brand new entity entering the CASH item in their records. The
beginning balance would be “0”. Cash transactions that would increase the
value were added on the left side of the T figure while cash transactions that
would decrease the value were added on the right side. The sums of the
increase and decrease transactions were subtracted to get the Net Change
or the New Balance. In using the account device, the new balance is
obtained through two additions and one subtraction.
In recording, we also have what we call permanent accounts (real
accounts). These are accounts whose balances are carried over from one
accounting period to another. Permanent accounts are the accounts that
are seen on the company's balance sheet and represent the actual worth
of the company at a specific point in time. Though the balances in these
accounts change from daily transactions that are part of the normal
business operations, these account balances are never closed out nor
transferred to the owner's capital account. An example of these would
include asset accounts, liability accounts

On the other hand, we have temporary accounts (nominal accounts). These

are the accounts whose balances are not carried over from one accounting
period to another, but are closed, or transferred, to permanent accounts at
the end of an accounting period. The purpose of temporary accounts is to
show how revenues, expenses, or withdrawals have affected the owner's
equity accounts. The accounts that fall into the temporary account are
revenue, expense, and drawing accounts.

We also have the ledger which is a group of accounts. In a manual system,

it can be a book with several pages for each account. If computer-based, it
can be an excel workbook with separate sheets for each account.

Chart of Accounts is the list of accounts of a company that is arranged

according to the items reported in the balance sheet. Detailed accounts that
include several details. It anticipates all the information that the
management might want to review at some time. For example, beneath the
CASH account, different accounts can be recorded for each bank and kind
of bank account. A code will be assigned for each account to simplify the
task of recording. For illustration, refer to the example below.
In recordkeeping, the most basic thing to learn is debit and credit. Debit (dr.)
is an accounting entry that either increases an asset or expense account, or
decreases a liability or equity account. It is positioned to the left in an
accounting entry. While credit (cr.) is an accounting entry that either
increases a liability or equity account, or decreases an asset or expense
account. It is positioned to the right in an accounting entry. The essential
thing to remember is that for each transaction, the sum of all debit amounts
must equal the sum of all credit amounts. This is also called the double-
entry bookkeeping. It helps in checking the accuracy of the recorded
transactions.

Luca Pacioli introduced the “dual aspect” of arranging account and followed
the equation Assets = Liabilities + Owner’s Equity. He arbitrarily decided
that asset accounts should increase on the left side (debit) and decrease on
the right side (credit). Given those rules for the asset accounts, it became
logical to do the opposite for the liability and equity accounts.
II. THE ACCOUNTING PROCESS

The accounting process involves six steps that are done sequentially during
an accounting period and is called the accounting cycle.

1) The first and most important part of the accounting process is the analysis
of transactions. This includes the process of deciding which accounts should
be debited or credited and in what amounts.
2) Journalizing original entries means recording the results of the
transaction analysis in the journal.
3) Posting is the process of recording changes in the ledger accounts
exactly as specified by the journal entries.
4) After an accounting period, judgment is involved in deciding on adjusting
entries.
5) The closing entries are journalized and posted.
 6) Financial statements are prepared. Judgment is required as to the best
arrangement and terminology.

III. TRANSACTION ANALYSIS

Before it is recorded, a transaction must be analyzed and determine its dual effect on
the entry’s accounts. This analysis results in a decision on which account to be debited
and which is to be credited.

Transaction analysis is the act of examining a transaction to decide how it affects

the accounting equation. It's also the first step in the accounting cycle.

In order to properly analyze a transaction, you must know and understand a few key
things. Must preserve the 2 basic identities:

(1) Assets = Liabilities + Owner’s Equity

(2) Debits = Credits

Example: Campus Pizzeria Inc.

Meredith Snelson started Campus Pizzeria, Inc. on August 1. Snelson was the sole owner
of the corporation . The following transactions all took place in August. Revenue and
expense transactions represent summaries of sales and expenses for the entire month;
in practice such entries could be made everyday.

Balancing Accounts

The difference between the sum of the two sides of an account is called
the balance.

This is the most important part of an account as it shows value or position of

asset, liability, capital, income or expenses of which the account is a record.
 If the total of the debit side exceeds the total of credit side then this would be
represented by a debit balance and opposite is true for a credit balance.

Reasons for Balancing Accounts

There is no hard and fast rule, however, the need for balancing an account may
arise when:

(1) The existing page allocated for the account is full and balance is required to be
calculated and transferred to the next page.

(2) Business needs information for a particular item for which an account already
exists.

(3) Trial balance is being prepared for which accounts’ balances are needed for its
preparation.

The Trial Balance

Is simply a list of the account names and balances in each account as of a given
moment of time.
IV. THE ADJUSTING AND CLOSING PROCESS

Closing entries are made to close the temporary accounts (revenue and
expense accounts) at the end of the year while adjusting entries are made
before the end of the period or the year to include accruals and to handle
advances and unearned revenues.

TYPES OF ADJUSTING ENTRIES

1. Recorded cost to be apportioned among two or more accounting

periods.
2. Unrecorded expenses.
3. Recorded revenues to be apportioned among two or more
accounting periods.
4. Unrecorded revenues

Other Adjustments

1. Continuous Transactions. Entries made in connection with events

that are , in effect, continuous transaction.
2. Depreciation Expenses. The item that shows the portion of such
long lived asset cost that has become expense during an accounting
period.
3. Bad Expenses. An adjustment made in order to recognize the
likelihood that not all credit customer will pay their bills.

Closing Entries

Journal entry made at the end of an accounting period to transfer the

temporary account balances to the permanent accounts.

In other words, closing entries zero out or close temporary accounts and
move their balances to permanent accounts to be carried and transferred to
the credit side of the Income Summary.
 Statement Preparation

After the adjusting and closing entries have been made, the period’s financial
statement can be made. The numbers for the income statement can be thought of as
coming from either of two equivalent sources: (1) the balances in the temporary
accounts just prior to their closing or (2) the credit (revenue) and debit (expense)
entries to the Income Summary Account. Amounts for the balance sheet are the
balances in the permanent accounts. In most companies, the accounts reported in
the financial statements are summaries of more detailed accounts in the ledger.
The Journal

A Journal is a chronological record of accounting transactions showing the names of

accounts that are to be debited or credited, the amounts of the debits and credits, and
any useful supplementary information about the transaction.

V. ACCOUNTING SYSTEMS

A sub- system of the Management Information System. It may be describing

as an orderly arrangement of procedures, personnel, written records,
equipment and devices used for the systematic or organized collection,
processing and reporting of financial and other information essential to the
user and effective conduct and evaluation of the activities or transaction of
a business enterprise.

It encompasses the process and procedures by which a business

organization’s financial information is received, registered, recorded,
handled, processed, stored, reported and ultimately disposed of.
Objectives of an Accounting System

The Optimum system is that one that best satisfies the following objectives:
1. To process the information efficiently –at low cost
2. To obtain reports quickly
3. To ensure a high degree of accuracy
4. To minimize the possibility of theft or fraud

Designing a good accounting system is a specialized job requiring a high

degree of skill. An unbeatable system would be prohibitively expensive and
time- consuming.

Internal Accounting Control

A basic principle of internal accounting control is that System should make

it as difficult as is practical for people to be dishonest or careless. Whenever
 feasible, one person should not be responsible for recording all aspect of a
transaction, nor should the custodian of assets be permitted to do the
accounting for these assets.

VI. COMPUTER-BASED ACCOUNTING SYSTEMS

What a Computer-Based System (CBS) Does?

1. Most Organization do their Accounting work by Computer
2. Some step in the Accounting cycle involve judgment, whereas others are
primarily mechanical
3. Mechanical steps are usually referred to as ‘book keeping”
4. CBS performs some or all of the Book keeping Step

Computer-Based System (CBS) performs some or all of the bookkeeping

step :
- Records and stores data
- Arithmetic operations on data
- Sort and summarizes data
- Prepares data

What a Comp-Based System (CBS) Does?

Input: Data entered by a data-entry clerk such as Sales order, purchase

order. A familiar example: scanning device used at the supermarket or
department store checkout stand. The scanner reads a bar code printed on
the item.

Processing:
The comp will not accept an entry in which debits do not equal credit. If a
Human make an error in selecting account, or enter wrong number both
debit and credit. Will be error. Computer system also sort data in ways that
may be of interest and use to management
Output:
CBS can be generated at regular intervals in a prescribed format or
prepared in a form specified by individual user. In some system, the user
product customized reports locally by using a personal comp that can
retrieve data from a central CBS.

MODULE
CB Accounting system are usually operated by several interconnected
software programs, each of which is called, a Module. Some program is
designed for specific industry (law, accounting. etc.) . These software
program can handle quantitative nonmonetary data as well as monetary
data.

Problem with Computer System

1. A Small company with “off-the-shelf software”, system development and
installation in a larger take many months and cost millions of dollars.
2. Technological advances make existing system obsolete within a few
years, much time and money spent to update them.
3. Unlike a manual system, a CBS doesn’t leave a paper trail that can be
readily audited. The system must rely on internal controls
4. A CBS will not be fully effective until its developers learn to design
reports that the system’s users need and can understand.

SUMMARY
In Manual accounting system, special journal, subsidiary ledger, and other
devices facilitate the process of recording accounting data.

A computer-based system performs the same function more rapidly, and it

can provide a variety of useful management report if it has been designed
thoughtfully and its users have been properly trained.
VII. CASE ANALYSIS: PC DEPOT