BITS College

Undergraduate Program

Course Number : SP 311

Course Title: Business Accounting

1
 Chapter Four

Accounting Systems

2
Accounting For A Merchandising Business

▪ Learning Objectives
▪ Describe the principles of properly designed accounting systems
▪ Describe the three phases of accounting system installation and
revision
▪ Describe data processing methods that may be used in accounting
systems
▪ Describe the use of subsidiary ledgers and special journals
Principles of Accounting systems
 Because of difference in businesses, in the number of transactions to be
processed, and the uses made of accounting data, accounting
systems will vary from businesses to businesses.
 However, the following the basic principles to be adhered:

 Cost – effectiveness balance

 Adequate internal controls
 Flexibility to meet future needs
 Effective reporting
 Adaptation to organizational structure
Principles of Accounting systems
 Cost – effectiveness balance
 An accounting system must be tailored to meet the specific needs of each
business. Since costs must be incurred in meeting these needs, one of the
major considerations in developing an accounting system is cost-
effectiveness.
 In other words, this means, no matter how detailed or informational a report
may be , it should not be produced if it costs more than the benefits received
by those who use it.
 Adequate Internal Controls
 An accounting system must provide the information needed by management
in reporting to owners, creditors, and other interested parties.
 In addition, the system should aid management in directing operations. The
detailed policies and procedures used to direct operations and provide
reasonable assurance that the entity’s objectives are achieved are called
internal controls.
Principles of Accounting systems
 Flexibility to Meet Future Needs
 A characteristic of the modern business environment is change. Each
business must adapt to the constantly changing environment in which it
operates.

 Whether changes are the result of new government regulations, changes in

accounting principles, organizational changes necessary, to meet
practices of competing businesses, changes in data processing
technology, or other factors, the accounting system must be flexible
enough to meet the changing demands made of it.

 For example, stock market regulators do often require varieties of reports

which require accounting systems change
Principles of Accounting systems
 Effective Reporting
 Users of information provided by the accounting system rely on various reports
for relevant information presented in an understandable manner. When these
reports are prepared, the requirements and knowledge of the user should be
recognized.
 For example, management may need detailed reports for directing operations
on a weekly or even daily basis, and regulator agencies often require uniform
data and establish certain deadlines for the submission of certain reports.
 Adaptation to Organizational Structure
 Only by effectively using and adapting to the human resources of a business
can the accounting system meet information needs at the lowest cost. Since
no two businesses are structured alike, the accounting system must be tailored
to the organizational structure of each business. The lines of authority and
responsibility will affect the information requirements of each business. In
addition, an effective system needs the approval and support of all levels of
management
Accounting Systems Installation and
Revision
Accounting Systems Installation and Revision
 Before
designing and installing an accounting system for an enterprise,
designers must have a complete knowledge of the business operations.

 Asnew information about a business is obtained and as a business

“outgrows” its accounting system when it expands to new operational
areas, the system will need to be revised.

 The job of installing or changing an accounting system, either in its

entirety or only in part, is made up of three phases:
 Analysis
 Design
 implementation
Accounting Systems Installation and Revision
 System Analysis:
 Has a goal of determining:
 Information needs,
 The sources of such information, and
 The deficiencies in procedure and data processing methods

 Usually begins with a review of the organizational structure and the job
descriptions of the personnel affected.

 Followed by a study of the forms, records, procedures, processing methods,

and reports used by the enterprise. [Manuals are sources for this]

 In addition to looking at the shortcomings of the present system, the analyst

should determine management’s plans for changes in operations (volume,
products, territories, etc.)
Accounting Systems Installation and Revision
 System Design:
 Accounting systems are changed as a result of the kind of analysis previously
described.
 The design of the new system may involve only minor changes from the
existing system (e.g. revision of a particular form and the related procedures
and processing methods) or it may be a complete revision of the entire
system.
 Systems designers must have a general knowledge of the qualities of different
kinds of data processing equipment, and the ability to evaluate alternatives.

 Although successful systems design depends to a large extent upon the

creativity, imagination, and general capabilities of the designer, observance
of the broad principles discussed is necessary.
Accounting Systems Installation and Revision
 System Implementation:
 Is the final phase of the creation or revision of an accounting system
 In this phase:
 New or revised forms, records, procedures, and equipment must eb installed,
 Any that are no longer useful must be withdrawn
 All personnel responsible for operating they system must get trained and closely
supervised
Data Processing Methods
Data Processing Methods
 The entire amount of data needed by an enterprise is called DATA
BASE.
 Depending upon the variety and the amount of data included in the
data base, various processing methods – manuals and computerized -
may be used.
 Whether the accounting system for a particular enterprise uses one or
a combination of these methods, the basic principles of accounting
systems as discussed are applicable.
Internal Control Structure
Internal Control Structure
 An entity’s internal control structure consists of the policies and
procedures established to provide reasonable assurance that the
entity's goals and objectives will be achieved.

 Internal control structure can be divided into three elements:

 The control environment
 The control procedure
 The accounting system
Internal Control Structure
 The Control environment:
 Represents an overall attitude towards and awareness of the importance of
controls by both management and other employees.
 Factors influencing the control environment include:
 Management’s philosophy and operating style:
 Includes: Management’s attitude concerning controls (ignorant vs observant)
 Organizational structure:
 Helps in establishing the framework for planning and controlling operations
 Important to identify authority and responsibility
 Personnel Policies and practices:
 Includes the hiring, training, evaluation, promotion, and compensation
 Examining common personnel policies that impact on the control environment include
the establishment of codes of ethics for employee conduct and conflict of interest
policies
Internal Control Structure
 The Control Procedures:
 are those policies and procedures that management has established within
the control environment in order to provide reasonable assurance that
enterprise goals will be achieved.
 The general control procedures that can be integrated with an accounting
system include the following:
 Competent Personnel and Rotation of Duties:
 It is necessary that all accounting employees be adequately trained and supervised as
well as to rotate them from job to job. Rotation of employees will help employees to
broaden their understanding of the system and disclose any irregularities.

 Assignment of Responsibility:
 If employees are to work efficiently, their responsibilities must be clearly defined. Control
procedures should exist to guarantee that no overlapping or undefined areas of
responsibility exist.
Internal Control Structure
 The Control Procedures:
 Separation of Responsibility for Related Operations.
 To decrease the possibility of inefficiency, errors, and fraud, control procedures should
exist to guarantee that responsibility for a sequence of related operations is divided
among two or more persons.
 For example:-
 No one individual should be authorized to order merchandise, verify the receipt of the
merchandise, and pay the supplier.

 Separation of Operations and Accounting:

 Control procedures should exist to guarantee that no overlapping or undefined areas of
responsibility exist to ensure that responsibility for maintaining the accounting records are
separated from the responsibility for engaging in business transactions and for the custody
of the firm’s assets.
Internal Control Structure
 The Control Procedures:
 Proofs and Security Measures
 Proofs and Security measures should be used to safeguard business assets and assure
reliable accounting data
 Example:
 Use of a bank account and other safe keeping measures for cash and other valuable documents.
 Use of cash registers
 Use of fidelity insurance

 Independent Review
 To determine whether internal control procedures are being effectively applied, the
control structure should be periodically reviewed and evaluated by internal auditors.
 These internal auditors must be independent of the employees responsible for operations.
Internal Control Structure
 The Accounting System
 The accounting system is an integral part of the internal control structure of
an enterprise.
 Without the information generated by the accounting system, management
would lack the ability to plan and direct operations in achieving enterprise
goals.
Independent Reading Assignment
 Distinguishbetween general ledger and subsidiary ledger
 Define special journal and identify their types.
 What is the main reason for using special journal and subsidiary
ledgers?
End of Chapter Four