Chapter-1

Business
Organization
and Accounting

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 Office Organization and Functions

The office in an organization is a center for information and

administration.

The most common functions in an office are

purchasing, personnel (human resources), general
administration, finance and sales and marketing.

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 Office Functions
There are several areas or functions to be administered and managed within a
business. For example, the 'head office' of say a manufacturing, retailing or
service business may cover the following areas:

B D

Personnel/
A C E
human Finance
resources

General Selling and

Purchasing
administration marketing

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 Whether a business manufactures products or
sells 'bought in' products, there will be a large
purchasing function, either purchasing raw
materials for manufacture or purchasing
finished goods for resale. The function of the
purchasing department will be to ensure that
the business purchases from suppliers
providing the best overall deal in terms of
price, service, delivery time and quality. The
purchasing department will also be
Purchasing responsible for ensuring that only necessary
purchases are made by the business.

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 Any business that employs a significant
number of people is likely to have a personnel
function or human resources function as it is
often called in larger organizations. This area
of the office will be responsible for the hiring
and firing of staff, for training of staff and for
the general welfare of the employees.

Personnel/Human
resources

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 General administration functions are very
wide-ranging but might include secretarial
support, dealing with telephone queries and
arranging matters such as rent of properties.

General
Administration

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 The finance function is also very wide-ranging.
On a day-to-day level the accounts department
will deal with sending invoices to customers,
receiving invoices from suppliers, payment of
suppliers, receiving money from customers
and making other payments such as purchases
of non-current assets and payment of
employees. The higher levels of management
in the accounting function may also be
responsible for management of the cash
Finance Function balances and for the overall financing of the
organization.

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 The selling and marketing function will deal
with all aspects of taking sales orders,
advertising, and any sales personnel.

Selling and
Marketing Function

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 • Functional organization involves setting up
departments for people who do similar
jobs. Primary functions in a manufacturing
company might be production, sales,
finance, and general administration.
• Sub-departments of marketing might be
Functional selling, distribution and warehousing.

Departmentation

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 Where the organization is structured according
to geographic area, some authority is retained
at Head Office, but day-to-day operations are
handled on a territorial basis (e.g., Southern
region, Western region). Many sales
departments are organized territorially.
Geographical
Departmentation

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 • In many organizations administrative
functions are carried out at head office as
much as is possible.
• When this is the case, the administration
function is said to be centralized.
• In many organizations administrative
functions are carried out at head office as
much as is possible.
Centralization/ • When this is the case, the administration
function is said to be centralized.
Decentralization

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 • A centralized administration department
involves as many administrative tasks as
possible being carried out at a single central
location, such as head office.
• When administrative tasks are carried out
at various separate locations, the
administration function is said to be de-
centralized. This may be appropriate when
Centralization/ there is a large geographical spread
between local offices or where substantially
Decentralization different activities are performed in
separate locations.

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 Question
Which of the following is not a function of the purchasing department?

Ensuring that only required goods

A
are purchased

Ensuring that suppliers used give the

B
best price

C Paying suppliers' invoices

D Negotiating discounts with suppliers

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 Answer

C Paying suppliers' invoices

Normally the accounts department will pay suppliers' invoices

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 • The basic principle of double entry bookkeeping
is that for every debit entry there must be a
corresponding credit entry.
• Debit entries in ledger accounts are increases in
assets or expenses and decreases in liabilities
and income.
• Credit entries in ledger accounts are increases
Double Entry in liabilities and income and decreases in assets
and expenses.
Bookkeeping – Basic
Principles

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 • You should remember that one of the basic
principles of double entry is that for every debit
entry there is an equal and opposite credit
entry.
• Remember also that the owner of the business
is treated as a separate entity to the business
itself and the amount that the owner puts into

Double Entry the business is a special payable of the business

known as capital.
Bookkeeping – Basic
Principles

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 Double Entries
Sales of goods

• DEBIT Bank/receivables

• CREDIT Sales
For cost accounting purposes we
Receipts from receivables will be concerned largely with
the sales of goods, purchases of
• DEBIT Bank

• CREDIT Receivables

Purchases of materials materials, the payment of wages

• DEBIT Materials control and the treatment of expenses.
So here is a brief reminder of the
• CREDIT Bank/payables basic
Payment of payables

• DEBIT Payables

• CREDIT Bank double-entry that you are likely

to come across.
Payment of wages

• DEBIT Wages expense

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 Double Entries
Payments of expenses or overheads

• DEBIT Expenses/overheads

• CREDIT Bank/payables For cost accounting purposes we

will be concerned largely with
If in doubt with double entry remember the
the sales of goods, purchases of
following rules:

• Debit entry: increase in an asset

• decrease in a liability materials, the payment of wages

• increase in an expense
and the treatment of expenses.
So here is a brief reminder of the
• decrease in income basic
• Credit entry: increase in a liability

• decrease in an asset

• increase in income double-entry that you are likely

to come across.
• decrease in an expense

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 Question
Which of the following is the correct double entry for a sale on credit?

DEBIT Payables
A
CREDIT Sales

DEBIT Sales
B
CREDIT Payables

DEBIT Receivables
C
CREDIT Sales

DEBIT Sales
D
CREDIT Receivables

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 Answer

DEBIT Receivables
C
CREDIT Sales

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 Transactions are initially
recorded in books of prime
entry, which are totaled, and
the totals posted to the
ledger accounts.

Cost Ledger Accounting

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 Cost Ledger Accounting

The word ‘ledger’ means a book. In accounting systems there are usually three
ledgers.

In practice a business will not enter every individual transaction into the ledger
accounts. Instead, each type of transaction will be recorded initially in its own
primary entry record or book of prime entry. The daily totals from these books are
then posted into the ledger accounts.

You should remember that one of the books of prime entry is the journal. The
journal keeps a record of unusual movement between accounts. It is used to
record any double entries made which do not arise from the other books of prime
entry.

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 Cost Ledger Accounting

The general or nominal ledger, which records all the ‘T’ accounts, such as wages, sales, purchases,
electricity, travel, advertising, rent, insurance, repairs, receivables, payables and noncurrent assets.
The cash and bank accounts are technically part of this ledger but are usually physically kept in a
separate book because cash and bank transactions are so numerous.

The payables ledger (also known as the creditors’ ledger and sometime the purchase ledger).
Although the total amount owed to suppliers is recorded in the general ledger, details of exactly
what is owed to whom are also recorded here. There is a separate account for each supplier. The
sum of the amounts owing in this ledger should agree with the payables balance in the general
ledger.
The receivables ledger (also known as the debtors’ ledger and sometimes the sales ledger).
Although the total amount owed by customers is recorded in the general ledger, details of exactly
what is owed from whom are also recorded here. There is a separate account for each credit
customer. The sum of the amounts owing in this ledger should agree with the receivables balance in
the general ledger.

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 Question
Which of the following is not a book of prime entry?

A Petty cash book

B Journal

C Non-current asset register

D Purchase returns daybook

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 Answer

C Non-current asset register

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 Question
What is the name given to the ledger which contains accounts such as rent,
electricity, travel, non-current assets etc.?

A General or nominal ledger

B Payables ledger

C Receivables ledger

D Purchases daybook

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 Answer

A General or nominal ledger

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Integrated System and In manufacturing businesses two types of
Interlocking System information are needed:
• Financial accounting information. For
example, the amounts paid for purchases
and wages. These are the amounts that
appear in the financial statements published
by businesses every year.
• Cost accounting information. For example,
how much materials and wages go into each
item produced. This information is used
internally by the company.

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 The same transactions may therefore have to be dealt with
Integrated System and in two different ways: once for the accounting information

Interlocking System and then again for the cost accounting information. There
are two approaches to these requirements:
• An integrated accounting system: Here, information is
recorded once for the two separate purposes. This can
save time and effort at the recording stage but might
increase effort at the presentation stage.
• An interlocking accounting system: Here, separate
ledger systems are maintained for the financial
information and the costing information. This increases
the recording effort but can be more efficient later when
presenting information.

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Integrated System and • An integrated system combines the cost
accounting and financial accounting functions
Interlocking System into one system of ledger accounts. This gives a
saving in terms of time and cost.

• An interlocking system is one where separate

ledgers are kept for the cost accounting function
(the cost ledger) and the financial accounting
function (the financial ledger).

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 Question
Which of the following statements is correct?

An interlocking system is a single system for cost and

A
financial accounting

In an integrated system there will be a financial ledger

B control account

In an interlocking system there will be a cost ledger

C
control account

In an integrated system there are separate ledgers for

D
cost and financial accounting

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 Answer

In an interlocking system there will be a cost ledger

C
control account

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 Most accounting information is numerical and, of course,
computers excel at dealing with that type of data.
The Functions and Computerized accounting systems should offer the
following advantages over manual systems:
Benefits of a
Computerized faster provision of information

Accounting provision of information that would not be easily available

System without a computerized accounting system

once the system is set up, cheaper information

more accurate information because arithmetic and certain

other errors will be eliminated.

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There are several important pieces of
Terminology that you should know:

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 A group of similar records. So, a receivables
ledger file contains records for each customer.

File

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 Each record refers to a single entity.
So, a customer record will hold all the information
about a customer; a product record will hold all the
information about a
product. Records are collected into files.

Record

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 (Also known as an attribute.) Each field holds a
separate piece of data relating to a record. Thus, a
customer record would have fields
for: name, address, telephone number, credit limit,
invoices outstanding, etc.

Field

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 The field that uniquely identifies a record.
For example, a part code or an employee number.

Key Field

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 Characters make up fields and are typically a – z, 0
– 9.
Sometimes a character will be the whole field. For
example, M or F for male or
female.

Character

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The Type of Data held can be divided into:

Standing or
Transaction Data
Reference Data

This records information

Data that is relatively
about each transaction and
permanent such as names
this data changes often as
and addresses, descriptions
transaction progress and are
and prices of products.
completed.

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 Types of Processing Data

In general, there are two types of processing that can be carried out: batch
processing and real-time on-line processing.
• Batch processing.
• Real-time, on-line processing.

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 Transactions are accumulated into batches and
then all processed together. Because transactions
must be accumulated it means that there is a delay
in processing them, so the information held in the
accounting system is generally out-of-date. For
example, if sales transactions were accumulated
during the week and processed to the receivables
file on the last day of the week, for most of the
time the balances shown owing from each
customer would be understated. The balances
Batch Processing would be correct only just after processing. Batch
processing is not so common now.

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 ‘real-time’ means that files are updated as
transaction happen; ‘online’ means that the files
are permanently accessible to be updated. For
example, when you withdraw cash from a cash
machine, the machine can access your bank
account record (it is on-line) to see if you have the
funds. When you take the money out your bank
account is immediately updated (real-time).
Real-Time, On-line
Processing

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 Question

Because computers are machines, the information they produce will always be correct.

Is the above statement true or false?

A True

B False

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 Answer

B False

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 Question
Which of the following is true?

Reference data is static; batch processing means files

A
are always up-to-date.

Transaction data is static; batch processing means files

B are usually not up-to-date.

Reference data is static; on-line, real-time processing

C
means files are always up-to-date.

Transaction data is dynamic; real-time processing

D
means files are usually out of date.

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 Answer

Reference data is static; on-line, real-time processing

C
means files are always up-to-date.

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