8B. Roles of Accounting 2

7/28/2019 8B. Roles of Accounting 2

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Financial systems

A system is a collection of procedures andprocesses

Pieces of paper that you record things on, sothat you are not spending money on thingsthat you are not supposed to, and the whole

process is complete in each system

It can be manual as well as computerized

May organizations have a procedures manualwhich documents all existing systems


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Financial systems

Payroll

Sales

Purchase

Credit

Cash

Pay

roll


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How does payroll system works?

Main input is through some kind of

mechanism such as clock card or finger track

Wages / salaries

Calculation of bonuses, OT

Calculation of gross pay

Calculation of deductions to arrive at net pay

Paying to employees

Payroll Cycle

Wages are an expense = to ensure thatpayment is only made to employees who haveprovided their services to the organisation.

Accounting system covers:

Work carried out

Pay calculated

Payroll (daybook)

General ledger

Payment


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Payroll

Gross wages

Pay slips

Cash payments or cheques

Tax deductions

Insurance

Loan repayment

Data held on payroll

Standing data

Personal details such as names, address etc

Rate of pay

Details of deductions

Holidays

Variable data

Gross pay to date

Tax to date

Pension contributions


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Documentation of payroll

Payslips

Payroll

Payroll analysis, including analysis of

deductions (tax, national insurance etc) and

details for costing purposes

Various forms required for income tax

purposes Coin analysis (denominations), cheques etc

Controlling payroll

Segregation of duty is vital

Might lead to fraud cases


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Setting of wages and salaries

Staffing and segregation of duties Maintenance of personnel records and regular

checking of wages and salaries to details in personnelrecords

Authorization required for: Engagement and discharge of employees

Changes in pay rates

Overtime

Non-statutory deductions (for example pension

contributions) Advances of pay

Recording of changes in personnel and pay rates

Recording of hours worked by timesheets, clocking inand out arrangements

Review of hours worked

Recording of advances of pay

Holiday pay arrangements

Answering queries

Review of wages against budget


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Recording of wages and salaries

Bases for compilation of payroll

Preparation, checking and approval of payroll

Dealing with non-routine matters

Payment of cash wages Segregation of duties

Cash sheet preparation

Filling of pay packets

Distribution of wages

Authorization ofwage cheque

Custody of cash

Encashment of cheque

Security of pay packets

Security of transit arrangements

Security and prompt banking of unclaimed wages

Verification of identity

Recording of distribution


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Payment of salaries

Preparation and signing of cheques and bank

transfer lists

Comparison ofcheques and bank transfer list

with payroll

Maintenance and reconciliation of wages and

salaries bank account

Deductions from pay

Maintenance ofseparate employees' records,with which pay lists may be compared asnecessary

Reconciliation oftotal pay and deductionsbetween one pay day and the next

Comparison of actual pay totals with budgetestimates or standard costs and the investigationof variances

Agreement ofgross earnings and total taxdeducted with income tax returns to the InlandRevenue


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S

ales

Sales Cycle

To ensure that all goods and services dispatchedare correctly invoiced, processed, recorded and

the debt collected


Sales order

Goods dispatched

Sales invoice

Sales daybook

General ledger

Receivables collected


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Sales cycle

Controls


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Pu

rchase

11-22


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Purchase Cycle

To ensure that payments are only made forgoods and services received and required by theentity


Purchase requisition

Purchase order

Goods received note

Purchase invoice

Purchase daybook General ledger

Payment

Purchase cycle


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Controls

Cre

dit


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Cash To ensure that all your receipts are banked

properly and spend money on transactions

that are approved

This relates to payments to and from the bank

Receipts from customers

Payments to customers

Petty cash

Control over receipt

Receipts must be banked promptly.

The record of receipts must be complete.

The loss of receipts through theft or accident

must be prevented.


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Controls over payments

Obtaining documentary evidence of the reason

why the payment is being made and the amount

of the payment. In the case of payments to

suppliers, the documentary evidence will be a

supplier's invoice (or statement).

Authorization of the payment, which means giving

formal 'official' approval to make the payment.

Restricting the authority to actually make the

payment to certain specified individuals

Authorization

Every payment must be approved by an

authorized person

The limit and the person who can authorize

the expenses

Bank reconciliation Statements


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working capital

Current Assets Current liabilities

It is the money that we required for the day to

day running of the business.

Without adequate working capital, the

smooth running of the business will be

negatively affected since its functional areas

will suffer.

Decisions relating to working capitaland short term financing

These involve managing therelationship between a firm's short termassets and short term Liabilities

This is extremely important functionin the business as it is mainly abalancing process between the cost ofholding CA and the risks associated withvery small or zero amount of them.

Working Capital Management


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The goal of working capital management is

to ensure that the firm is able to continue

its operations and that it has sufficient cashflow to satisfy both maturing short-term

debt and upcoming operational expenses

Cash management

Inventory management

Debtors management

Short term financing

Management of stocks

Includes raw materials, work in progress andfinished goods.

The cost of holding stocks:

Financing cost

Storage cost

Insurance cost

Cost of losses as result of theft, damage etc

Obsolescence and deterioration cost

These cost could be 20 to 100% of the totalvalue of stock held


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The cost of holding low stock:

Cost of loss of customer good will

Ordering cost low stock levels usually associated

with higher ordering cost than bulk purchase

Cost of production hold-ups owing to insufficient

stock

The organization normally will set the balance

which achieves the minimum total cost, and

arrive at optimal stock level.

Management of debtors

Cost of allowing credit:

Financing cost

Cost of maintaining debtors accounting records

Cost of collecting the debts

Cost of bad debts written off Cost of obtaining credit reference

Inflation cost


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Cost of refusing credit

Loss of customer good will Security costs owing to increased cash collection

Loss of sales

Have to identify and balancing off the above

costs

Management of cash

Cost of holding cash

Loss of interest if cash were invested

Loss of purchasing power during times of high

inflation

Security and insurance cost


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Cost of not holding cash

Cost of inability to meet bills as they fall due Cost of lost opportunities for special offer

purchase

Cost of borrowing to obtain cash to meet

unexpected demands

Why controls in systems areimportant?

To safeguard company's assets

Efficiency

Prevent fraud

Prevent errors


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wagesPurpose Key areas

To safeguard company's

assets

Ensuring that cash wages

cannot be stolen

Efficiency Ensuring that people are

only paid for over time when

necessary (approved)

Prevent fraud Ensuring that there are no

ghost employees, people

being paid but who do not

work for the company

Ensuring employees do not

claim pay for hours they have

not worked

PurchasingPurpose Key areas

To safeguard company's assets Ensuring that only goods that

have being received are paid for.

Ensuring goods are in good

conditions

Efficiency Ensuring that the best price is

negotiated before buying

Prevent fraud Preventing purchasing staffs

accepting payments from suppliers

to persuade them to purchase from

that supplier

Prevent errors Ensuring that the correct amount

is charged by the suppliers

Ensuring that all the purchases

are recorded


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SalesPurpose Key areas

To safeguard company's assets Ensuring goods are only soldto customers who are likely to

pay

Efficiency Ensuring that the orders are

processed promptly so that

customers dont go elsewhere

Prevent fraud Ensuring that there is no theft

of cash from the business

Prevent errors Ensuring that the correct

quantity of goods is being

despatched and invoiced

CashPurpose Key areas

To safeguard company's assets Ensuring cash is kept safe

from theft

Efficiency Ensuring cash is banked

promptly, as to gain interest

Prevent fraud Ensuring employees do not

claim for expenses not incurred

Prevent errors Ensuring that entries in cash

book are correct


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Manual Vs. Computerized accounting

systems

Manual systems

In many situations manual systems areinferior to computerized systems in terms of

productivity,

speed,

accessibility,

quality of output,

incidence of errors,

'bulk'

when making corrections.


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Advantages Disadvantages

Low capital cost Slower at performingcalculations

No computer experience

required

More likely to make

calculation errors

Easy to correct errors Analysis of information is

more time consuming

Can review transactions for

logical sense whileentering/performing

calculations

Less easy to audit

Computerized Accounting

Different accounts have different codes which

is the primary key

Accounting software would have different

modules such as invoicing, inventory, payroll,

cash book, receivable ledger etc..


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Integrated software

Each module will be integrated with othermodules, so the data will be automatically passedfrom one module to another

If there is an input into the invoicing moduleauthorizing the dispatch of an invoice to acustomer, there might be automatic links: To the receivables ledger, to update the file by posting

the invoice to the customer's account

To the inventory module, to update the inventory file

To the general ledger, to update the file by posting thesale to the sales account

To the report generator, to update the sales analysisand sales totals

Advantages

It becomes possible to make just one entry in

one of the ledgers which automatically

updates the others.

Users can specify reports, and the software

will automatically extract the required datafrom all the relevant files.

Both of the above simplify the workload of the

user


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Disadvantages

it requires more computer memory than

separate (stand-alone) systems - which means

there is less space in which to store actual

data.

Because one program is expected to do

everything, the user may find that an

integrated package has fewer facilities than aset of specialized modules.

Advantages Disadvantages

Quicker Capital cost

Can perform more complex

calculations

Training cost, especially for

older staffs

Fewer errors Less easy to correct errors

More security (passwords) Systems can crash

Easy to sort and analyze

data


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Databases and spreadsheets

A database may be described as a 'pool' of

data, which can be used by any number of

applications. Its use is not restricted to the

accounts department.


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Objectives

There is common data for all users to share.

The extra effort of keeping duplicate files in

different departments is avoided

Conflicts between departments who use

inconsistent data are avoided.

4 main objectives

It should be shared

The integrity of the database must be

preserved

The database should provide for the

operational requirements of all its users.

The database should be capable ofevolving


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Spreadsheets

Most of you are very familiar with the use ofspreadsheets

A spreadsheet is essentially an electronicpiece of paper divided into rows and columnswith a built in pencil, eraser and calculator. Itprovides an easy way of performing numericalcalculations.

The intersection of each column and row of aspreadsheet is referred to as a cell

The use of spreadsheets

To create proforma statements of financial

position and income statements

To set up notes to the accounts

Managing payrolls

Budgets

8B. Roles of Accounting 2

Documents

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