Introduction

In this session, the following will be discussed:

Basic operation of an accounting system

How an AS is developed?

Internal & External controls

HI5001
ACCOUNTING FOR BUSINESS
DECISIONS

TOPIC 6
Accounting Systems

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Converting Data to Information

Operation of an Accounting System

3 basic phases
Input

Business
Transactions

Source documents entered into journals

Processing
Journals posted to general ledger
Output
Financial statements

Source
documents

Journals

Ledgers

Reports

Interested
Parties
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Important Considerations in Developing an Accounting

System

Development of an Accounting System

Must give consideration to:

Cost versus benefits

Systems analysis

Compatibility

Understanding information
requirements and sources
of information

Flexibility and adaptability

Internal control

Systems implementation
and review

Systems design

Implementing systems,
training staff, preparing
accounting manual,
test-runs, evaluation
and review

Determining personnel
requirements, source
documents, accounting
records and procedures,
reports and reports format
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Internal Control Systems

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Principles of Internal Control Systems

Efficient use and protection of an entitys asset is

a primary management function

1. Clearly established lines of responsibility

All procedures adopted by an entity to control its

activities and protect its assets are described
collectively as an internal control system

3. Division of responsibility for related transactions

2. Separation of record keeping and custodianship

4. Mechanical and electronic devices
5. Adequate insurance
6. Internal auditing
7. Programming controls
8. Physical controls
9. Other controls

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Limitations of Internal Control Systems

Manual Accounting Systems Subsidiary Ledgers

a) Absolute assurance not possible

Control accounts & subsidiary ledgers

Summary information

b) Effectiveness influenced by size of entitys

operations

Control account
Detailed information
Subsidiary ledger
Accounts receivable
Accounts payable
Inventory

c) Good controls can break down due to tiredness,

indifference or carelessness
d) Heavy reliance on segregation of duties
e) Difficulties in detecting computer fraud

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Subsidiary Ledger

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Manual Accounting Systems Special Journals

Subsidiary Ledger
P. Able
Date

Debit

General Ledger

Nov 8

Accounts Receivable Control

Debit

Balance
3,200

1,800

Nov 16

Date

Credit

Nov 1

Credit

General journal inefficient where there are many

transactions

5,000
3,200

1,800

Balance

Group like transactions and record in a special

purpose journal

Subsidiary Ledger

Nov 1

6,500

Nov 30

5,500

Nov 30

11,000
6,900

4,700

Schedule of Accounts Receivable

as at 30 November
P. Able

$1,800

R. Baker

2,400

D. Cane

500
$4,700

R. Baker
Date

Debit

Credit

Balance

Nov 1

Nov 20

credit sales

sales journal

credit purchases
purchases journal

cash receipts cash receipts journal

cash payments
cash payments journal

1,100

Nov 3

1,100

2,400

2,400

Subsidiary Ledger
D. Cane
Date

Debit

Credit

Balance

Nov 1
Nov 12
Nov 28

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2,200
900

3,100
500

2,600

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11

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Sales Journal

Sales Journal (cont.)

A. Records only credit sales of inventory

Sales Journal

B. Total posted to general ledger monthly

Date

Invoice
no.

Jan 2 401

Account

Post
Ref.

Sales

GST
Collections

Accounts
Receivable

R. Abbot

1,100

110

1,210

5 402

D. Ball

900

90

990

7 403

N. Camp

820

82

902

9 404

R. Abbot

1,410

141

1,551

Each transaction recorded on a single line

19 405

A. Evans

920

92

1,012

Entries do not require a narration

21 406

J. Ford

850

85

935

Posting efficiency achieved

26 407

A. Evans

1,550

155

1,705

29 408

N. Camp

750

75

825

$8,300

$830

$9,130

C. Detail (by debtor) posted to subsidiary ledger

daily
D. Advantages

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Purchases Journal

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Purchases Journal (cont.)

Purchases Journal

A. Records only credit purchases

B. Can be used for items other than inventory
C. Total posted to general ledger monthly
D. Detail (by debtor) posted to subsidiary ledger
daily
E. Advantages

as for sales journal

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Date
Record

Date of
Invoice

Account

Terms

Post
Ref.

Purchases

GST
Outlays

Accounts
Payable

Jan 3

Jan 2

Kirby Ltd

n/30

1,900

190

2,090

Jan 4

Risk Ltd

n/30

1,200

120

1,320

Jan 8

Dunn Supply

n/30

1,410

141

1,551

13

Jan 12

Dunn Supply

n/30

1,820

182

2,002

20

Jan 18

CSR Ltd

2/10, n/30

820

82

902

24

Jan 24

Cooper Ltd

2/10, n/30

900

90

990

27

Jan 26

Risk Ltd

2/10, n/30

2,810

281

3,091

30

Jan 29

CSR Ltd

900

90

990

$11,760

$1,176

$12,936

n/30

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Cash Receipts Journal

Cash Payments Journal

A. Records all receipts of cash

A. Records all payments of cash

B. Records each receipt and total banked

B. Records each payment and cheque number

C. Totals posted to general ledger monthly

C. Totals posted to general ledger monthly

D. Detail (debtors only) posted to subsidiary ledger

daily

D. Detail (creditors only) posted to subsidiary ledger

daily

E. Columns set up for common receipts

E. Columns set up for common payments

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Use of the General Journal

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Other Issues

Abnormal balances in subsidiary ledgers

Generally inefficient

Credit balances in accounts receivable

Used for

Debit balances in accounts payable

Infrequent transactions

Account set-offs

Adjusting entries

Buying and selling from same customer/supplier

Closing entries

Need legal right to set-off

Reversing entries
Correcting entries

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In-class Worked Example (for Art & Medical P/L)

From the following information, set-up special journals and record
(balance of art supplies was $2,500, no medical supplies). Use Sales Journals.
1/8 Purchased $440 of art supplies for cash
1/8 Purchased $5,500 of medical supplies from Nead Co (credit)
3/8 Returned defective medical supplies ($220)
4/8 Sold Medical supplies to P & H for $2,000 (cost $1,200)
5/8 Sold art supplies for $990 (cost $550) on credit to P Marks
6/8 Purchased art supplies from Tott Co for $770 (credit)
10/8 Returned defective art supplies from Tott ($110)
12/8 Credit of $330 issued to P & H for medical supplies over-ordered (cost $180)
15/8 Purchased medical supplies (1,000), paying cash
15/8 Paid Nead Co balance owing
16/8 Sold art supplies for cash ($275) cost $160
19/8 Received payment from P Marks
22/8 Sold medical supplies for cash ($880). Cost $500
25/8 P & H paid 75% of account owing
29/8 Refunded a cash customer $22 on stock sold on 16/8 damaged goods.
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Accounting Software

Electronic spreadsheets

Excel, Lotus 123

General ledger programs

ACCPAC, Xero, Attache, MYOB, QuickBooks, Sybiz

Data input obtained from source documents

Output produced by the program

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Accounting Functions

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Computerised Accounting
Advantages

Reduction in processing costs

Speed of processing

Error reduction

Automatic posting

Automatic production of documents and reports

Improved reporting and decision making

Faster response time

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Computerised Accounting (cont.)

MYOB

It is recommended that students do familiarise
themselves with accounting software.

Disadvantages

Failed systems

All computers (for student use) at Holmes have

MYOB available or you can download a free trial
copy on www.mymyob.com.au

Power failure

Viruses

Hackers

This allows a trial for a period but it will shut

down once expires (or you need to purchase).

Fraud

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Tutorial
Topic 6
Accounting systems
Reading:
Hoggett & Edwards Chapter Seven

Questions:
Hoggett & Edwards Chapter Seven
Discussion Questions: 1 & 3
Problems: 7.1, 7.3, 7.5, 7.8, 7.11 & 7.14
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