The accouting process

THE ACCOUNTING PROCESS
After studying this chapter you should be able to:
explain the nature and importance of accounting information
describe the uses of accounting information
discuss the concepts underlying the accounting process
explain the steps in the accounting process
design and explain the importance of the Chart of Accounts
understand the objectives of internal control
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WHAT IS ACCOUNTING?
Accounting was defined by Paul F. Grady as:
… the body of knowledge and functions concerned with systematic originating, authenticating, recording, classifying, processing, summarizing, analyzing, interpreting, and supplying of dependable and significant information covering transactions and events which are, in part at least, of a financial character, required for the management and operation of an entity and for the reports that have to be submitted thereon to meet fiduciary and other responsibilities.
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WHAT IS ACCOUNTING?
The four facets of the accounting process:
Design of the accounting information system
Operation of the accounting information system
Reporting the economic activities of the entity and accountability of management
Verification of the accounting system, data, and information reports
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WHY IS FINANCIAL INFORMATION IMPORTANT?
Financial information:
Measures the economic health of a business
Provides information to enable management and stakeholders to make decisions
No business can succeed without this information
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WHO USES THE INFORMATION?
Internal users:
Those working within the business who create the information
External users:
Those outside the business who are affected by its business operations
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INTRODUCTION TO THE ACCOUNTING PROCESS
The entity concept
The affairs of a business entity are kept separate from those of its owner(s).
The business entity requires finance to create wealth for the owners. Financing is a combination of:
funds from the owners,
funds borrowed from financiers and creditors, and
profits retained in the business.
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INTRODUCTION TO THE ACCOUNTING PROCESS
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INTRODUCTION TO THE ACCOUNTING PROCESS
The accounting equation
Assets = Liabilities + Equity
Benefits = Obligations
or
Assets – Liabilities = Equity
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PRINCIPLE OF DOUBLE ENTRY
For each transaction there must be balancing debit and credit entries made to accounts in the ledger.
Ledger – a book containing accounts to which debits and credits are posted from journals (the books of original entry).
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THE BASIS FOR RECORDING FINANCIAL TRANSACTIONS
Monetary convention – the expressing of financial transactions in a common currency.
Historical cost concept – the practice of recording transactions at their original cost or value.
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CONTROLLABLE AND NON-CONTROLLABLE EVENTS
Controllable events
Transactions undertaken by the business that have an impact on the accounting elements.
Non-controllable events
They affect a business, but they are not recorded as actual business transactions.
The accounting process deals only with controllable events.
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THE ROLE OF SOURCE DOCUMENTS
A source document identifies the transaction and gives it a monetary value.
Source documents include:
purchase and sales invoices,
cheque butts,
receipts,
cash sales dockets,
credit and debit notes, and
internal adjustment notes.
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CONTROL DOCUMENTS
Control documents establish authorisation to initiate business events and source documents.
They provide an audit trail – a sequence of paperwork that proves the validity of transactions.
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STEPS IN THE ACCOUNTING PROCESS
There are four essential steps in the accounting process.
Collection
Processing
Storing
Reporting
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THE CHART OF ACCOUNTS
Chart of Accounts:
is a numerical list of all the ledger accounts a business uses to record transactions
classifies transactions into broad financial reporting categories:
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THE CHART OF ACCOUNTS
Links the four principle accounting statements:
Balance sheet,
Income statement,
Statement of changes in equity, and
Cash flow statement.
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THE CHART OF ACCOUNTS
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INTERNAL CONTROL
Internal control - policies and procedures that inform management as to whether operational objectives are being met.
Focuses on three broad elements:
Compliance
Operations
Reporting
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INTERNAL CONTROL
For internal control strategies to work as intended, five principles:
Attitude,
Assessment,
Activity,
Advice, and
Audit
must be followed.
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INTERNAL CONTROL
Practical internal control measures include:
Establishment of responsibility
Segregation of duties
Documentation procedures
Physical, mechanical and electronic controls
Independent internal verification (internal audit)
Rotation of duties
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