ACC 811 ACCOUNTING THEORIES (MSC)

INTRODUCTION:
An accounting system refers to the financial reporting mechanism
where every transaction is recorded to prepare financial statements to be
checked and validated by the Internal Auditor as part of managerial
control and the External Auditor who gives his opinion to the truth and
fairness of the financial records.
It can also be seen an enterprise based formal system which
expresses in fundamentally numerical terms past, present and future
financial actions of such an enterprises.
Conceptual Analysis
Accounting systems are assumed to be situated in the context of
enterprises. These enterprises need to be seen broadly as ‘collective
human endeavors which encompasses macro (e.g. societal), micro (e.g
business) and mini (e.g. household) interpretations.
Davis et-al Image Perspective of Accounting
Four principal images have shaped the development of financial
accounting. These are,
[1] those which treat accounting as a historical record
[2] those which are descriptor of current economic reality
[3] those which are seen as an information system and
[4]those which are considered as commodity.
Types of Financial Accounting System
1. Single Entry: The entries of exps and revenue recorded only once.
This preferred by small organization because of little inflow and
outflow of resources.

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2. Double Entry: Transactions affects two different account. This
means there is inflow in both income and asset and outflows
reflecting expenses and liabilities. This system of recording is seen
as more accurate as recognized by the tax authorities.
However, the modern record keeping has become so computerized
with the use of accounting software, that saves users time, efforts and
money.
IMPORTANCE
1. Assists organization to keep accounts, to record all incoming and
outgoing transactions.
2. Provide a ready reference to a business whenever they need to
check any transaction.
3. Ensure accurate decisions making.
4. It enables a comprehensive financial statements to be prepared
and presented.

COMPUTERIZED ACCOUNTING SYSTEM

A computerized system is an information system mechanism that
processes transactions and events based on Generally Accepted
Accounting Principles (GAAP). This in turn helps organizations generate
reports and assists different aspects of a company’s finances per their
requirements.
Functional systems capture different types of transactions according
to their main features, like sales, purchases payroll, treasury, investment
in long-term capacity.

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 Transaction processing implies interactions between the accounting
function and operating departments.
General Ledger = Central accounting database
Primary source of information for internal (management) and
External Reporting Purposes.

Register of amounts
owed to suppliers
Salaries and Social Charges

Goods received
from suppliers
Other business expenses
Reports to
management and
Bank account cash General Ledger outsiders
in and out
Finance from shareholders and banks

Register of debts
owed by clients
Purchase of long-term assets

Sales of good to
clients

Recording Transactions
Information flows into the general ledger through several layers of
processing individual (daily) transactions are summarized by period and
by type. Through summarization aggregates are built up for the year’s
activities.
Journals
 Captures details of individual transactions.

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 Used to build periodic summaries and feed aggregated data into the
general ledger.
 May be organized according to functional transaction processing
systems.
General Leger
 Collection of summarized, aggregated transaction data
 Source for the preparation of periodic income statements and
balance sheets.
Audit Trail
 Traces the content of aggregates back to transaction details.
Chart of Accounts
 Used to categorize and record transactions within the accounting
database according to the double entry accounting logic.
 State-mandated or voluntary.
XBRL (Extensible Business Reporting Language)
 Automated, flexible reporting tools.
 Using specific tags of individual data items, defined and linked
through flexible taxonomies.
 Organization of data within the General Ledger (G/L)
In the G/L, data are stored according to the double-entry system.
The G/L is organized into a series of accounts (cfr. Charts of accounts):
data files to record transactions of a particular type. Specifics of an
account:
 Two columns for figures: debits and credits
 Narrative commentary
 Cross-referencing details

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Control and Audit
 Internal Control
 Internal checks
 Internal audit
 External audit
 Corporate governance
 Defining internal control
 Components of a system internal control
 Control activities
o Preventive controls
o Detective controls
o Corrective controls
Defining Internal Control
Internal Control is a process, established, operated and monitored
by those charged with governance and management of a company, to
provide reasonable assurance regarding the achievement of objectives in
the following categories:
a) The effectiveness and efficiency of the company’s operations;
b) The reliability of its financial reporting;
c) Its compliance with applicable laws and regulations.
Sustaining the company’s business operations (efficiency and
effectiveness concerns);
Preparing reliable financial reporting (including financial
statements);
Compliance with applicable laws and regulations.
Components of a System of Internal Control

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 A system of internal control consists of five interrelated
components:
o Control environment
o Risk assessment
o Control activities
o Information and communication
o Monitoring
Each component is relevant for each internal control objective
Monitoring

Information &

Risk Assessment Control Activities

Communication

INTERNAL CONTROL (IC ) SYSTEM COMPONENTS

Control Environment
The control environment sets the tone of an organization,
influencing the control consciousness of its people. It is the foundation
for all other components of internal control, providing discipline and
structure. Control environment factors include the discipline and
structure. Control environment factors include the integrity, ethical
values and competence of the entity’s people; management’s philosophy

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and operating style; the way management assigns authority and
responsibility, and organizes and develops its people; and the attention
and direction provided by the board of directors.
Risk Assessment
Every entity faces a variety of risks from external and internal
sources that must be assessed. A precondition to risk assessment is
establishment of objectives, linked at different levels and internally
consistent. Risk assessment is the identification and analysis of relevant
risks to achievement of the objectives, forming a basis for determining
how the risks should be managed. Because economic, industry, regulatory
and operating conditions will continue to change, mechanisms are needed
to identify and deal with the special risks associated with change.
Control Activities
Control activities are the policies and procedures that help ensure
management directives are carried out. They help ensure that necessary
actions are taken to address risks to achievement of the entity's
objectives. Control activities occur throughout the organization, at all
levels and in all functions. They include a range of activities as diverse as
approvals, authorizations, verifications, reconciliations, reviews of
operating performance, security of assets and segregation of duties.
Information and Communication
Pertinent information must be identified, captured and
communicated in a form and timeframe that enables people to carry out
their responsibilities. Information systems produce reports, containing
operational, financial and compliance-related information, that make it
possible to run and control the business. They deal not only with

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internally generated data, but also information about external events,
activities and conditions necessary to informed business decision-making
and external reporting. Effective communication also must occur in a
broader sense, flowing down, across and up the organization. All
personnel must receive a clear message from top management that
control responsibilities must be taken seriously. They must understand
their own role in the internal control system, as well as how individual
activities relate to the work of others. They must have a means of
communicating significant information upstream. There also needs to be
effective communication with external parties, such as customers,
suppliers, regulators and shareholders.
Monitoring
Internal control systems need to be monitored--a process that
assesses the quality of the system's performance over time. This is
accomplished through ongoing monitoring activities, separate evaluations
or a combination of the two. Ongoing monitoring occurs in the course of
operations. It includes regular management and supervisory activities,
and other actions personnel take in performing their duties. The scope
and frequency of separate evaluations will depend primarily on an
assessment of risks and the effectiveness of ongoing monitoring
procedures. Internal control deficiencies should be reported upstream,
with serious matters reported to top management and the board.
Control activities usually involve a policy component and a
procedure component
Policy: establishes what should be done.
Procedure: actions necessary to implement a policy.

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CLASSIFICATION OF CONTROL ACTIVITIES
o Preventive Controls: P&P designed to prevent an error or fraud
from occurring.
o Detective Controls: P&P designed to detect an error or fraud as
soon as possible.
o Corrective Controls: P&P to correct problems in a timely manner.
Separation of Functions
Separation of functions (“Segregation of Duties”) as a preventive
control measures. It calls for the separation of the four basic functions of
transaction processing.
o Authorizing transactions.
o Executing transactions.
o Recording transactions.
o Safeguarding resources resulting from consummating transactions.
The objective is mainly to provide an environment where fraud
becomes difficult.

Traditional/Manual System of Accounting

Input Processing Output
Data Instructions Manual Processing Information

Process of Computerized Accounting

Input Processing Output
Data & Instructions Electronic Processing through computersProfit & Loss A/C
Receipts Balance Sheet
Debit Notes
Credit Notes
Invoice 9
Cheques
Features of Computerized accounting
1. Fast, Powerful, Simple and Integrated
2. Complete Visibility Enhanced User Experience
3. Accuracy
4. Speed
5. Scalability
6. Power
7. Improved Business Performance
8. Quick Decision Making
9. Complete Reliability
Difference between Manual accounting System and Computerized
Accounting
1. Recording of Data
2. Data entering
3. Classification and processing of data
4. Data Storage
5. Reporting
6. Accuracy
7. Lesser paper work
8. Codification of data
9. Data sharing
10. Adjusting entries
Advantages of Computerized Accounting

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1. Automation, faster provision of information
2. Cost effective
3. Security & Reliability
4. Speed: easy to process voluminous data, computerized systems has
a lot of memory, it can record and store the large data in its
memory, which is limited one in manual system.
5. Visuals
6. Accuracy: More accurate information because arithmetic and
certain other errors will be eliminated.
Disadvantages of Computerized Accounting
1. Garbage in garbage out
2. Needs heavy investment
3. Problem of security
4. Loss of data
5. Possibility of manipulations
Various Components of a Computerized Financial Accounting System
The major components of financial accounting software are as
under:
1. General ledger module
2. Accounts payables module
3. Accounts receivable module
4. Payroll module
5. Fixed assets accounting module
6. Inventory accounting module
Pacioli: The Father of Traditional Accounting

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 Pacioli was not really the inventor, but was “the first accountant to
combine his knowledge with the technology that enabled authors to print
books using a movable type and a printing press to instruct the world on
the subject in print”. Pacioli documented the double entry, chart of
account classification scheme used to record and store accounting data.
To keep the accounts in balance, Pacioli proposed a rigorous process for
recording, maintaining and reporting accounting data.
 The memorandum book should include notations.
 The journal was the source for the ledger,
 It was in the ledger that the businessman could lean before anyone
else whether he was a success or a failure.
Rules of Accounting
Chart of Accounts
 Classify and summarize financial measurements.
 Nominal accounts vs real accounts.
One compendium of sample charts of accounts and accounting
procedures for different industries is the encyclopedia of

Steps in the accounting cycle and their objectives

Step Description Objective
1 Prepare Unadjusted To provide a convenient listing to check for debit-credit
Trial Balance equality, and a starting point for adjusting entries
2 Journalize and Post To record accruals, expiration of deferrals, estimations,
Adjusting Entries and other events often not signaled by a new source
document
3 Prepare Adjusted To check for debit-credit equality and to simplify

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 Trial Balance preparation of the financial statements
4 Prepare Financial To communicate summarized financial information to
Statement external decision makers.
5 Journalize and Post To simplify certain subsequent journal entries and
Reversing Entries reduce accounting costs.

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