HARAMBEE UNIVERSITY

SCHOOL OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING & FINANCE

Assignment for Fundamental of

Accounting ii

Name Id No
Kalkidan Tsegaye -------------------2006

submission date:
 submitted to:

Unit 5: Accounting Systems

5.1 Introduction
This unit introduces the essential components and principles of accounting systems. An
accounting system is a structured process for recording, processing, and reporting financial
transactions. The efficiency and speed of processing these transactions depend significantly
on the type of accounting system employed by a business.

5.2 Components of an Accounting System

An accounting system comprises several key elements essential for the accurate and
efficient handling of financial data. The five basic components are:

5.2.1 Source Documents

 Definition: Documents that provide the basic information to be processed within the
accounting system.
 Examples: Invoices, bills, payroll records, purchase orders, receipts, bank
statements.
 Importance: These documents are the starting point for recording financial
transactions, serving as proof of transactions and ensuring accuracy and
authenticity.

5.2.2 Input Devices

 Definition: Tools that capture information from source documents and transfer it to
the processing component of the system.
 Examples: Journal entries (both paper-based and electronic), scanners, keyboards,
mobile devices, barcode readers.
 Function: Facilitate the entry of transaction data into the system, ensuring that
information is accurately captured for further processing.

5.2.3 Information Processors

 Definition: Systems that interpret, transform, and summarize information for
analysis and reporting.
 Types: Manual (paper-based ledgers) and computerized systems.
 Examples: Accounting software like Peachtree, QuickBooks, Sage, Oracle
Financials.
 Function: Ensure data accuracy, facilitate decision-making processes, and provide
timely financial information for internal and external users.
5.2.4 Information Storage
 Definition: Components that keep data accessible for future use, ensuring that
historical financial information is readily available.
 Examples: Databases, cloud storage solutions, ledgers (manual or electronic), data
warehouses.
 Function: Store processed data securely for analysis, reporting, and compliance
purposes. Ensure data integrity and provide a reliable audit trail.

5.2.5 Output Devices

 Definition: Tools that extract information from the system and make it available to
users in a usable format.
 Examples: Printers, monitors, digital dashboards, projectors.
 Function: Provide outputs such as financial statements, customer bills, internal
reports, and management information, facilitating decision-making and operational
efficiency.

5.3 Fundamental Principles of Accounting Systems

To ensure effectiveness, accounting systems must adhere to several fundamental
principles:

5.3.1 Control Principle

 Objective: Ensure that the system allows managers to control and monitor business
activities effectively.
 Internal Controls: Methods and procedures designed to direct operations towards
achieving business goals, ensure reliable financial reporting, and safeguard assets
against fraud and error.
 Details: Internal controls encompass checks and balances, segregation of duties,
and authorization protocols to maintain integrity and accuracy in financial processes.

5.3.2 Relevance Principle

 Objective: Provide information that is relevant to decision-makers, enabling them to
make informed decisions.
 Key Aspect: Systems should capture and report data that impacts decisions,
focusing on information that is timely and pertinent to the business context.
 Consideration: Identifying relevant information for disclosure based on the needs of
decision-makers ensures that the system remains focused on delivering actionable
insights.

5.3.3 Compatibility Principle

 Objective: Ensure the system conforms to the company’s activities, personnel, and
structure.
 Customization: Systems must be adaptable to the unique characteristics of the
company, including its size, industry, and specific operational needs.
 Consistency: The accounting system must work harmoniously with the company’s
goals, ensuring that financial processes support overall business objectives.
5.3.4 Flexibility Principle
 Objective: Allow the system to adapt to changes in the company and its
environment.
 Types of Changes: Technological advancements, shifts in consumer tastes,
regulatory changes, and evolving business activities.
 Design: Systems should be designed to accommodate these changes, ensuring that
the accounting processes remain robust and responsive.

5.3.5 Cost-Benefit Principle

 Objective: Ensure that the benefits of an activity outweigh its costs, focusing on
maximizing value.
 Decision-Making: Compare the usefulness of information to the costs of obtaining
and processing it, ensuring that the system delivers value without unnecessary
expenditure.
 Example: Reporting certain information must justify the costs involved in its
computation and dissemination, balancing the need for detail with resource
constraints.

5.4 Special Journals and Subsidiary Ledgers

Special journals and subsidiary ledgers play crucial roles in organizing and managing
detailed financial data:

5.4.1 Subsidiary Ledgers

 Definition: Detailed ledgers showing the balances for individual customers and
suppliers, supporting detailed transaction tracking.
 Control Accounts: Accounts in the general ledger summarizing total balances from
subsidiary ledgers, ensuring comprehensive oversight.
 Function: Relieve the general ledger of detail, promote division of labor, and
facilitate detailed analysis of customer and supplier transactions.
 Example: Accounts Receivable control account and individual customer accounts
(Customer A, B, etc.) provide detailed transaction histories and balances.

5.4.2 Special Journals

 Definition: Journals used to record similar types of transactions, streamlining the
recording process.
 Function: Enhance efficiency by grouping and processing similar transactions
together, reducing repetitive entries.
 Examples: Sales journals, cash receipts journals, purchase journals.

5.4.2.1 Advantages of Using Special Journals

 Time Efficiency: Reduces the amount of writing by using predefined account titles
and common transaction templates.
 Posting Efficiency: Allows posting of column totals instead of individual amounts,
simplifying the process.
  General Ledger Simplification: Keeps detail out of the general ledger, making it
easier to manage and review.
 Labor Division: Multiple people can work on different parts of the accounting
records simultaneously, improving workflow.
 Management Analysis: Facilitates analysis of transaction types, providing insights
into sales patterns, cash flows, and purchasing activities.

5.4.2.2 Sales Journal

 Usage: Records sales of merchandise on credit, tracking accounts receivable.
 Transactions: Each entry involves a debit to Accounts Receivable and a credit to
Sales, reflecting revenue earned.
 Posting: Regular posting to subsidiary customer accounts and periodical totaling for
general ledger entries ensure accuracy and completeness in sales tracking.

5.5 Computer Technology and Accounting Systems

The integration of computer technology significantly enhances the functionality and
efficiency of accounting systems:

Computer Hardware
 Components: Processing units, hard drives, monitors, printers, servers, networking
equipment.
 Function: Physical equipment used in accounting systems, enabling data
processing, storage, and retrieval.

Computer Software
 Components: Programs that direct hardware operations, manage data entry,
processing, and reporting.
 Examples: Peachtree, QuickBooks, Sage, Oracle Financials, ERP systems.
 Function: Facilitate data processing, reduce errors, automate routine tasks, and
provide analytical tools.

Benefits of Computerized Systems

 Efficiency: Streamline record-keeping, reduce time spent on manual tasks, and
enhance data accuracy.
 Network Capability: Allows multiple users to access a common database,
enhancing collaboration and real-time data sharing.
 Scalability: Easily scales to accommodate growing transaction volumes and
expanding business operations.
 Data Security: Enhanced security features protect sensitive financial information
from unauthorized access and data breaches.
 Reporting: Advanced reporting capabilities provide detailed insights and real-time
financial analysis, supporting strategic decision-making.
5.6 Summary
Accounting systems, though varying across businesses, universally adhere to principles of
control, relevance, compatibility, flexibility, and cost-benefit. These principles ensure
effective management and accurate financial reporting. Understanding and implementing
these components and principles are crucial for maintaining efficient, reliable, and
adaptable accounting processes within an organization.