Week 4-ACCT1101

• Accounting system

  A structured process used to collect, record, store, and report financial information of an organization
• Operation of an accounting system

  1. Identifying transactions

  2. Recording in journals

  3. Posting to ledgers

  4. Preparing financial statements

  5. Analyzing financial data
• Three phases of development of an accounting system

  1. Analysis phase

  2. Design phase

  3. Implementation phase
• Analysis phase


  Involves understanding the organization's business processes, identifying information needs, and designing the accounting system to meet those needs
• Design phase


  Involves developing the structure of the accounting system, including chart of accounts, journals, ledgers, internal controls, and reporting requirements
• Implementation phase


  Involves implementing the designed accounting system, training staff, testing the system for accuracy and reliability, and ensuring smooth transition to the new system
• Principles of internal control system

  • Segregation of duties
  • Authorization and approval
  • Documentation
  • Physical controls
• Segregation of duties

  Assign different responsibilities to different individuals to prevent fraud and errors
• Authorization and approval

  Ensure that transactions are authorized by appropriate personnel
• Documentation

  Maintain proper documentation for all transactions and activities
• Physical controls

  Safeguard assets through measures like locks, security cameras, and restricted access
• Limitations of internal control system

  • Human error
  • Cost-benefit trade-off
  • Override by management
  • Collusion
• Human error

  Internal controls are subject to human error or manipulation
• Cost-benefit trade-off

  Implementing strong internal controls can be costly and may not always be feasible for small businesses
• Override by management

  Management may override internal controls, leading to potential risks
• Collusion

  Individuals within the organization may collude to circumvent internal controls
• Subsidiary ledgers


  Contain detailed information about individual accounts, such as accounts receivable or accounts payable
• Recording transactions in subsidiary ledgers and reconciliation

  Transactions recorded in subsidiary ledgers are periodically reconciled with corresponding control accounts in the general ledger to ensure accuracy and completeness of the accounting records
• Special journals

  Used to record specific types of transactions in a systematic and efficient manner, such as sales journals, purchase journals, cash receipts journals, and cash payments journals
• General journal


  Used for recording non-routine or adjusting entries that cannot be recorded in special journals
• Handling abnormal balances in subsidiary ledgers and account set-offs

  1. Abnormal balances in subsidiary ledgers may require investigation to identify errors or irregularities and take corrective actions

  2. Account set-offs involve offsetting a debtor's account against a creditor's account to settle mutual obligations between parties