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RICHMOND ACADEMY
MA1
FOUNDATION IN ACCOUNTANCY
MANAGEMENT INFORMATION
Lecture Notes #1
Part 1: The Nature and Purpose of Cost and Management Accounting
Topic: Business Organization and Accounting
Objectives:
● Describe the organization, and main functions, of an office as a centre for information and administration
● Describe the function and use of a manual of policies, procedures and best practices
● Identify the main types of transactions undertaken by a business and the key personnel involved in initiating, processing and
completing transactions
● Explain the need for effective control over transactions
● Explain and illustrate the principles and practice of double-entry book-keeping
● Describe and illustrate the use of ledgers and prime entry records in both integrated and interlocking accounting systems
● Identify the key features, functions and benefits of a computerized accounting system
Office Organization and Functions
Office functions
There are a number of areas or functions to be administered and managed within a business. For
example, a manufacturing, retailing or service business’s “head office” may cover the following
areas:
Purchasing: sourcing best deals re price, service, delivery time and quantity & ensuring only
necessary purchases are made
Personnel/human resources: hiring & firing, training & general welfare of staff
General administration: secretarial support, telephone queries, renting properties
Finance: sending & receiving invoices, payment of suppliers & employees, receiving money
from customers, purchasing non-current assets, managing cash balances & overall
financing of the organizations
Selling and marketing: taking sales orders, advertising; sales personnel
Organization charts
Organization charts are a traditional way of depicting the various roles and relationships of the
formal structure. They are a simplified way of showing:
● The units (e.g. departments) into which the organization is divided and how they relate to
each other
● Formal communication and reporting channels
● The structure of authority, responsibility and delegation
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● Any problems in the areas above, such as excessively long lines of communication, lack
of coordination between units or unclear areas of authority
The most common form of organization chart is the vertical organization chart, which illustrates
the flow of authority downwards through the different levels of the organization, and the pyramid
shape of many organizations.
Organization charts may be set up by:
Functional departmentation: setting up departments for people who do similar jobs
Geographical departmentation: setting up departments according to geographic area, e.g., sales
Departments
Product/brand departmentation: grouping activities on the basis of products or product lines
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Centralisation / decentralization
Centralisation
It is popular to find the administrative functions of many organisations being carried out at “head
office”. This is called centralisation and the administration function is said to be centralised.
Advantages of centralisation
● Consistency - in computer codes, data and information used
● Security/control over operations makes it easier to enforce standards
● Head office is in a better position to know what’s happening in the organisation
● Economies of scale, purchasing equipment and supplies
● Administrative staff would be in one location, allowing for development of expertise and
clearly defined career paths.
● Standardisation of systems and procedures.
● Specialised staff can be used.
● Duplication of service is avoided
Disadvantages of centralisation
● Local offices might have to wait for tasks to be carried out.
● Reliance on head office causes local offices to be less self-sufficient.
● A system breakdown would impact the entire organisation.
● Procedures may not suit all offices.
● Lack of familiarity with each local situation.
Decentralisation
Where administrative tasks are carried out at various separate locations, the administration
function is said to be de-centralised. This may be appropriate when there is a large geographical
separation between local offices or where substantially different activities are performed in
separate locations.
Advantages of decentralisation
● Decisions are made by those with knowledge of the local situation.
● Decisions can be made quickly without requiring head office approval.
● Local managers may be more motivated by being involved in decision making.
● It aids managerial development.
Disadvantages of decentralisation
● There is duplication of activities.
● Decisions can be made that benefit the local office rather than the organisation as a
whole.
● Costs are increased.
● Systems and procedures may differ by location and information may not be consistently
gathered in different locations.
Policy manual
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The manufacturer of any fairly technical product (e.g., a mobile telephone) usually creates a
manual or a set of (written) guidelines that suggests the best way of using it. Likewise, in a
company a policy manual is a guide to ensuring that all personnel follow company procedures
and best practices. While such procedures and practices may govern the ethical behaviour of
personnel (code of conduct), we are concerned with the technical procedures, that is, the rules
that govern the various business functions or the way business transactions (such as purchasing
materials or non-current assets) are done.
In a small organisation these may be communicated orally by management but in larger
organizations (many personnel, various geographical locations) a policy manual helps to ensure
that correct procedures and practices are followed across the organisation (uniformity).
In practice, all personnel should have ready access to the policy manual and be familiar with the
procedures governing their functions. Strict adherence to the rules should not create inflexibility
and when in doubt, senior personnel should be consulted.
Main types of transactions of a business
The main types of transactions that most businesses enter into are :
Making sales;
Paying expenses;
Paying employees;
Making purchases (materials);
Purchasing non-current assets (e.g., equipment, furniture, motor vehicles)
Documents for buying and selling
✔ Purchase requisition (Internally generated)
✔ Letter of inquire (or phone)
✔ Quotation
✔ Letter accepting the quotation/sign a sales order
✔ Acknowledgement
✔ Delivery Note
✔ Good receive note
✔ Sales invoice
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✔ Credit note (perhaps)
✔ Cheque Requisition
✔ Cheque
✔ Receipt
Control over transactions
In order to control transactions in a business a system of authorisation of transactions must be in
place. This is necessary because of the number of different people within the organisation
involved in transactions and the need for order and control over the business’ resources – income
and expenditure of the business.
In a fairly large organisation management will not have time to be personally involved in every
transaction. Key areas over which management should have control are:
1) Sales on credit to new customers. Ensuring the potential new customer has a good
credit rating. E.g. credit bureaus, background checks.
2) Purchases of goods or non-current assets and payments for expenses. Ensuring that
expenses are valid and necessary. Authorisation at various expense levels.
3) Payment of employees. Ensuring only bona fide employees are paid and for actual work
undertaken / hours worked. E.g., clock cards and timesheets
Double entry-bookkeeping – basic principles
The basic principle of double-entry bookkeeping: for every debit entry there must be a
corresponding (equal and opposite) credit entry.
Debit entries in ledger accounts are increases in assets or expenses and decreases in
liabilities and income.
Credit entries in ledger accounts are increases in liabilities and income and decreases
in assets and expenses
Remember, the owner of the business is treated as a separate entity to the business itself
and the amount the owner puts into the business is a special payable of the business
known as capital. “Drawings” are deductions from the business’ capital or profits.
This equation may also be expressed as:
ASSETS – LIABILITIES = CAPITAL + PROFIT – DRAWINGS
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Transposed:
ASSETS = CAPITAL + PROFIT – DRAWINGS + LIABILITIES
LIABILITIES = ASSETS - CAPITAL + PROFIT – DRAWINGS
For cost accounting purposes we will be concerned largely with the sales of goods,
purchases of materials, the payment of wages and the treatment of expenses. The basic
double-entries you are likely to come across are:
Sale of goods Payment of payables
DR Bank / receivables Dr Payables
CR Sales Cr Bank
Receipts from receivables Payment of wages (net wages)
DR Bank DR Wages/expenses
CR Receivables CR Bank
Purchases of materials Payment of expenses or overheads
DR Materials control DR Expenses / Overheads
CR Bank/payables CR Bank / Payables
If in doubt over double entry remember the following rules:
Debit entry: Increase in an asset
Decrease in a liability
Increase in an expense
Decrease in income
Credit entry: Increase in a liability
Decrease in an asset
Increase in income
Decrease in an expense
Cost ledger accounting
Cost accounting is the accumulation of costs for inventory valuation in order to meet the
requirements of external reporting and also for internal profit management. In other
words it produces information for both financial accounting and management accounting.
In practice a business will not enter every individual transaction to the ledger accounts.
Instead each type of transaction will be recorded initially in its own primary (original)
entry record or book of prime entry then totalled and the totals posted to the ledger
accounts. The main purpose of prime entry records is to prevent a large volume of
unnecessary details in the ledgers.
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The main types of transaction and their related books of prime entry are as follows:
● Sales invoice sent out - Sales day book
● Credit notes sent out - Sales returns day book
● Purchases invoices received - Purchases day book
● Credit notes received - Purchases returns day book
● Cash/cheque receipts - Cash received book
● Cash/cheque payments - Cash payments book
Combining the cost accounting and the financial accounting functions
Double entry bookkeeping takes place from the summaries of transactions in the day
books. For example, in the sales day book (a book of prime entry) there will be a list of
sales invoices totalling $1,500. This total will then be posted to the ledger account as
follows:
Debit Receivables account $1,500
Credit Sales account $1,500
In a similar way purchases invoices are posted from the purchases day book. In the
ledger accounts there are always two sides to every transaction. It is only after the books
of prime entry have been totalled that they are posted to the ledger accounts. For cost
accounting purposes there are two possible methods of structuring the ledger accounts –
an integrated system and an interlocking system.
Integrated system
An integrated system is one which combines the cost accounting and the financial
accounting functions in one system of ledger accounts. (One ledger)
Advantage: Saves time and cost.
Disadvantage: Trying to fulfil two purposes with one set of ledgers despite the
differences between financial accounting and management accounting requirements.
Interlocking system
An interlocking system is one where separate ledgers are kept for the cost accounting
function (cost ledger) and the financial accounting function (financial ledger). (Two
ledgers) The cost ledger and financial ledgers will each include a control account. Many
organisations will have the usual debit and credit entries made to the financial accounting
system, which also contains a memorandum cost ledger account which will have posted
all items which are transferred to the cost accounting system.
When a company uses the interlocking system, there are certain items which appear in
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financial accounting books only and are not included in cost accounting books, for
example, interest and dividends received. However there are financial accounting items
related to costs and profits, such as cash, creditors (payables), debtors (receivables) and
revenue reserves, which are of interest to the cost accountant. Those financial accounting
items are not included in separate cost accounting books but are held in the cost ledger in
the cost ledger control account until they are ready to be transferred.
The cost ledger control account provides a place to record items that are of a financial
accounting nature. For example, when an invoice is received for materials, the materials
control account will be debited but instead of crediting the payables account and the
credit will go to the cost ledger control account (as the costs ledger does not record
payables).
In similar fashion, a financial ledger control account is an account in the financial
ledger to record costing items. It is used to maintain the integrity of the double entry
system. The two sets of ledgers will need reconciling on a regular basis.
Advantage: Allows easier access to cost accounting information.
Disadvantages: More time consuming to prepare two sets of ledgers
Computerised accounting systems
A computerised accounting system will allow much faster and more accurate entries to
the accounting system. It is surprising to find a business that does not use some form of
computerised accounting system. In the full ledger computerised system the computer
system will usually maintain the following ledgers:
● General or main ledger (for all asset, liability, income and expense accounts)
● Receivables ledger – accounts for each customer
● Payables ledger – accounts for each supplier
● Cash books – including the main cash book and petty cash book
The system may also contain detailed inventory records and a payroll programme.
The cycle of accounting using a computerised accounting system works in the same way
a data processing cycle does. There is some INPUT, PROCESS, and OUTPUT.
A. Data is collected.
B. Data is processed.
C. Files are updated.
D. Data is communicated
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In older systems, files may be conventionally classified into transaction files and master
files. These distinctions are particularly relevant in batch processing applications.
A transaction file is a file containing records that relate to individual transactions. For
example, a company’s daily sales may be recorded in the sales day book. These entries
are examples of transactions records in a transactions file.
A master file in such a system is a file containing reference data such as customer
names and addresses as well as cumulative transaction data such as year to date sales.
For example, in a payables ledger system, master file data would include:
a) Standing reference data for each supplier (name, address, reference number,
amount currently owed (cumulative data) etc.) and
b) Transactions totals for each supplier such as purchases, purchase returns and
payments.
The terms transaction file and master file are not used much in modern processing, which
prefers to talk in terms of databases.
Files are used to store data and information. The main types if data processing
operations involving files are file updating, file maintenance and file enquiry.
Both manual and computerised data processing can be divided into two broad types:
batch processing and real-time processing.
Batch processing
Batch processing involves transactions being grouped and stored before being processed
at regular intervals, such as daily, weekly or monthly. Because data is not input as soon
as it is received the system will not always be up-to-date; e.g., payroll processing
Uses / Advantages:
1) Allows for good control over input, processed and output data (in numbered
batches, e.g., in payroll processing, a different batch may be used for each
department).
2) Missing records may be located by identifying the batch number.
3) Suitable for internal, regular tasks such as payroll
Disadvantage:
1. Delays in processing not suitable for systems requiring customer contact
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Real-time processing
Real-time, online processing involves transactions being input and processed
immediately. On-line refers to a machine which is under direct control of the main
central processor for that system. A terminal is said to be on-line when it communicates
with the central processor. PCs have their own processor so they are on-line by
definition. (However, the term ‘on-line’ is increasingly being used to describe an active
Internet connection.)
Uses
Appropriate when immediate processing is required, and the delay implicit in
batch processing would not be acceptable. Examples: point of sale terminals,
banking and credit card systems, travel agents (hotel rooms) and airlines
Most modern software packages use real-time processing.
Most computerised ledger systems are fully integrated which means that when one
transaction is input on the computer it is recorded in all the relevant accounts and records.
For example, if a purchase for materials is entered into the computer system an integrated
system will automatically make the following entries:
● Records the purchase in the general ledger accounts
● Record the invoice in the individual supplier’s account in the payables ledger
● Increase the inventory balance for that type of material in the inventory records
Advantages:
In addition to being faster and more accurate than manual systems, a computerised
accounting system can produce a variety of reports for management, e.g.
1) inventory records, aged receivable listings, inventory valuations
2) trial balances, income statements and statements of financial position &
3) payroll analysis
Tutorial Questions
1. What is the most appropriate definition of an office?
A. A centre for exchanging information between businesses
B. A centre for information and administration
C. A place where information is stored
D. A room where many people using IT work
2. What is the purpose of an organisation chart?
A. To demonstrate formal relationships and communication flows
B. To demonstrate the filing and coding systems used
C. To set out production schedules for a period
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D. To map where each department and function is located
3. Which is a disadvantage of office manuals?
A. Strict interpretation of instructions creates inflexibility
B. The quality of service received from suppliers is reduced
C. They create bureaucracy and de-motivate staff
D. They do not facilitate the induction and training of new staff
4. Which function is LEAST likely to be carried out by an Accounts Department?
A. Arrangement of payment of creditors
B. Calculation of wages and salaries to be paid
C. Despatch of customer orders
D. Preparation of company financial records
5. Which of the following will not be a function of the human resources department?
A. Hiring employees
B. Firing employees
C. Paying employees
D. Arranging training of employees
6. The following statements relate to the policy manual of an organisation. Which
statementsare true?
1) Policies should be in place to deal with the authorisation of the purchase of fixed assets
2) Employees will need to know where to refer to but need not have read it.
3) Strict adherence to the manual can lead to inflexibility
A. All three
B. 1 and 2 only
C. 1 and 3 only
D. 2 and 3 only
7. Which of the following personnel in an organisation would not be involved in the sale of
goods on credit?
A. Stores manager
B. Purchases ledger controller
C. Credit controller
D. Accountant
8. Which of the following is not a book of prime entry?
A. Petty cash book
B. Journals
C. Non-current asset register
D. Purchase returns day book
9. The following statements relate to the recording of accounting transaction in the
books of prime entry.
1) Credit notes from suppliers are recorded in the sales return day book
2) Invoices to customers are recorded in the sales day book
3) Payments for expenses are recorded in the cash payments book
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Which of the above statements are true?
A. 1 and 2 only
B. 1 and 3 only
C. 2 and 3 only
D. All three
10. The following statements relate to cost ledger accounting:
1) An integrated system is one where separate ledgers are kept for cost accounting
and management accounting
2) An interlocking system is one where there is just one system of ledger accounts
for cost accounting and for management accounting
Which of the following is correct with regard to the above statements?
A. Both statements are correct
B. Neither statement is correct
C. Statement 1 is correct but statement 2 is incorrect
D. State ment 2 is correct but statement 1 is incorrect
11. What is the purpose of prime entry records?
A. Provide a check on the double-entry book keeping
B. Provide a list of outstanding payments
C. Prevent unnecessary detail in the ledgers
D. Assist in the preparation of a trial balance
12. Purchases invoices are entered into an organisation’s computer system at the end
of each day.
What is this an example of?
A. Batch processing
B. Real time on line processing
C. File maintenance
D. File updating
Homework:
1. You are working in the finance department of a company. A colleague from the sales
department has requested some accounting information that the sales department does not
normally receive. They assure you that the head of the finance department is aware of the
request.
What should you do?
A. Give them access to the information
B. Print out the information and give it to them
C. Ignore the request
D. Refer the matter to the head of finance
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2. Which of the following personnel in an organisation would not be involved in the
purchase of materials?
A. Credit controller
B. Inventory manager
C. Accounts clerk
D. Purchasing manager
3. What document should normally be completed if a purchase of a non-current asset is
required?
A. A purchase requisition
B. A despatch note
C. A goods received note
D. An invoice
4. Which of the following is a potential disadvantage of centralisation?
A. Greater control by senior management
B. Risk reduction in relation to operational decision making
C. Local offices are less self-sufficient
D. Consistency of decision making across the organization
5. Which of the following is the correct sequential flow of documents in the purchase of
goods on credit?
A. Purchase order, Purchase requisition, Goods received note, Delivery Note, Invoice
B. Purchase requisition, Purchase order, Goods received note, Delivery Note, Invoice
C. Purchase requisition, Purchase order, Delivery Note, Goods received note, Invoice
D. Purchase order, Purchase requisition, Invoice, Delivery Note, Goods received note
6. The cost accountant has produced a report showing the hourly output from the factory floor
for the last week.
Who in the organisation is most likely to require this information?
A. The financial accountant
B. The sales director
C. The production manager
D. The human resources manager
7. Which of the following is not an example of internal information to the accounts
department?
A. Goods received note
B. Time sheet for employees
C. Material requisitions from the factory
D. Purchase invoices from suppliers
8. Which of the following documents in the purchases cycle would be generated by the
supplier?
A. Purchase order
B. Credit note
C. Purchase requisition
D. Goods received note
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9. Which document is sent to a supplier following the receipt of a quotation?
A. Purchase order
B. Goods received note
C. Purchase requisition
D. Delivery note
10. Which document may be sent with products delivered to a customer?
A. Goods received note
B. Delivery note
C. Receipt
D. Quotation
11. When ABC returns goods to EFG Co (a credit supplier), which of the following
documents should ABC expect to receive?
A. Invoice
B. Credit note
C. Receipt
D. Remittance Advice
12. Which of the following statements about integrated accounts is/are correct?
i. Integrated systems save time and administrative effort
ii. Integrated systems maintain two separate sets of accounts: one for the financial
accounts and one for the cost accounts
iii. Integrated systems avoid the need for periodic reconciliation
A. (i) only
B. (i) and (ii) only
C. (i) and (iii) only
D. (ii) and (iii) only
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