eR a INTRODUCTION 1, PRINCIPLES OF ACCounrs ————=—««=« Basic principles of accounting This section provides the definition and purpose of accounting and introduces the basic principles, concepts and conventions of accounts necessary for an understanding of the following sections. The various types of business organizations, as well as the main users of accounting information, are identified. A description of the accounting process is highlighted along with the impact of technology on accounts. Objectives ae ff At the end of this section, you should be able to % define accounting % state the purpose of accounting identify the users of accounting information *& * outline the distinguishing features of various types of business organizations * identify the main financial statements f of business ney nts prepared by various forms Sescribe the accounting cycle uuse a diagram to represent the accounting cycle lain accounting concepts and conventions absens, i Process fol and impact of technology on the accounting ee ee SEEN ee£ Key Content This is the section that introduces accounting, to students who have not been previously exposed to the subject. The content includes definition of the terms ‘accounting’ and ‘principles of accounting’ accounting as a business practice — the purpose of accounts internal and external users of accounting information and their needs types of business organizations — sole traders, partnerships, limited liability companies, cooperatives, non-profit organizations financial statements ~ income statement/trading and profit and loss accounts, income and expenditure accounts, balance sheets, cash flow statements. Teachers are not expected to teach how to prepare the cash flow statements but it should be identified as one of the financial statements which must be prepared by corporations the accounting cycle with its diagrammatic representations. principles which guide the accounting process - accruals/matching concept, prudence (conservatism) concept, consistency concept, separate entity concept accounting processes which could be readily performed by the use of the computer, for example, payroll, stock control, debtors’ and creditors’ schedules software currently being used in accounting advantages /disadvantages of using the computer in accounting, the role and impact of technology use of computers for the preparation of accounting records. Among the major weaknesses shown the omission of one or more steps by students in this section are | in the accounting cycle showing no distinction between. giving examples when definitions ‘recording’ and ‘posting’ are required listing the accounting cycle out of giving unclear definitions of the sequence accounting concepts and conventions the improper labelling of the | accounting cycle an inability to explain accounting concepts and conventions % drawing the accounting cycle without arrows when showing the direction in which the accounting process flowsHistory of Accounting/Bookkeeping as a Business Practice Bookkeeping has been in existence for a very long time. In the da of ancient Babylon, traders kept records of their business me transactions by writing on tablets of clay which were baked harg the sun. Later, the Normans used to record their business 2 transactions on ‘tally sticks’. These were pieces of wood divided into two parts to accommodate accounting information. It ‘Was not until the late thirteenth century that modern bookkeeping Started in northern Italy. It was at this time that the important principles of double entry were introduced. Today, bookkeeping and accounting 5 are well established with their appropriate concepts, conventions, principles and ce ge ten o tandards. The study of bookkeeping and accounting has become very popular all over the world and the accounting profession is regarded as one of the most developed professions internationally. This course of study on which you have embarked isa first step to your becoming a highly skilled accounting professional Understanding Key Terms Before you will be able to understand the accounting process, you must first be aware of the basic terms and principles. Bookkeeping and accounting In studying Principles of Accounts you need to understand that the terms bookkeeping and accounting are two separate functions. > = —- Accounting is a cyclical process that can be trailed or traced in order to enable use of the information provided in the books of the business. | Accounting constitutes the final steps in the Bookkeeping is the art of recording business transactions in the appropriate books of accounts in a manner which is systematic and neat. Bookkeeping constitutes the first steps in the accounting process. Process. Principles of accounts x SEs In bookkeeping and accounting, a business transaction is any business activity or event which results in an exchange of value or the exchange of money or money’s worth. It is important to note that the course you are studying is called ‘Principles of Accounts’. Principles of accounts may be regarded as the generally accepted guidelines or rules, which are followed internationally when preparing accounting records and financial statements. Business transactions When a business transaction takes place, the business gives up something in order to receive something. If the business buys goods for cash, for example, it gives up cash to receive goods. If some time later the business sells the goods for cash, it gives up goods to receive cash.Every transaction that takes place in a business will result in at least two entries in the books of account. One entry is known as a ‘debit’ entry and the other is known as a ‘credit’ entry. Business transactions must therefore be interpreted so that the correct bookkeeping and accounting steps can be taken. Further details relating to the concepts of debit and credit and the application of debit and credit, are provided in Sections 3 and 4 of this book. An account Generally, the word account means to record or to note. An account, however, is the history of all the transactions affecting a particular accounting item. In other words, an account shows the records of increases or decreases in assets, liabilities, revenues, expenses and capital or owner's equity. An example of a cash account is shown below in simple form as Exhibit 1-1 oe Exhibit 1-1 . fd tg cory SIERRAS Sept. 8 Sales Sept. 10 Rent Note Sept.15 Sales Sept. 12 Wages The cash account Sept. 20 Electricity shows a history of Sept. 25 Purchases the transactions affecting cash during the m of September cash increases and decreases for September. We say then that the cash account shows the debit and cre entries made the month of September. jonth or the Purpose of Accounting The definition of purpose of accounting is separate from that of accounting. Accounting responds to the question ‘what is accounts?’ while purpose of accounting responds to ‘why are accounts kept?” and ‘how can I use accounting information to fulfil my organization’s goals and objectives?’ The overall aim of accounting, then, is to provide financial information in such a way as to enable business owners and managers to make pertinent financial decisions. dit during “SR The information provided should reveal the financial position of the business ~ whether or not it is making a profit or loss or breaking even (that is, neither making a profit nor a loss) - at a particular time during the period or at the end of the financial year.SS ixtrqduchiorreo Principles. of Se eee nena se I meena Tia wt sili a a 3 = To show whether a profit or a loss is made, a profit and loss account jg usually annually or monthly in some cases. When profits are made, it “Pree, the business to continue but when losses are suffered over a sustained sa fe tre he business operators will have to make a decision to discontinue ine operations. Another purpose of accounting is to ensure the accessibility of accounting aerarmmation. For this information to be accessible, all business transactions have he recorded in a way that is consistent with the generally agreed accounting principles. One such principle is the double entry system, which is the foundation for recording transactions. Accounting is not only used in the organizations of sole traders, partnerships or limited liability companies, but is also used in non-profit organizations such as clubs, churches and charitable organizations which include the Red Cross and the Salvation Army. Small, medium and large business organizations must have proper accounting records to prepare financial statements for government, creditors, potential investors, owners and trade unions. The overall purpose of accounting, therefore, is to provide financial information to enable a variety of users to make financial decisions. Users of Accounting Information in order to make spect The users may have ects of the Each of the users requires information about the business decisions, take actions or simply just for their information. interest in all aspects of the accounting information or selected asp' information. a) Managers and owners who also manage These need day-to-day information on alll aspects of the business and of the i. environment in which the business operates. They also need to understand OY present and future performance of the business. These users want to know "5 the business owes and owns as well as what is owed to the business and profit or loss is being made. b) Owners who are not concerned with day-to-day management i Some owners are mainly concerned with receiving about the progress of their businesses and the competens those who manage them. When they look at the finan statement they want to determine if there is growth in investment value now and projections for the future- c) Lenders t Banks and other financial institutions that lend MO" 0 businesses are primarily concerned with the ability ©. of cf business to make payments of interest and repay™e” vial in the future, They use the information to determin of the business as well as the timeliness of its cashTete eS iples.of:Accounting——-. SCT omega = d) Customers Customers may also like to know whether a business is financially sound so that they know, with a degree of certainty, that the business will be around to fulfil contracts, provide follow-up services and supply spare parts e) Suppliers The primary information needed by suppliers of goods on credit to a business is whether or not the business is able to pay for the goods and the probability of delay in payment. Financial statements can be of assistance to suppliers in essing the credit worthiness of potential customers. Cash flow projections as well as the financial performance of the business over a number of years are important for suppliers. f) Employees Employees need information about their employer's business. They have a stake in the business and are interested in its viability. Many people may be worried that their employer may go out of business and so employees are becoming more interested in the fortunes of their employers. Some employees accept the view that if the business is doing well, they will do well in terms of job security and better pay. g) The government Government agencies have a wide range of information needs about a business including statistical data about employment and production. These needs are frequently met from the data found in bookkeeping records. More directly, financial statements provide data from which taxes (national insurance, PAYE, income tax, corporation tax) can be assessed and collected. Government also has a regulatory role to ensure that a business adopts and maintains good, ethical and legal business practices. h) Labour unions Labour unions use financial information in their bargaining arrangements and when determining a business’ ability to pay higher wages and salaries. i) Stock exchanges The price of shares on a stock exchange will depend on how well the business is doing financially. The share prices of profitable businesses will generally increase while those of non-profitable businesses will decrease. Other users of accounting information include j) Trade associations m) Financial analysts k) Financial press n) Regulatory authorities 1) Lawyers 0) Competitors. in accounting information caw be found om the vb which acconepanies this book. sis Stal,Concepts and Conventions Accounting Y nent of accounting, certain concepts (ideas as to how the rl ould be carried out) have been established. aie are many accountiny "8 concepts, but at this level of your study of accounting, tl lere are seven basic that will be reflected in various practical problems you will encounter as from Section 1 through 14. You will notice that these concepts will perm different applications, depending on actual circumstances. aCCOUNtin, YOU move it many The seven concepts are: 1 The business entity concept This concept states that all accounts are kept in respect of business entities, Every effort must be made to distinguish the business from the person or persons who own or manage these businesses. You will see that in the case of a sole trader, the accounting books are kept in a manner which distinguishes the business from the owner. In the case of a partnership, the accounting reflects a distinction between the partnership and the individual partners. For companies and cooperatives, the businesses are kept separate from their shareholders or owners. This distinction is reflected in the names given to the various forms of businesses as well as the practice of opening separate business bank accounts. 2 Money as a common denominator A business has many varied assets, liabilities and other items of value. The values placed on these items cannot be added or subtracted unless there is a common base. In accounting, money is used as this common base or denominator to express certain facts about the business, including the value of its assets, the amount of liability, its working capital and the general wealth of the business. This concept is also known as the money measurement concept 3 The cost concept Assets acquired by businesses are recorded in the accounting books to reflect the price paid for them. That is, the assets are recorded ‘at cost’. This means then, that very often the costs recorded in the accounting books do not represent the current values of the assets, You will note in Section 2, for example, that the assets shown ona balance sheet are shown at cost. 4 The goin Generally, required to treat the business a5 Ss. Preparing the account: 5 The dual aspect concept j 8 is a ce : F eshte oop in accounting. Each business transaction is descr affects a minimum ere, Means that each business event or transac and a receiving of sont” COURS. Each transaction results in both a 8 Sofsome value. In all business transactions, equal val¥a on Ronte e Tiagae —- aaiiees = Basic ‘Principles of Accounting aoe Lbbecee | Se es Re eempas toe ne exchanged. The dual aspect concept is reflected in the of a transaction. This means that at least two accounts account will show the value received and the other w ‘double entry’ record will be affected. One ill show the value given es oe pestsearee: oes CME Stem of 2 wides certain me act oF double entry system of accounting Pro The dual a advantages: Complete record of each Easier day-to-day control of the business hecking of arithmetical t trial balance 2 | accuracy via a tri f it ; ; clit he ration of final accounts and balance sheets. acilitating the prepal business event or transaction 6 The accruals concept In any given accounting period, some of the money the business receives may relate to a transaction carried out in a past accounting period. Likewise, money may be received in that given period for a transaction which is to be carried out at a later date. The accruals concept states that any event or transaction which increases or decreases the ca pital of a business in a given period, involv es the accrual of income or expenditure and should be accounted for in that period, whether or not money has been received or paid. Hence, in an accounting period, income is not necessarily the amount of money actually received, nor is expenditure the amount of money actually spent. Income and expenditure are seen as the values of the transactions which have taken place in a particular accounting year, and these values must be accounted for in that same year. iptions are made: se assum) ujiger the accrual concept therefore the » cad regardless of When ice i ime an asset oF servi ned at the tim Revenue is eal is made. a int of cash is ma in earning the income of the pei are those costs incurred in earning, Expenses for 2 xpenses are paid. for that period, regardless of when these exp revenue fo! ue earned and ce between the revel a riod is the differen: t all cash has The net profit ied 4 during that period, whether oF n0 the expenses In —————— 7 The realization concept The date on which goods or services are transferred to a customer is the date on which revenue is considered to be earned and a profit made (realized), saseseeeee regardless of when the goods or services are actually paid for. This means that me On revenue is realized once the goods or services have been sent to the customer, og regardless of when actual payment for these goods or services is made.Accounting Conventions In order to properly interpret and be guided by the accounting concep thre conventions are generally observed: 1 Conservatism In applying the concept, accountants tend to be conservative If there Cisa choice between using high and low values for assets, the accountary choose to use the low values. On the other hand, the accountant wilt! higher costs when the choice is between a high cost and a lower cost Another term used for conservatism is prudence. While the possilty anticipated future losses may be brought into the accounts, anticipated . future profits will not be included. In summary, the accountant will overestimate costs and losses but underestimate revenues and profits, 2 Consistency In accounting, a number of alternatives are available to the accountant, Each alternative is acceptable. However, if the accountant selects one, he is required to follow that alternative or method selected, over a reasonable period of time. He is not allowed to change from one method to another in any one accounting year. You will see later on in the text that there are various methods of depreciation and various methods of stock valuation. The accountant is free to choose any one of these methods, but once the choice is made, the consistency convention is applied. 3 Materiality In the operation of a business, some items are considered to have more importance or value than others. These items are material because in an assessment of the size or financial position of the business their costs are relatively high. The value attached to an item, therefore, will determine ne it is treated in the account. It may be a waste of time trying to include sm and immaterial items in the accounts. In some instances, items that at considered to be immaterial in value are added together before being included. When preparing the final accounts of medium to large SiZ° businesses, the figures are rounded off to the nearest thousand or und. dollars. Note that what is material for one business may be quite jimmatel for another. Forms of Business Organizations You must always remember that when you prepare accounts it must be ws ae of a business. Based on the information at your disposal you vie are termine or identify the business whose accounts you are expected '© P : whose transactions you are required to record, All forms of business ot aoe of organizations maintain accounts appropriate to their specific form OF setFigure 1-4 A sole trader. Figure 1-5 Partners. - iin as ~~ Basic Principles of Accounti es guiding principles. The various forms of business organizations include the following: ; Sole trader This is a business that is wholly owned by one person — a man or a woman. There are many kinds of sole trader or sole proprietor : businesses, for example, grocery shops, bakeries, salons, pharmacies, taxi services and soon. Partnership A partnership is formed by two or more persons but not exceeding twenty. Many partnerships are formed by professionals such as lawyers, accountants, doctors as well as other types of businesses. The financial statements prepared in a partnership are more than those prepared by sole traders. In addition to the trading account, the profit and loss account and balance sheet, a profit and loss appropriation account as well as capital and current accounts for each partner, have to be prepared. Additionally, each partner's share of profit and interest received on their capital has to be accounted for on the balance sheet. Company/Corporation There are mainly two types of companies considered in the CSEC* syllabus i) A private company cannot sell shares to the public and is usually owned by family members. ii) The public company or corporation. A public company is owned by a large number of shareholders. Public companies in the Caribbean must prepare accounts to meet international standards and also provide more information than partnerships, for example, information about ordinary share capital, debentures, general and other reserves and dividends. Cooperative A cooperative is an association of members who come together voluntarily to achieve a common aim. They contribute capital and share losses and profits, Each member has only one vote at meetings regardless of the amount of capital contributed. The accounts of cooperatives are prepared similar to that of companies.eo | Non-profit organizations TWh There area large number of organizations 1, profit making as their objective. They operat “om of providing services for their members and i the; communities in which they operate. Although \, have the profit motive, the members still have.) in the financial affairs of the organization. The an es a of proper accounting records and the Prepara tion — Figure 1-6 A school in financial statements are required by non-profit making organizations such as St Lucia. sports clubs, churches, schools, social and voluntary organizations as tho, must account to their members for membership fees paid, funds raised through a fund-raising activities and donations received. The financial statements Prepared by non-profit organizations are common in some respects but there are some 7 important differences when compared to other types of organizations h ain Further details on the various forms of business organizations will be seen in hy appropriate sections of this book. Financial Statements Prepared by Various Organizations The main financial statements prepared by an organization or business will depend on the form of business, the nature of the business and the type of business. Some statements are common to all organizations and businesses while others only relate to specific forms, nature and types. In general, the following considerations are of critical importance when distinguishing one organization” business from another and help to determine the appropriate financial stateme* to be prepared: 1 The objective of the organization or | 4 The transferability of ownership business 5 The owners’ liability for debts, 2 The legal status required 6 The ease of organization and diss! # 3 The capital needs 7 The continuity of ownership. Partnershi Companies or Corporations Nps The trading account | The profit and loss account Sole Traders ding account The profit and loss a The balance sheet ithe tra ce {The pit ny = Te » mic She iii The cash flow statement ee! ropriatic ool The balance s| Propriation Of profit account The appropriation of profit cco." Manufacturing Businesses Cooperatives Non. “Profit Organizati, The trading account The feceipts nizations The manufacturing #00 The profit sod lose account The income cand Payments account The trading account . t Te bare thee The balance sheer enditure account The profit and loss accou" sh flow statement The trading account The pelance ie ment The cash flow state! The appropriation account aonarnamamseteenaeey i ns inancial statements normally prepared by various organiza!" ss Figure 1-7 Fioe iemeteee.-* _ —~“Basic-Principles: of-Accounting-— a neces SB ee The Accounting Cycle You should always remember that trailed or traced, The during any one accounting is accounting cycle is accounting period. The ¢ recall that an accounting transaction is in the business receiving value, as well rise to a “piece of paper’, This ‘piece source document, forms the bas; about this in Section 3.) Starting w cycle traces the financial events th a cyclical process which can be a series of steps which are repeated ycle starts with a transaction. You will any activity by the business which results as giving value. Each transaction gives of paper’, namely an original document or a for an accounting record. (You will learn more ith these source documents, the accounting roughout the period Diagram of the Accounting Cycle Pieces of paper or original or source or. documents Auditing, analysis and interpretation Original books or journals Preparing financial statements Balances The Ledger from (General gf Previous Preparing adjusted ate period trial balance and Sales) k p Determining Pre-closing ; adjustments to trial balance trial balance Figure 1-8 Diagram of the accounting cycle. i i is ding of the Step 1 in the accounting cycle is the recor data relating to a transaction on original documents or source documents, for example, invoices and receipts. These documents are looked at in Section 3.KZ Step 2is the recording of information from the original documents in the journals or original Books Different names for the journal: ‘Types of journals or original books: Cash book Purchases journal or purchases day book Sales journal or sales day book Purchases return or returns outwards book Sales return or returns inwards book The petty cash book The general journal Day books Subsidiary books Original journal Book of original entry Prime books The task of the bookkeeper/accounting clerk is to identify the appropriate journal or book in which to record a particular transaction. Journals are dealt with in Section 3. ZIRT STRESS Note The terms journal and book are used interchangeably. What is recorded in each book and how it is recorded are dealt with in Section 3. VY Step 3 in the accounting cycle is to post the totals from the original books to the appropriate ledger accounts. There is an important distinction between recording and posting. In summary, posting entails recording the transaction twice and the application of the principle of debits and credits. Another aspect of Step 3 is the bringing down of the balances from the previous year. If the business has been in operation for rs than one year, there will be balances carried down (c/d) at end of the first year. These balances at the start of the new accounting period will be brought di (balances b/d or b/f) to open. f eilevant stceonie in tell Step 4 is to take what is called a pre-closing trial accu t the end of the period to test the arithmetical Teas 2CY Of the debit and credit entries posted to the debits she ng that period. When added, the total of the trial balance, be equal to the total of the credits on theStep 5 entails determining the adjusting data needed to prepare the final accounts, for example, data for annual depreciation, bad debt, prepayments and accruals. The necessary journal entries are then made to record these adjusting items before posting them to the appropriate ledger accounts. After the necessary adjustments have been made, Step 6 is the preparation of the adjusted trial balance to ensure the accuracy of the debit and credit entries that have been made. It must be pointed out, however, that an agreement of the trial balance totals does not necessarily mean that no error has been made in the recording of transactions. We will look at possible errors in accounting — both those that affect the trial balance totals and those that do not ~ in Section 4. In Step 7 the financial statements are prepared. The statements include: Trading accounts Profit and loss accounts Balance sheets Receipts and payments accounts Income and expenditure accounts Manufacturing accounts Cash flow statements ‘The specific financial statements prepared at the end of a period will depend on the nature and form of the business. These statements are looked at in the relevant sections throughout the book. Y Step 8 entails the bringing down of the balances in the ledger accounts at the end of the accounting year to close off the accounts. Any balance that remains in an account will be carried forward to the next accounting period, and the cycle repeats itself. M Step 9 takes place after the accounting cycle is completed and deals with the auditing of the financial statements. After such an exercise, an audit report is usually made to the owners or board of directors of the business. The financial statements are also analyzed and interpreted, and the sesscondesgtonenasonens findings are used as the basis on which financial decisions are made by Leben iit management and other users of accounting information. This step is not a = cio be four part of the accounting cycle as it is undertaken by an independent source. on the DVD whicha . i, SK.) Accounting ang techno), 9 The Role and Impact of Technology on the Accounting Process Accounting can either be done manually or with the aid of the computer Th latter is called computerized accounting. The Principles applied when the . accounts are written up manually are also applied when the accounting Proce computerized. The general trend now is that more and more accounting owe! in small, medium and large businesses are being computerized. ms Computers are used to process information, that is, to Convert information from one form to another. A computer accepts information ec input, processes the information in some Way, and produces information as output. In accounting systems, we usually input information to the computer at a detailed level (eg. invoices, purchase orders, etc.). The computer processes this information, ang eventually produces summarized and sorted information for US, @.g. a trial balance or an expenditure Summary. The machine can also detect and Teport on conditions that need attention, e.g. where expenditure goes over the allotted budget. Computers accomplish their task by following (executing) instructions These instructions are Prepared by people, and are called software to distinguish them from the computer machinery, or ware. The instructions are only of a very simple kind and are elated to the Processing of information. However, by combining them into sets of instructions called a Program, we can make the computer perform complex tasks, Computer Hardware The computers used in businesses are quite similar to each other, and are based on the generally accepted standards for Personal computers. These are the types of machines that we will talk about. The structure of the machines consists of @ number of interconnected components, The central Processing unit (CPU) This is where the instructions are executed, and is the real ‘brain’ of the machi These days, a typical CPU ig contained on a single integrated circuit chip, a) le inch Of silicon about on, Square ~ the term we use for these is microcomputer RAM (random access isis the 4 ‘ ted by be memory where the programs are stored in order to be exect memory) Bus i - ter 4 bers 1S a Set of wires that connects the different components of the compl ether. It is used to send various types of signals around the computerFigure 1-10 Flash or thumb drive. Figure 1-12 Computer hard drive. Peripherals This term is generally used to group all the components other than those just listed. We have: input peripherals such as mouse, keyboard, scanner ~ used to input data to the computer. Output peripherals such as printers and video display units are used by the computer to present information to the user. Input/output peripherals are used for both input and output of information — e.g. floppy disks, hard disks, magnetic tapes, computer terminals and solid state memory, popularly known as flash drives or thumb drives, etc. Communications Very often we want to have access to a computer from somewhere else other than where the central machine is situated. We also might want a number of different people to <————__—— share the same machine, at the same time. We do this with Al | Oo lc the help of a local area network (LAN). This is a cable that = 2 connects all the computer terminals and personal computers oe to the central machine (called the network server). Figure 1-11 Depictic a network system Storage Hard disk is our main method of permanent data storage. A hard disk unit consists of a set of disks to store the data, plus other hardware (heads, arms and electronics) to move the data about. In order to safeguard our data, we like to keep multiple copies (‘backup’). Because the set of disks is fixed into the unit, the most economical way of maintaining backup is to copy the hard disk data onto magnetic tape flash drives (or floppy disk for small amounts of data). With the increased use of flash drives, however, computers are now being manufactured without floppy disk drives. Software When we write instructions for the computer, we are generally trying to accomplish a specific task, e.g. producing a trial balance. These instructions are grouped together into a program. You can think of a program as a set of instructions that are executed on a computer in order to perform a specific task. We also group our programs together to form systems or applications. All the various sets and types of instruction are referred to as software. For convenience, software is generally grouped into systems software and applications software. The purpose of systems software is to make the computer efficient and easy to use, and consists of items such as compilers, the operating system, database management system and communications software. The purpose of applications software is to enable us to do our jobs better. Applications software consists of items such as spreadsheets and word processors.Compilers When we talk about a computer executing an instruction, that instruction js only a pattern of 1s and 0s, e.g. 10110110001100110011. This Pattern is called binary and is all that a computer can interpret (computers used to be called binary computers at one time). The main reason for this is reliability. [tis easy to design reliable electronics circuits that operate in this way. People find these Patterns difficult to understand; therefore, when instructions are prepared for the more like a combination of mathematics ese languages, e.g. COBOL, Pascal, ADA, etc. We then use a special piece of software called a compiler to translate this human-type language into binary. The computer then executes these binary instructions. The human-type instructions are often called source code; the binary instructions are called object code. Operating Systems An operating system (0S) is designed to enable the computer to operate efficiently and reliably. It does this by taking control of the computer hardware ae ou bret ia etc.) and allocating them to the other user programs (or users for short), as ley have to use th Oj i i computer hardware © operating system to gain access to the One difficult thing to appreciate is the difference i i 7 ‘ce in computer and human ae A typical CPU can execute about 19 million instructions per The CPU might a a one in the information at about two characters per second. is 1 000 times faster agen esttUctions to process each character. So the computer Some operating systene tn Manan and might be idle for 99.9% of the une fae) 2 s idle time, switchii ‘ during idle periods. This is discussed ieee the CPU onto other jobs one user to use the computer at i any ropsr ent a ne Th hn ae ie a ans ey Pec Persona computer OS. Basically, DOS provide. a eet of small programs <¢) that enable the user and user Programs to handle the peripherals Single-user, multi-tasking operatin System — Thi {ser to use the CPU at any one time, bur eee more edad ee ae ; PP: ly executed at any one time. | Say apparent, i Program (tas! ie only executes one program at atime bat yee between tren te CPU really appears to the user that the Programs are being ex ecuted at eel so oe that it Same time. Multi-user, multi-tasking ©peratin, 'd System — » types of OS, enabling many users to shee same coe > ost complex to execute many tasks parently at the same time, Suro i au each user al . a older because earlier computers were so expensive, con, iSingly, this type of OS is developed to enable them to be used efficiently as Potable by sana sheUNIX OS is an example of this type. Because UNIX has been developed over a long period, it is quite reliable for a complex OS. Troubles with UNIX are likely to be due to human problems, rather than to software unreliability. This type of OS needs a much higher level of expertise to maintain it effectively, than the other types mentioned. Database Management Systems (DBMS) This software is designed to enable information to be organized in a flexible and easily accessible way on the backing storage (hard disk). We refer to this information as being stored in a database, i.e. a group of interlinked files. Modern DBMS, such as INFORMIX, also provide easy-to-use languages to enter, process and display the information. Communication Software These are designed to run in a distributed environment, that is, the users and machines of the system can be distributed throughout the building or buildings of the organization. Some of the users might be using personal computers. All the users will be connected together via a network. Because of this, special communication software is needed to link-up the users (clients) to the main machine or machines (servers). Application Software We shall first of all deal with software designed to replace manual processing of information with similar computer processing. Application software is designed for specific purposes. In many ways the structure of this type of computer application is very similar to the manual system which the computer replaces. If you look at a computer accounting application in detail, you will see that information is stored in records and files. Application software does things like checking that input is correct, updating files, and extracting and printing information. There are other types of general-purpose application software that can be bought. They are generally classed as ‘productivity aids’, or decision support software. They cover areas such as word processing, spreadsheets, project management, statistical analysis, etc. The characteristics of this software are a) it can be used in a wide variety of areas b) we cannot modify the software to meet our requirements ©) itis generally written for personal computers and d) itis relatively, cheap. It is this software that has made computers so popular. Remember, the least important part of a computer application is usually the computer!The typical tasks that a computer carries Sorting - when we are presenting Fi out in an administrative environment information, we usually need it in a certain include: sequence, e.g. a bank statement is usually 4 Storage and retrieval of data - the machine behaves like an electronic filing in date sequence. The computer can perform this very quickly. cabinet, except that the data can be stored | 2° summarizing - most financial and retrieved much faster than via manual | fo, nation requires totalling in various methods. Data is organized into records and ways, files, just like a manual system. The usual e medium of storage is hard disk. ‘és Presentation — the way in which se f dats fea ants information is presented is extremely Ss Selection of data for further important. Good presentation allows fast Heseooing: De machin wit sitet absorption of the material presented, rraugh its data to select required data. | eden computer software hes ecrcusive dettsincondllooe ieee dont ig | lites to assist in this regard, especially then extracted from the rest of the data, for | '" ‘Re s*=phics presentation area, further processing. Computer applications have some advantages over manual systems. We will now look at a summary of some of the advanta; iges and some disadvantages of computer application systems. Table 1-1 Advantages of computer applications Accuracy Reliability ee eke * Once the programme is working correctly, it wil alvays give the correct answers mistake when performing additions, for example. * The computer processes information with a very high level of accuracy which is critical for informed decision-making. Computational errors are avoided once a correct formula is used. As a result, accurate financial statements are produced. * Generally, the possibilty of mathematical errors is greatly reduced. These advantages are even __more critical for large businesses with large volumes of transactions and accounting records. * Provided that the data is set up correctly, the computer will not forget to pay an employee, for example. * They can impose control on administrative procedures — for example, not allowing cheques to be printed there are no funds available. * The processing of data in the computerized accounting system is a continuous operation from the point of inputting data from source documents to the point of printing the reports or other final results. When the computer system is integrated, the data is input once and all the related ledger accounts are automatically Updated followed by the preparation of financial statements, a * To calculate and print a payroll for 20 000 people ‘might take a computer a couple of hours at most. * Because of the incredible speed with which ‘Computations are made, ledger accounts can be kept up-to-date continually and current reports can be Prepared quickly, allowing managers to make decisions * They are good at producing complex analyses. For example, if you wanted to know the average salary o! female clerical employees bom in 1951, the computer can produce this type of information quick. There is @ reduction in the cost of operating the accounting system. ~ itwon't make aEconomy Inflexibility Unreliabilty ~ Complexity calculating each employee's gross earnings | computing the various statutory and other deductions to be made for each employee \, % preparing cheques | 3% maintaining a record of each individual's gamnings.. Table 1-2 Disadvantages of computer applications enema cor + They are awkward to change. If tax laws change, then the relevant computer programs will have to change. This takes time and costs money. _ * They require discipline. With a computer system, there is generally only one way of doing __something, s0 you have to work in the way that the system specifies. This may be good or bad. + You can't see what is happening. With a manual system, everything is visible. With a computer, the __information is hidden on magnetic disk and tape. This presents auditing problems * There are also the usual problems that you get with a machine. Because of the complex interaction of hardware and software, they are often more troublesome than other machines. Examples of applications software for accounting © Peach Tree Accounting © PayPak * Dac Easy © Pastel Accounting © Accpac © QuickBooks © Roundtable Accounting * Batch Master PFW ° PCLaw * MYOB Do you know any others? These computer-based accounting systems will process data in the same manner as does a manual system. The steps are: 1 transactions are recorded manually on source documents; 2 data from these source documents are then input into the computer; and 3 the computer processes the data/information and performs routine tasks such as preparing journals, posting to ledger accounts, determining account balances and printing financial statements and other reports. Payroll The most common application of the computer in accounting relates to routine repetitive operations. One such operation is payroll. The typical payroll procedure includes: preparing a payroll summary for each period preparing each employee's statement showing gross earnings, deductions and net pay keeping records showing the amounts deducted to be paid over to the relevant ee aca The computerized payroll system will maintain the necessary records, print the cheques and reports, as well as provide managers with a detailed breakdown of labour cost. Study the following table which compares the processing of payroll manually and the processing of payroll through the use of computers.Table 1-3 Manual vs computerized payroll accounting Manual vs Ler ee a Functions Manual Payroll Computerized Payroll Timekeeping Anew sel of records is fled in [ Raw data is entered on an appropriate each period. formularized form. Computation of gross pay | Gross pay for each employee is | Details Telatng to the number of hoursidays worked computed and entered manually | and the rate of pay is entered into the computer in the appropriate books. and a formula given, The computer does the Computation after the formula is entered, Once 3 formula is worked out, there is no need to repeat the working for each new set of figures paced in te computer. Calculation of deductions | The deductions for each Deductions are often calculated as percentages of employee is worked out, based | the gross pay. The formulae are placed in the On the applied percentage rates, | computer. The computer then displays the net pay to determine the net pay. This is then entered manually in the records. Preparation of cheques, | These are either typed or written| There is a cheque-prnting feature in payroll earnings statements and by hand. They have to be proof- applications that allows names and amounts to be payroll registers ‘ad and some form of control | _afixed to cheques automaticaly has to be maintained. Bank reconciliation The payroll bank account in the | In ‘some systems, bank reconciliation is an accounting records has to be automatic feature. This feature updates the cash reconciled with the monthly book and performs an automatic reconciliation after bank statement entries are made from the bank statement. Statutory reports Reports have to be prepared The reports are generated automatically. Periodically, showing for each} Information becomes available on a timely basis, employee the total amounts This speeds up the decision-making process, eamed, deducted and paid. because the wait time between the preparation of There also has to be manual feports and the analysis of datalinformation is reconciliation of individual data greatly reduced. with control data. Computer Journals and Ledgers Computers can be used to maintain journals and ledgers, and to prepare financial statements. Data for posting to the journals may be entered from the point of sale or by input clerks who enter the data from the original documents or invoices. Journals are then updated, and the postings to the ledger accounts are done automatically. The computer may be programmed to print the journals and copies of the ledger accounts. Where the system is integrated, correspondence with debtors is done demand. by the system. Statements of balances are usually printed onIn some organizations the financial reports and analyses required are fairly standard and even these are computerized. Therefore, the financial statements may be generated by the computer. Transactions and end-of-period adjustments may be analysed by accountants or by the system. The manager is therefore required to make decisions based on the reports generated by the system and print various financial reports as the need arises It is worth repeating, that the possibility of mathematical errors is greatly reduced, and the speed of the computer ensures that the records are kept current. In Table 1-4 below and on page 38, is a of computing terms and their definitions. Table 1-4 List of computing terms Peter eee Term Definition Files Documents held on a computer. All computer records are held in files. The files replace the physical book in which the records are kept in a manual system. File name ‘A specfidunique name is assigned to each fie. If two files are given the same name, the latter fle will replace the earlier file in the computer's memory. Directory The place where fles are kept, Directories replace the physical fing cabinet and organize fles in Random the same manner in which they would be organized in fling cabinets and partion folders. access | Achip that provides the workspace for the user and the applications that are loaded from the hard memory (RAM) drive, RAM is susceptible to fluctuations in electricity, If current fails, all details held in RAM not stored in a secondary medium will be lost. Read-only ‘Atype of memory that contains information that may only be read. Ths includes firmware memory (ROM) | instructions that manufacturers would ike to make known to the users of the computers. There is programmable read-only memory that allows the user the facility to make initial changes to it. Secondary storage] Any storage medium other than the hard drive. Some examples of secondary storage are floppy disks, magnetic tapes and flash drives Hardware ‘The physical components of a computer, for example, the monitor, CPU and keyboard. Software The pre-coded instructions downloaded unto the computer. These instructions are programs that direct the operations of the computer. Bit ‘The smallest unit of information that a computer uses. Each character that is typed into the computer is converted into a series of zeros and ones representing the flow of electricity through the computer's circuits. Byte A combination of eight bts that represent one character. Application ‘A program that allows the computer to perform user tasks. The computer is therefore able to software prepare vouchers, post entries to ledger accounts and print reports because of application software. Spreadsheet ‘An application that is used for numerical analysis. Data is presented in rows and columns on the spreadsheet. The computer automatically provides the solution for any formula entered into the system. Word processor | An application that is used for the processing of documents. This is ideal for the preparing of LL reports, memoranda and other inter- and intra-office correspondence. continued on page 38Continued from page 37 Information — Output devices Peripheral devices Save Central processing unit (CPU) Printers computer consultant and you have been called in to ‘eorganize the accounts department of a company in Roseau, Dominica. The Board of Directors of the company * has asked you to make a presentation explaining the advantages of a computerized accounting system when compared to a manual system. Make a presentation of the advantages and disadvantages of using a computer-based versus 2 manual accounting system, Pre-programmed instructions that tell the computer what to do, Data that is entered into a file or record. Devices that are used to facilitate the transfer of data into the com instead of a pen. The keyboard is an ‘example of an input device, These are facts or may be materials that were collected but not lines. Data that is organized and usable is called information, Decisions are completed report, ledger or account may be viewed as information, Devices that transfer data/information from the computer to its user. The monitor an output device. Hardware items that enhance the performance of the computer, but without able to function adequately. Acommand made by the user, instructing the computer to retain datalinformation the user must instruct the computer to retain the details. This is called ‘saving’ The CPUs sometimes refered toa the bran ofthe computer. it determines how much mene the system can carry and how fst the computer is able to process information. The speed ofa ‘Processor for a microcomputer is usually measured in megahertz (MHZ). Output devices that transmit datainformation from the computer to its user in the form of a hard Copy (on paper) Printers are categorized by how they produce the characters onthe page, tats impact and non-impact. Impact printers produce a character whenever a hammer or pin strikes an ink ribbon, The dot matrix printer and the daisy wheel printer are examples ofthis type. Non-impact printers use a variety of other technologies to produce a print on the pages. The ink-jet and the laser printers fl in this category. PUT. These devices ag Us organized along any specay Taken based on informa, isan exams y Which the computes in its memory dual aspect concept going concern concept Summary of Terms accounting accruals concept hardware bookkeepi P money measurement concept bus eepine non-profit organization business entity concept operating system busi, ‘, original document usiness transaction eck central processing unit en 1 P company Payro) il peripherals compiler an computerized accounting progr: , prudence conservatism . consistency convention Purpose ofaccounting sg co1 oration random access memory (RA\ sae realization concept cooperative software cost concept sole trader database management system ocument (DBMS) source double entry system ne