Chapter 8 The Role Of Accounting

1. Laws and regulations governing accounting

2. The main financial systems in business
3. Relationship between accounting and other
business functions

Laws and regulations governing accounting

Company law:
Accounting Records
Duty to prepare financial statements
Duty to file the annual report and accounts
The requirement for audited accounts

Laws and regulations governing accounting

1.1 Company law: Accounting Records
The duty of companies is to keep accounting records of their business
transactions should be an element of national company law.
Although the details of national law vary between countries, the
essential requirements should be broadly the same in every country.
For example:
In UK, company law states that companies must keep adequate
accounting records.
Adequate means that the accounting records should be sufficient to:
- Show and explain the companys transactions
- Disclose (with reasonable accuracy) the financial position
- Enables the Directors to prepare financial statement for the company, as
required by law
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Laws and regulations governing accounting

1.1 Company law: Accounting Records
Accounting Records should contain:
I.Day-to-day records of all money received and spent and transactions in
respect of which receipt and expenditure will take place.
II.A records of all the assets and liabilities of the Company.
III.Where the Company holds inventory, a record of the inventory held as
at the end of the financial year and a record of all goods bought and sold
(except in the retail trade) in sufficient details for the identity of suppliers
and customers to be identified.
It is a criminal offence to fail to keep accounting records.
In UK, any officer of the Company (director or company secretary) found
guilty of this offence could be liable to imprisonment or a fine.
However, tax laws requires the owner of sole trader businesses and
business partners to maintain sufficient accounting records so that their tax
liability on the profits of their business can be calculated.
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Laws and regulations governing accounting

1.2 Company law: Duty to prepare financial statements
Companises are required by law to prepare financial statements,
usually for each financial year of the Company.
The financial statements must be approved by the directors of the
Company, who must satisfied that they give a true and fair view of
assets, liabilities, financial position and profit or loss of the
Company for the year.
Financial Statements consists of:
I.A statement of financial position
II.An Income Statement
III.A statement of Cash Flows
IV.A statement of changes in equity
V.Notes to financial statements
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Laws and regulations governing accounting

1.3 Company law: Duty to file the annual report and accounts
Companies required to submit a copy of their annual report and
accounts with a government body.
In UK, Companies required to file their annual report and
accounts with the Registra of Companies.
Member of the public may (on payment of a suitable fee) obtain
access to these filed accounts, for the purpose of inspecting them.

Laws and regulations governing accounting

1.4 Company law: The requirement for audited accounts
With some exceptions, a companys annual accounts must be
audited by independent auditor (external); and
The accounts must contain a statement by the auditors (the auditors
report) about whether in their view the accounts give a true and fair
view.

Laws and regulations governing accounting

2.1 Laws, regulations and the format and content of company accounts
National laws vary in the amount of detail that they specify concerning
the format and content of company accounts (the financial statements and
notes to statement).
The law might specify:
- How a statement of financial position or income statement should be
presented; and
- The minimum items that it should contain.
Financial statements are prepared in accordance with some longestablished principles of accounting, such as the going concern concept
and accruals concept.
Some regulatory bodies (IASB) responsible for preparing accounting
standards have produced a statement of principles and guidelines (the
Framework for the preparation and presentation of FSs)

Laws and regulations governing accounting

2.2 The purpose of accounting standard
The Companies Act 1985 dictates the form and content of accounts,
which must also comply with accounting standards.
International Financial Reporting Standards (IFRS) are issued by
the International Accounting Standards Board (IASB).
The International Accounting Standards Board's objectives include:
(a)Development of global accounting standards
(b) Rigorous application of those standards
(c) Convergence of national accounting standards
Company law requires that a published balance sheet must give a
'true and fair view of the state of affairs' of the company at the year
end, whilst the profit and loss account must give a 'true and fair view
of the profit or loss' for the financial period.
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The Main Financial Systems In Business

There are a number of functions to be managed within a business:
(a) Purchasing
(b) Human resources
(c) Finance
(d) Sales and marketing
(e) General administration
These activities are supported by business systems and financial
systems.
To minimise these risks, an organisation must ensure that it has
adequate controls over transactions. (ie: through control procedures)
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The Main Financial Systems In Business

Systems are separate but inter-related processes with the aim of
achieving an objecrive.
Systems are often documened in a company by a procedures
Manual.
Two main financial systems in business:
(i) Purchases system
(ii) Sales system
Others:
- Payroll system
- Credit control system
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(i) Purchase system

Purchase Requisition:
A request (properly authorised) is sent to the buying department, asking it to purchase a
quantity of a particular item. The requisition might come from the manager of the stores
department.
Purchase Order:
The buyer places an order with a supplier, probably after checking prices and delivery
terms with a number of different suppliers.
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(i) Purchase system

Delivery Note:
The supplier delivers the goods. The person making the delivery provides a delivery notes,
as evidence that the good have been delivered.
This is signed by the person receiving the goods.
Delivery not is used to prepare an internal document, called goods received note (GRN)
This includes details of the goods received, including the inventory code for the item.
A copy of GRN is sent to the account department.
Purchase Invoices:
An invoice is received from the supplier. Suppliers normally give customers a specified
length of time for making the payment (the credit period).
The suppliers invoice, called the purchase invoice, specifies the goods supplier, their cost
and the date by which payment is required.
The accountant/book-keeper matches the purchase invoice with the GRN and a copy of
purchase order, to make sure that the details agree. If they do agree, a record is made in
accounting system for the invoice received (the amount payable).
Accounting record for payment:
The invoice is eventually paid (by the account department).
A record of the payment must be entered in the accounting system.

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(ii) Sales system

Sales Order:
A sales order is received from the customer.
The prder goes through a credit check.
The sales order is processed.
Delivery Note:
The goods are delivered to the customer, who signs the delivery note.
A copy of the delivery note is sent to the account department.
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(ii) Sales system

Sales Invoice:
A sales invoice is produced from the sales order and delivery note, and the invoice is sent
to the customer.
Accounting record for sales invoice:
The accountant/book-keeper records the details of the sales invoice in the accounting
system.
Accounting record for payment received:
When the customer eventually pays, the payment is sent or notified to the account
department, and a record of the payment is made in the accounting system.

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Advantages Manual or automated

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Control Over The Transactions

Financial control procedures exist to ensure that:
(a) Transactions are correctly recorded
(b) Business assets are safeguarded
(c) Production of accurate and timely information
Examples of good financial control procedures include:
(a)Cheque/bank transfers over a certain amount needing two
signatures
(b) Authorisation limits on purchase orders
(c) Authorisation of expense claims
(d) Effective credit control
(e) Effective computer security and access levels
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Relationship between accounting and

other business functions
(i) Accounting and purchasing
Purchasing:
Responsible for buying goods & services from external suppliers;
Deciding which suppliers to use and agreeing a price and other conditions
of purchase.

Accounting:
Preparing the annual financial plan or budget for the business
An element of the budget should be a material purchases budget, which is
the budget for the quantities of materials that will be purchase in next
financial year and their cost.
In order to prepare the budget, the accountant should therefore discuss
prices with the purchasing department.
Responsible for producing management information about prices, by
comparing actual paid and expected/budgeted prices.
Responsible to provide information to senior management about inventory
control in order to avoid excessive inventories.
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Relationship between accounting and

other business functions
(ii) Financial

considerations in production
Manufacturing:
Produce products.

Accounting:
Record the cost of production and calculate the cost of closing
inventory at the end of each financial year.
Provide management information about the production costs for the
purposes of:
- Preparing the annual budget.
- Calculating expected unit cost of production for each product item.
- Produce control report about actual production costs incurred.

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Relationship between accounting and

other business functions
(iii) Financial issues in marketing
Marketing:
Make pricing decisions, and decide how much should be charged for
goods and services.

Accounting:
Providing information about costs and gross profit margin.
Estimating total profit at different price levels.
Involved in the preparation of marketing budgets and providing control
report information that compares actual marketing spending with the
budget.

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Relationship between accounting and

other business functions
(iii) Financial issues in marketing
Marketing:
Make pricing decisions, and decide how much should be charged for
goods and services.

Accounting:
Providing information about costs and gross profit margin.
Estimating total profit at different price levels.
Involved in the preparation of marketing budgets and providing control
report information that compares actual marketing spending with the
budget.

Costs and benefits of effective service provision

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