Accounting systems in small and medium enterprises

2.15. Use of source documents

· Initiate transactions and report their occurrence.

· Authenticate raw data that are input into the accounting system.

· Provide verifiable legal evidence of completed financial transactions.

· They are properly written sources of accounting information covering various transactions undertaken in the business during a given accounting period.

· They are occasionally used as media of contract between the firm and outsiders who deal with it from time to time.

· An underlying document, they are a basis or springboard for introducing transactions data into the accounting system.¹³

¹² I.M. pandey, financial management, seventh edition

¹³ S.N. Maheshwari, advanced accountancy(volume 1), fifth edition, 1995

2.16. Developing an accounting system

According to WEYGANDT, KIESSO, and KELL good accounting systems do not just happen. They are carefully planned, designed, installed, managed and refined. Generally, developing an accounting system involves the following four phases:

Analysis: This involves determining the internal and external information needs. It is identifying sources of information and the needs for controls, studying alternatives. If an existing system is being analyzed, its strengths and weaknesses must be identified.

Design: For a new system, forms and documents must be selected from alternatives, job descriptions must be prepared and equipments must be selected. Successful system design depends to a large upon the creativity, experience and capabilities of the designer. Redesigning an existing system may involve only minor changes, a complete overhaul or replacement of a manual system by a computerized system.

Implementation: Whether a new system is created or an existing is revised, the plan and design have to be implemented. New or revised documents, procedures, reports and processing equipment must be hired, trained and closely supervised through a start up or transition period.

Follow up: After the new or revised system is operational, it must be evaluated and monitored for weaknesses and break downs. Furthermore the effectiveness and efficiency of the system must be evaluated in relation to design and operational objectives. Corrections in design or changes in implementation may be necessary. Both internal and external audit procedures provide feedback and follow up assurances in regard to the soundness of the system.¹⁴

2.17. Financial statements

A firm communicates financial information to the users through financial statements and
reports. The financial statements contain summarized information of the firm's financial
affairs, organized systematically. They are means to present the firm's financial position to

¹⁴ Kieso, D.E and Weygandt, J.J, Intermediate accounting, John Wiley,1980, p.3-8

users. The preparation of financial statements is the responsibility of top management. As these statements are used by investors and financial analysts to examine the firm's performance in order to make investment decisions, they should be carefully prepared and contain as much information as possible.

There are four types of financial statements to be prepared by the firm for the users of accounting information. These statements are:

Balance sheet (statement of financial position) Trading, profit and loss account (income statement) Fund flow statement

Cash flow statement

These statements are contained in the company's annual report. A typical annual report also includes the chairman's speech, the director's report, the auditor's report and accounting policy changes. For internal management purposes, i.e. planning and controlling, much more information than contained in the published financial statements is needed. Therefore, the financial accounting information is presented in different statements and reports in such a way as to serve the internal needs of management and external decision making.

2.17.1. Balance sheet (statement of financial position)

The purpose of balance sheet is to report the financial position of a business at a particular point of time , that is :

Assets = liabilities + owners equity

Assets: These represent the resources owned by the entity. Assets are divided into current assets and fixed assets.

Current assets: These are cash and other assets, which are reasonably expected to be realized in cash or consumed during the normal operating cycle, or within one year whichever is longer, for example cash, account receivable, inventory, etc.

Fixed assets: these are long live assets that were acquired for use during operations and have a life span of more than one accounting period.

Liabilities: Liabilities are the debts of the entity. Owners' equity represents the interests of the owners. The heading specially identifies the name of the entity, the title of the report, and specific data of the statements.