Business Leadership Series 001..Closing the financial knowledge gap.

Accounting Systems Design and Internal Control

Adesina Adedayo

Linkgates ConsultingTel: 01-4322888, 08033005344,08074495469E-mail:linkgatesconsulting@yahoo.co.ukWebsite: www.aaps-ng.com

Acknowledgements………………………………………………………………………

Background………………………………………………………………………………..

Part 1

Chart of Accounts……………………………………………………………………

Overall Responsibility…………………………………………………………………

Management of the Computer System…………………………………………………

Accounts Receivable……………………………………………………………………...

Accounts Payable…………………………………………………………………………

Part 2

Order Entry………………………………………………………………………………

Cost Accounting………………………………………………………………..

Monthly Reporting

Inventory Control

Payroll

Part 3

Internal Accounting Control

Fixed Assets

Bank Reconciliation Statement

Budgeting & Financial Planning

Acknowledgement

I want to acknowledge the support from my friends and loved ones who encouraged me consistently by saying, “ Ade, you need to download some of these things, so that fresh ideas can come back into your system”. I want to say I have complied by effectively downloading them.

I will also want to allay the fear of my friends, who are of the opinion that by putting the set up of accounting system in a booklet form, it may end up depriving them of the secrecy of the trade. The truth is by putting these on paper, we will end up with the spread of knowledge and gain the respect of members of the public who will come to appreciate the uniqueness of the Professional Accountant and understand that we don’t just keep books, we add value through financial analysis and planning based on solid accounting systems and sound internal controls.

I am appreciative of my family and friends who have never given up on me in terms of belief in my competency and knowledge. I am indeed humbled by your faith in my ability even though at times I am scared of the enormous responsibility that comes with such absolute reliance on my opinions.

I pray that God will continue to imbibe me with the Spirit of the Oracle and not that of the Orator.

While I acknowledge that there is still room for improvement, I am encouraged to publish this booklet based on my conviction that perfection and improvement comes with time. We can safely conclude that this publication can be considered as my step of faith. Other professional publications will follow in quick succession.

We are conscious of the truth that says, “The People Perish for Lack of Knowledge” and that is why our mission statement is very simple:

“We want to close the financial knowledge gap”.

Background

What is Accounting?

The simple definition of accounting is "A precise list or enumeration of financial transactions." For the most part, that's all that accounting is a list of financial transactions in your business. It's a method for you to track the money coming into your business and the money going out.

Why is Accounting Important?

Obviously, accounting is important because you want to know if your business is making a profit. Also, the business owner wants to be able to look at sources of income and expenses and make decisions based on that information.

Using accounting software, the business owner can generate reports on "profit and loss", "cash flow", the "balance sheet" and dozens of other reports that can help him/her get an overall picture of how the business is doing now or in the past.

Also, the Tax Authorities require tracking of money for value added taxes, payroll and income tax purposes. In fact, a good accounting system can make the filing of tax returns much easier and less time consuming.

How do I Setup My First Accounting System?

Pick An Accounting Method

The first decision to be made is which type of accounting method to choose, there are 2 choices:

The Cash Method (or Cash Basis) - this means that you count income when you actually receive it (either as cash, credit card charges or cheque) and your expenses are counted when you actually pay them. This is the most common method for small businesses, especially those that take immediate payment for a product or service (credit card, cheque, cash, etc.)

The Accrual Method (or Accrual Basis) - this means that you count income when a sale is made (regardless if you actually receive the money for it) and expenses are counted when you actually receive the good or service (instead of paying for it immediately). This method is common for larger businesses or small businesses that utilize "invoicing" and frequently deliver a product or service before being paid for it.

Choosing a Method

You are free to pick either method provided you have less than N5 million in annual sales OR you maintain inventory (in that case, then you must use the accrual method).  

The accrual method is generally considered to give you a more accurate picture of your company's financial situation but requires you to take extra steps like maintaining accounts receivable and accounts payable records. The cash method is generally easier to maintain and is the preferred method for small businesses.

Choose a Method for Recording Transactions

After you've decided on an accounting method, the next step is to decide how you are going to record transactions. You have basically 2 choices:

Hand-Recording Transactions - you actually hand-write each transaction in a ledger.

Software - you enter transactions in a software program which then automates many routine tasks.

By far the most popular method is software.  There are dozens of accounting software packages and most of them will help you maintain your books as well as automate things like payroll and reports.

Differences between Manual and Automated Ledgers.

Think of the G/L as a sheet of paper on which transactions from all four categories of accounts-assets, liabilities, income, and expenses-are recorded. Some of them flow up from various sub ledgers, and some are entered directly into the G/L through a general journal entry. An example of such a direct entry would be the payment on a loan.

The same concept of a sheet of paper holds for each sub ledger that feeds the general ledger.

A computerized accounting system works the same way, except that the general ledger and sub ledgers are computer files instead of sheets of paper. Entries are posted to each and summarized, then the summary is sent up to the G/L for posting.

Set up Your "Chart of Accounts"

After choosing a method for recording transactions, it's time to setup your "chart of accounts".  A "chart of accounts" is simply a listing of all the various accounts in your accounting system. There are income accounts, expense accounts, asset accounts, etc.

As noted above, an accountant can be of great assistance in setting up your initial chart of accounts. Also, some accounting software programs include a "wizard" that will customize a "chart of accounts" for your business.

Components of the Accounting System

Think of the accounting system as a wheel whose hub is the general ledger (G/L). Feeding the hub information are the spokes of the wheel. These include

Accounts receivable Accounts payable Order entry Inventory control Cost accounting Payroll Fixed assets accounting

These modules are ledgers themselves. We call them subledgers. Each contains the detailed entries of its specific field, such as accounts receivable. The subledgers summarize the entries, then send the summary up to the general ledger. For example, each day the receivables subledger records all credit sales and payments received. The transactions net together then go up to the G/L to increase or decrease A/R, increase cash and decrease inventory.

We'll always check to be sure that the balance of the subledger exactly equals the account balance for that subledger account in the G/L. If it doesn't, then there's a problem.

Learning and Maintaining Your Accounting System

Once you've chosen your accounting system, the next step is learning and maintaining your accounting system. Learning the system will obviously depend on what solution you've adopted, but maintaining the system is accomplished primarily by 2 things:

1. You Have to Use the System - once you've taken the time and energy to setup an accounting system, you have to actually utilize it properly. This means entering every transaction, cheques, bill, charges or refund.

2. Reconcile Your Bank Statement - the best way to maintain your accounting system is by reconciling your bank statement with your accounting system every month. This means that you compare each transaction from your bank account or accounts with your accounting system and make sure that they balance. This process alone will force you to properly account for the company's money.

Part 1

Accounting Concepts and Principles

1. Accounting Entity

Accountants treat a business as distinct from the persons who own it. Then, it becomes possible to record the transactions of the business without the proprietor also. The concept of separate business entity is applicable for all types of organizations like sole proprietorship, partnership etc. where the business affairs are free from the private affairs of the proprietor or partner.

2. Money Measurement

Accounting records normally those transactions which are being expressed in monetary terms. Measurement of business events in monetary terms helps in understanding the state of affairs of the business in a much better way.

This is definitely informative and useful.

3. Going Concern Concept

It is assumed that the business will exist for a long time and transactions are recorded from this point of view. Based on this concept, the accountants, while valuing assets, will not consider the forced sale value of assets (market value), but the assets, normally, will be reflected at the cost of acquisition minus depreciation. Similarly, depreciation is provided based on the expected life of the assets. The concept, however, does not imply the permanent continuance of the business.

The underlying presumption is that the business will continue in operations long enough to charge against income the cost of fixed assets over their economic lives and to pay the liabilities when they fall due. This concept is applicable to the business as a whole and not for a particular division or branch. Merely closing of a branch or division may not adversely affect the ability of the enterprise to continue other businesses normally.

Once the business goes into liquidation or becomes insolvent, this concept does not apply. In other words, the going concern status of the concern will stand terminated from the date of appointment of a receiver.

4. Accounting Period Concept

According to this concept, the life of a business is divided into appropriate segments of time, say 12 months, for studying the results. While the life of a business is considered to be indefinite, according to the going concern concept, the measurement of income and studying the financial position of the business after a very long time would not be helpful in taking corrective steps at the appropriate time.

Therefore, it is necessary that after each segment of time interval the management should review the performance. The segment of time interval is called accounting period, which is usually a year. At the end of each accounting period, an income statement and a balance sheet is prepared. The income statement discloses the profit or loss made by the business during an accounting period. The balance sheet discloses the state of affairs of the business as on the last date of the accounting period. The term “conventions” includes those customs or traditions which guide the accountants while preparing the accounting statements.

5. Cost Concept

Transactions are entered in the books of account at the amounts actually involved. An asset is ordinarily recorded at a price at which it has been acquired. For example, a plot of land purchased by a firm for N5,000,000 would be recorded at this value irrespective of its current market price.

Cost concept has the advantage of bringing objectivity in the presentation of the financial statements. In the absence of this concept, the figures shown in the accounting records would have to depend on the subjective view of a person.

6. Realization Concept

Accounting is a historical record of transactions. It only records what has happened. It does not anticipate events, though anticipated adverse effects of events that have already occurred are usually recorded.

For example, A places an order on B for supply of certain goods. Upon receipt of the order, B procures raw material, employs labor, and produces and delivers the goods to A. In this case, the sale transaction will be recorded in the books of B only when the goods are delivered and not upon the receipt of an enforceable purchase order from A.

7. Expenses Recognition

Cost is the total outlay or expenditure on acquiring resources required for the production of goods or rendering of services. Cost of resources utilized and lost during a particular period is termed as the expired cost or expense and is charged to the revenue of the period to obtain information about income. Costs of the resources remaining unutilized or unexpired at the end of the period are carried forward to the next accounting period and are termed as assets.

8. Accrual Concept

The accrual system is a method whereby revenue and expenses are identified with specific period of time like a month, half year or a year. It implies recording of revenue and expenses of a particular accounting period whether they are received/paid in cash or not. Under the cash system of accounting, the revenue and expenses are recorded only if they are actually received/paid in cash irrespective of the accounting period to which they belong. But under accrual method, the revenue and expenses relating to that particular accounting period only are considered.

9. Disclosure

Apart from the statutory obligations, good accounting practice also demands that all significant information should be disclosed fully and fairly. The financial statements have to be prepared honestly and should disclose the information which is of material interest to the owners, present and potential creditors, and investors.

Whether something should be disclosed or not will depend on whether it is material or not. Materiality depends on the amounts involved in relation to the assets group involved or profits. In the case of financial statements of a limited company, the practice followed is to append

the notes to the accounts and disclose significant accounting policies. This is in pursuance of the convention of full disclosure.

10. Dual Aspect Concept

Each transaction has two aspects. With every increase in the money owned to others, there should be an increase in assets or loss. Thus, at any time the accounting equations is as follows:

Assets = Liabilities + Capital, or alternatively

Capital = Assets - Liabilities

For example, a proprietor brings in N100,000 in cash as capital to start a small business.

N100,000 is the capital and corresponding amount of N100,000 will appear as cash in hand (assets).

11. Verifiable Objectivity

According to this concept, all accounting transactions should be evidenced and supported by objective documents. These documents include invoices, contracts, correspondence, vouchers, bills, pass books, cheque books etc. Such supporting documents provide the basis for making accounting entries and for verification by the auditors later on. This concept also has its limitations. For example, it is difficult to verify internal allocation of costs to accounting periods.

12. Materiality

According to this convention, the accountant should attach importance to material details and ignore insignificant details. This is because otherwise accounting will be unnecessarily overburdened with minute details. The question “what constitutes material details” is left to the discretion of the accountant. Moreover, an item may be material for one purpose while immaterial for another.

The term materiality is a subjective term. The accountant should regard an item as material if there is a reason to believe that knowledge of it would influence decision of the informed investor. According to Kohler, “Materiality means characteristic attaching to a statement, fact or item whereby its disclosure or method of giving it expression would be likely to influence the judgment of a reasonable person.

13. Consistency

The accounting practices should remain the same from one year to another. For example, consistency in valuation of stock in trade or in method of charging depreciation. If the stock has been valued by adopting the principle of cost or market value, whichever is less, the same principle has to be consistently followed year after year.

Similarly, the method of charging depreciation, either straight line or written down value method, has to be consistently followed. This is necessary for the comparison of results. However, consistency does not mean inflexibility. In the case of change in law or from the point of view of improved reporting, this convention is broken and then adequate disclosure, as to the impact on the profit due to such change, has to be mentioned in the notes appended to the accounts.

14. Conservatism

Financial statements are usually drawn up on a conservative basis, especially in the initial stages when the anticipated profits, which were accounted, did not materialize. This results in less acceptability of accounting figures by the end-users. Therefore, accountants follow the rule “anticipate no profits but provide for all possible losses.” Similarly, based on this convention, the inventory is valued at cost or market price whichever is less.

Necessary provision for bad and doubtful debts is made in the books of account. Window-dressing, i.e. showing a position better than what it is, is not permitted. It is also not proper to show a position substantially worse than what it is. In other words, secret reserves are not permitted. Therefore, this convention has to be applied with reasonable caution and care.

15. Timeliness

Financial reports should be timely to have any usefulness for decision makers. Timeliness in financial reporting requires estimation of depreciation, provision for bad and doubtful debts, provision for discount etc. to prepare the financial statements of different accounting periods.

16. Industry Practice

Sometimes, practice prevailing in a particular industry is given precedence over generally accepted accounting principles. For example, valuation of gold on the basis of market price, agriculture

products on the basis of minimum support price determined by the government,etc.

17. Substance over Form

The accounting treatment and presentation in the financial statements of transactions and events should be governed by their substance and not merely by their legal form. Hence, when goods are purchased on hire-purchase basis, the property in goods is transferred to the buyer on the payment of the last installment only. However, the buyer for all practical purpose uses the goods as if he is the owner of the goods in question from the date of acquisition.

This aspect is reflected in the books of the buyer, normally by recording the asset at its cash price at the time of payment of initial amount (down payment). Hence, substance should always override the legal form. To quote Shiv Khera, “Attitude can make or break you. Success is vital but not without a feeling of fulfillment, like good looks are worth nothing without goodness. So, always choose substance over form. Never the reverse.”

Accounting Standard

Accounting communicates the financial results of business to various parties by means of financial statements which have to exhibit a “true and fair” view of the state of affairs. Like any other language, accounting also has complex set of rules.

However, these rules have to be used with a reasonable degree of flexibility in response to specific circumstances of the business and also in line with the changes in the economic environment, social needs, legal requirement and technological developments. Thus, these rules, though not rigid, cannot be applied arbitrarily. They normally operate within the boundary of rationality.

Accounting standards are defined as the policy documents issued by a recognized expert accounting body relating to various aspects of measurement, treatment and disclosure of accounting transactions and events.

Chart of Accounts

Your financial records are meant to track all of your transactions for the purpose of keeping them in balance as well as providing useful data for management reports and to use as decision making tools. The chart of accounts is the key to this data.

There must be an account number that covers every type of transaction, including the source of your income and the type of expense you incur. At the end of any designated period (month, year), you will total the naira amount in each category, and that will provide you with the numbers to create a tax return or a profit and loss statement.

First, you must learn the major categories that create the chart and then you can work on the subheadings that will give you the detail you require. The accepted accounting method numbers them from 100(or 1000) to 600(or 6000). However, this may be extended to 700(or7000) and 800(or 8000) as well for purposes of additional detail.

The meaning of each category is as follows:

100-Assets

This will include current assets such as cash and accounts receivable(which is considered to be liquid because it converts to cash as accounts are collected).

Current assets are numbered 110 -149. Fixed assets such as furniture, fittings, machinery, equipment and real estate are numbered 150 -199.

200- Liabilities

This will include current liabilities such as accounts payable, taxes due, and the current portion (one year’s worth of payments) of any loan, and these will be numbered 210 -249.

Your long term liability such as the noncurrent portion of any loan and any other nonmaturing note will be numbered 250-299

300- Equity Account

The amount of equity, meaning the difference between assets and liabilities, will be covered in this account number with one exception. Retained earnings have an account prefix of their own, 400.

400- Retained Earnings

500- Income

This is where you will categorize the various types of revenue that are received by your company that will be primarily income derived by sales. If you collect value added tax on certain types of sales but not all, here is where you can track that information so that you can report the numbers accurately.

600- 800 Expense

Each type of expense (material, labor, rent, utilities and so on) will have its own account number. For the purpose of utilizing data for tax returns, separate accounts will be established for expenses that are not deductible such as payment of personal expense and the principal portion of any loan payments.

Overall Responsibility

Responsibility accounting systems generate financial and related non-financial information about the actual and planned activities of a company's responsibility centers--organizational units headed by managers responsible for a unit's performance. The principal components covered are budgets, performance reports, variance reports, and transfer prices.

The responsibility center's actual performance is compared to its planned (budgeted) performance and explained how resources can be transferred from one center to another. It also explains the management planning and control process.

Responsibility accounting is an underlying concept of accounting performance measurement systems. The basic idea is that large diversified organizations are difficult, if not impossible to manage as a single segment, thus they must be decentralized or separated into manageable parts. These parts, or segments are referred to as responsibility centers that include: 1) revenue centers, 2) cost centers, 3) profit centers and 4) investment centers.

This approach allows responsibility to be assigned to the segment managers that have the greatest amount of influence over the key elements to be managed. These elements include revenue for a

revenue center (a segment that mainly generates revenue with relatively little costs), costs for a cost center (a segment that generates costs, but no revenue), a measure of profitability for a profit center (a segment that generates both revenue and costs) and return on investment (ROI) for an investment center (a segment such as a division of a company where the manager controls the acquisition and utilization of assets, as well as revenue and costs). 

Controllability Concept

An underlying concept of responsibility accounting is referred to as controllability. Conceptually, a manager should only be held responsible for those aspects of performance that he or she can control. In my view, this concept is rarely, if ever, applied successfully in practice because of the system variation present in all systems. Attempts to apply the controllability concept produce responsibility reports where each layer of management is held responsible for all subordinate management layers.

Responsibility accounting has been an accepted part of traditional accounting control systems for many years because it provides an organization with a number of advantages. Perhaps the most compelling argument for the responsibility accounting approach is that it provides a way to manage an organization that would otherwise be unmanageable. In addition, assigning responsibility to lower level managers allows higher level managers to pursue other activities such as long term planning and policy making.

It also provides a way to motivate lower level managers and workers. Managers and workers in an individualistic system tend to be motivated by measurements that emphasize their individual performances. However, this emphasis on the performance of individuals and individual segments creates what some critics refer to as the "stovepipe organization."

Information flows vertically, rather than horizontally. Individuals in the various segments and functional areas are separated and tend to ignore the interdependencies within the organization. Segment managers and individual workers within segments tend to compete to optimize their own performance measurements rather than working together to optimize the performance of the system.

Management of the Computer System

The main reason you are in business is to ensure the maximum possible revenue with the minimum possible cost in terms of resources so as to add value to the business.

The Need for Computerization of Operations

Business technology is continuously changing names and

changing roles.

In the 1970s, business technology was known as data

processing (DP). DP’s primary role was to support the existing

business. It was primarily used to improve the flow of financial

information.

In the 1980s, business technology changed names to

information systems (IS). The role changed from supporting the

business to doing business.

Things started to change as the 1990s approached. Businesses

shifted to using new technology on new methods. Technology’s new

name became information technology (IT) and its role became to

change business.

In the mid 1990s, we started moving away from information

technology toward knowledge technology (KT). Knowledge is

information charged with enough intelligence to make it relevant and

useful. KT will change the traditional flow of information from an

individual going to the database to the data coming to the individual.

KT will “think” about the facts based on an individual’s needs, reducing

the time spent finding and getting information. Then businesspeople

can spend more time doing what’s important: deciding how to react to

problems and opportunities.

Use of Computer in data capture

Perhaps the most dynamic change in recent years is the move

away from main frame computers that serve as the center of

information processing toward network systems that allow many users

to access information at the same time.

Networks connect people to people and people to data.

Networks have three major benefits:

– They save time and money.

– Networks provide easy links across functional boundaries.

– Companies can see their products more clearly.

Computer software( programs) provide the instructions that

enable you tell the computer what to do. It’s important to find the right

software before finding the right hardware (equipment).

Business people most frequently use software for five major

purposes:

– Writing (word processors)

– Manipulating numbers (spreadsheets)

– Filling and retrieving data (databases)

– Presenting information visually (graphics), and

– Communicating.

Today’s software can perform all five functions in one kind of

program known as integrated software or suites.

Word Processing Programs: Businesses use word processors

to increase office productivity. Standardized letters can be

personalized quickly, documents can be updated by changing only the

outdated text and leaving the rest intact, and contract forms can be

revised to meet the stipulations of specific customers. Example:

Microsoft Word.

Spreadsheet Programs: This is simply the electronic

equivalent of an accountant’s worksheet. A spread sheet is a table

made up of rows and columns that enables a manager to organize

information. Example- Microsoft Excel

Database Programs: This allows you to work with information

you normally keep in lists: names and addresses, schedules,

inventories, and so forth. Simple commands allow you to add new

information, change incorrect information, and delete out of date or

unnecessary information. Example: Microsoft Access.

Graphics Programs: Can use data from spreadsheets to

visually summarize information by drawing bar graphs, pie charts, and

line charts.

Communications software makes it possible for different

brands of computer to transfer data to each other. The software

translates data into ASCII American Standard Code for Information

Interchange), the common standard all computer manufactures have

agreed to adopt.

Accounts Receivable

The main reason you are in business is to provide goods or services to your customers. Success is a sale, and once that transaction takes place, your accounting system goes into action. The value of that sale becomes income to the company and is posted to the income

subledger. If the sale is cash, it is posted to the cash account. If the sale is made on credit, it is posted to the accounts receivable.

Posting a Sale to Account Receivable

The first step here is to post the sale to income and then to the customer account card. In each case, you will want to identify the transaction by a date and invoice number that will allow you to refer to the source document.

Then you will need to add the current charge to any previous balances to get the current amount owed by that customer. This detailed record is critical for the effective collection activities of your business.

A computerized system will automatically update receivable balances; on a manual system, you will have to make sure that the step is done. Your accounts receivable total balance will show up as an important line item on the asset side on your balance sheet.

Posting Payments and Other Credits to Receivable

When a payment has been received, it will be credited against the existing balance on your customer’s account receivable card. The important step here is making sure that the payment is credited against the exact invoice being paid. At the end of the month, you will want to determine the age of all of your outstanding customer accounts so that you can determine what monies are due from invoices that are over 30,60,90 days and longer. If you don’t post the payment against the proper invoice

Making Collections.

By looking at receipts from past billing cycles, it is often possible to detect recurring cash flow problems with some clients, and to plan accordingly. Small business owners need to examine clients on a case-by-case basis, of course. In some instances, the debtor company may simply have an inattentive sales force or accounts payable department that needs repeated prodding to make its payment obligations. But in other cases, the debtor company may simply need a little more time to make good on its financial obligations. In many instances, it is in the best interests of the creditor company to give such establishments a little slack. After all, a business that is owed money by a company that files for bankruptcy protection is likely to see very little of it, whereas a well-managed business that is given the chance to grow and prosper can develop into a valued long-term client.

Methods Of Collecting.

A good way to improve cash flow is to make the entire company aware of the importance of accounts receivable, and to make collections a top priority. Invoice statements for each outstanding account should be reviewed on a regular basis, and a weekly schedule of collection goals should be established. Other tips in the realm of accounts receivable collection include:

Do not delay in making follow-up calls, especially with clients who have a history of paying late

Curb late payment excuses by including a prepaid payment clause with each invoice

Get credit references for new clients, and check them out thoroughly before agreeing to do business with them

Know when to let go of a bad account; if a debt has been on the books for so long that the cost of pursuing payment of it is proving exorbitant, it may be time to consider giving up and moving on (the wisdom of this depends a lot on the amount owed, of course).

Collection agencies should only be used as a last resort.

Accounts Payable - AP

An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable entry is found on a balance sheet under the heading current liabilities. Accounts payable are often referred to as "payables".

Another common usage of AP refers to a business department or division that is responsible for making payments owed by the company to suppliers and other creditors.

Accounts payable are debts that must be paid off within a given period of time in order to avoid default. For example, at the corporate level, AP refers to short-term debt payments to suppliers and banks.

Payables are not limited to corporations. At the household level, people are also subject to bill payment for goods or services provided to them by creditors.

Each demands payment for goods or services rendered and must be paid accordingly. If people or companies don't pay their bills, they are considered to be in default.

Accounts payable is the term used to describe the amounts owed by a company to its creditors. It is, along with accounts receivable, a major component of a business's cash flow. Aside from materials and supplies from outside vendors, accounts payable might include such expenses as taxes, insurance, rent (or mortgage) payments, utilities, and loan payments and interest.

For many businesses, the significance of every overdue payment can often be greatly magnified. For this reason, it is absolutely essential for entrepreneurs and business owners to deal with the accounts payable side of the business ledger in an effective manner. Bills that are unpaid or addressed in a less than timely manner can snowball into major credit problems, which can easily cripple a business's ability to function.

By making informed projections and sensible provisions in advance, the business can head off many credit problems before they get too big. Obligations to creditors, ideally, should be paid off concurrently with the collections of accounts receivable. Payment cheques should also be dated no earlier than when the bills are actually due. In addition, many companies will find that their business fortunes will take on a cyclical character, and they will need to plan for accounts payable obligations accordingly.

Prioritizing and Monitoring

This is especially true for fledgling business owners who are often stretched pretty tightly financially. Entrepreneurs who find themselves struggling to meet their accounts payable obligations have a couple of different options of varying levels of attractiveness. One option is to "rest" bills for a short period in order to satisfy short-term cash flow problems. This basically amounts to waiting to pay off debts until the business's financial situation has improved. There are obvious perils associated with such a stance: delays can strain relations with vendors and other institutions that are owed money and over-reliance on future good business fortunes can easily launch entrepreneurs down the slippery slope into bankruptcy.

Another option that is perhaps more palatable is to make partial payments to vendors and other creditors. This good-faith approach shows that an effort is being made to meet financial obligations, and it

can help keep interest penalties from raging out of control. Partial payments should be set up and agreed to as soon as payment problems are forecast, or as early as possible. It is also a good idea to try to pay off debts to smaller vendors in full whenever possible, unless there is some clear benefit to be had in making installment payments to them.

Usually, signs of cash flow problems will start to show up well before the company's financial fortunes become truly desperate. One key concern is aged payables. Bills should never be allowed to "ripen" more than 45 to 60 days beyond the due date, unless a special payment arrangement has been made with the vendor in advance. At 60 days, a company's credit rating could be jeopardized, and this could make it harder to deal with other vendors and/or loaning institutions in the future.

Outstanding balances can drive interest penalties way up, and this trend is obviously compounded if many bills are overdue at the same time. Such excessive interest payments can seriously damage a business's bottom line. Business owners should keep in mind, however, that it is in the best interest of vendors and other creditors to keep the fledgling business solvent as well. Explaining current problems and their planned solutions to creditors can deflect ill feelings and buy more time. Some—though by no means all—creditors may be willing to waive, or at least reduce, growing interest charges, or make other changes to the payment schedule.

It is crucial to the success of a small business that accounts payable be monitored closely. Ideally, this aspect of the firm's operations would be supervised by a financial expert (either inside or outside the company) who is not only able to see the company's financial "big picture," but is able to analyze and act upon fluctuations in the company's cash flow.

This also requires detailed record keeping of outstanding payables. Reports ought to be checked on a weekly basis, and when payments are made, copies should be filed along with the original invoices and other relevant paperwork. Any hidden costs, such as interest charges, should also be noted in the report. Over a period of time, these reports will start to paint an accurate cash flow picture.

Internal audits of accounts payable practices can be an effective method of addressing this issue, especially for expanding companies. Accounts payable is one of a series of accounting transactions covering payments to suppliers’ owed money for goods and services.

Business organizations which have become too large to perform such tasks by hand, or who prefer not to do them by hand will generally use accounting software on a computer to perform this task. Accounts payable is classified as a liability account and as such normally has a credit balance. Accounts payable is classified as a Current Liability because the obligation is generally due within 12 months from the initial transaction date.

Reconciliations

One of the most difficult and time-consuming tasks can be reconciling company records of invoices and payments against vendors' statements of outstanding invoices. If the two companies have applied invoices to different sets of credit memos and checks, and the situation has been going on for a long time, it can become very difficult to untangle. For instance, if a company cuts a cheque for invoice #3, and the vendor applies the cheque to invoices #1 and #2, the vendor may continue asking for a payment for invoice #3. If this situation is multiplied over hundreds of invoices, it can take hours or days to resolve the discrepancies.

Expense administration

Expense administration is usually closely related to accounts payable, and sometimes those functions are performed by the same employee. The expense administrator verifies employees' expense reports, confirming that receipts exist to support airline, ground transportation, meals and entertainment, telephone, hotel, and other expenses. This documentation is necessary for tax purposes and to prevent reimbursement of inappropriate or erroneous expenses. Airline expenses are, perhaps, the most prone to fraud because of the high cost of air travel and the confusing nature of airline-related documentation, which can consist of an array of reservations, receipts, and actual tickets.

Petty cash is also usually paid out by AP personnel in the form of a check made out to an employee, who cashes the check at the bank and puts the cash in the petty cashbox.

Internal controls

A variety of checks against abuse are usually present to prevent embezzlement by Accounts Payable personnel. Separation of duties is a common control. Nearly all companies have a junior employee

process and print the checks and a senior employee review and sign the checks. Often, the accounting software will limit each employee to performing only the functions assigned to them, so that there is no way any one employee – even the controller – can single handedly make a payment.

Some companies also separate the functions of adding new vendors and entering vouchers. This makes it impossible for an employee to add himself as a vendor and then cut a check to himself without colluding with another employee.

In addition, most companies require a second signature on checks whose amount exceeds a specified threshold.

In accounts payable, a simple mistake can cause a large overpayment. A common example involves duplicate invoices. A invoice may be temporarily misplaced or still in the approval status when the vendors calls to inquire into its payment status. After the AP staff member looks it up and finds it has not been paid, the vendor sends a duplicate invoice; meanwhile the original invoice shows up and gets paid. Then the duplicate invoice arrives and inadvertently gets paid as well, perhaps under a slightly different invoice number.

Audits of accounts payable

Auditors often focus on the existence of approved invoices, expense reports, and other supporting documentation to support checks that were cut. In the real world, it is not uncommon for some of this documentation to be lost or misfiled by the time the audit rolls around. An auditor may decide to expand the sample size in such situations.

Part 2

Order Entry

This is the process of entering order information to a fulfillment system. It is also the recording of an order placed or received.

Initial input system of the order processing system. Marketing is responsible for taking orders. Accounting is responsible for billing the customer and collecting payments.

The most important objectives of order entry are speed and accuracy so that customers can receive what they have ordered as quickly as possible and marketers can determine which promotions are working best.

In addition to product and customer information, order entry must also capture a key code and payment type (cash, credit, credit card). The order entry process may also include entry of demographic information gathered on the order form, such as occupation or age. If the order is taken over the telephone, the order entry clerk can act as a salesperson by trying to increase the size of the order.

Cost Accounting

Background

Cost accounting has long been used to help managers understand the costs of running a business. Modern cost accounting originated during the industrial revolution, when the complexities of running a large scale business led to the development of systems for recording and tracking costs to help business owners and managers make decisions.

In the early industrial age, most of the costs incurred by a business were what modern accountants call "variable costs" because they varied directly with the amount of production. Money was spent on labor, raw materials, power to run a factory, etc. in direct proportion to

production. Managers could simply total the variable costs for a product and use this as a rough guide for decision-making.

Some costs tend to remain the same even during busy periods, unlike variable costs which rise and fall with volume of work. Over time, the importance of these "fixed costs" has become more important to managers.

Examples of fixed costs include the depreciation of plant and equipment, and the cost of departments such as maintenance, tooling, production control, purchasing, quality control, storage and handling, plant supervision and engineering. In the early twentieth century, these costs were of little importance to most businesses.

However, in the twenty-first century, these costs are often more important than the variable cost of a product, and allocating them to a broad range of products can lead to bad decision making. Managers must understand fixed costs in order to make decisions about products and pricing.

For example: A company produced railway coaches and had only one product. To make each coach, the company needed to purchase N60 of raw materials and components, and pay 6 laborers N40 each. Therefore, total variable cost for each coach was N300.

Knowing that making a coach required spending N300, managers knew they couldn't sell below that price without losing money on each coach. Any price above N300 became a contribution to the fixed costs of the company. If the fixed costs were, say, N1000 per month for rent, insurance and owner's salary, the company could therefore sell 5 coaches per month for a total of N3000 (priced at N600 each), or 10 coaches for a total of N4500 (priced at N450 each), and make a profit of N500 in both cases.

Cost Benefit Analysis

Cost/Benefit Analysis is a powerful, widely used and relatively easy tool for deciding whether to make a change.

To use the tool, firstly work out how much the change will cost to make. Then calculate the benefit you will from it.

 Where costs or benefits are paid or received over time, work out the time it will take for the benefits to repay the costs. 

Cost/Benefit Analysis can be carried out using only financial costs and financial benefits. You may, however, decide to include intangible items within the analysis. As you must estimate a value for these, this inevitably brings an element of subjectivity into the process.

Benefit-cost analysis is simply rational decision-making. People use it every day, and it is older than written history. Our natural grasp of costs and benefits is sometimes inadequate, however, when the alternatives are complex or the data uncertain. Then we need formal techniques to keep our thinking clear, systematic and rational. These techniques constitute a model for doing benefit-cost analysis. They include a variety of methods:

identifying alternatives;

defining alternatives in a way that allows fair comparison;

adjusting for occurrence of costs and benefits at different times;

calculating dollar values for things that are not usually expressed in dollars;

coping with uncertainty in the data; and

summing up a complex pattern of costs and benefits to guide decision-making.

It is important to keep in mind that techniques are only tools. They are not the essence. The essence is the clarity of the analyst's understanding of the options.

General administrative and overhead costs

When a large organization, like a government, analyzes many possible investments over time, it may have a problem deciding how to treat general costs that are not specific to a particular project. Such costs are sometimes called overhead costs or general and administrative costs. These are more or less fixed costs. One additional project will often make little difference. The standard practice in benefit-cost analysis is to take the marginal or incremental approach to counting costs and benefits, but this approach ignores most of the program and overhead costs. The problem with this as a standard practice, therefore, is that it is too generous to the investments and overstates the true returns. In the extreme, overhead costs never get counted anywhere in the organization's decision-making process.

If the organization only occasionally makes major investments, it may be reasonable to ignore program and overhead costs - in essence,

letting them be borne by the run-of-the-mill operations of the organization. In this case, it is reasonable to take a marginal-cost approach. In contrast, if the organization makes many investments, it is preferable to include an 'average' allowance for overhead in the costs, although any single investment has little effect on overhead at the margin. If all investment options bear overhead equally, this factor is unlikely to influence the choice among them very much. Even so, it is preferable to have a realistic picture of investment returns, including overhead costs, than to have an unrealistically rosy picture.

Monthly Reporting

Clear financial reporting to the Board of Directors is essential for good financial management in any organization. Budgets and accurate day-to-day financial records are of limited use if the information they contain is not communicated clearly to the Board and those people responsible for managing the organization.

The essential elements of good financial reporting are:

All information must be relevant. Financial information must be understandable. The information presented must be reliable. Financial information must be timely to be useful.

Reported information must be relevant

The Finance Committee and/or Board of Directors should determine what financial information they require to monitor the organization’s financial progress. Information should include a summary of results of operations (revenues received and expenses incurred), financial position (assets and liabilities) and key statistical data to help the Board determine the financial outlook for the future. Specifically, monthly financial reports should at a minimum include totals for:

Revenue from principal activities and other sources. Salary and benefits expenses. Fixed costs, if significant. Other expense information as the Board considers necessary. A summary of significant assets at the end of the month

including cash, accounts receivable, accounts payable (outstanding invoices).

The above information should give you an idea of the organization's current financial status and progress since the last Board meeting.

A comparison of actual with budgeted results is also very useful. Actual-to-budget comparisons will enable the Board to determine whether approved financial policies are being followed (Is the centre operating at a break-even level as directed by the Board?) and whether corrective action needs to be taken. The actual-to-budget analysis is most useful when accompanied by a brief narrative explaining significant variations.

Some Boards require monthly as well as year-to-date information for actual and budgeted revenues and expenses. The amount of detail reported is, of course, up to the Board of Directors.

Reported information must be understandable

Your monthly financial reports should neither be so summarized as to be superficial nor so detailed and voluminous as to be unintelligible. The ideal amount of information reported to the Board will be a function of the culture of the Board members together with the level of their involvement. Some Boards require reams of detail while other Boards prefer a simple one page summary assuming that all of the details have been taken care of by the staff. The ideal amount of information reported usually lies somewhere between these two extremes.

One strategy to determine the appropriate amount of information is to start with a fairly summarized report and then add information as requested by Board members. For example, if your Board wants details of advertising and professional development expenses reported each month then expand your initial summarized version of the report to include these amounts. If your Board requests a copy of the monthly bank reconciliation then attach that to the statement of financial position presented. You might want to revisit the content of monthly financial reports with each newly appointed Board of Directors.

Reported information must be reliable

Financial reports to Boards of Directors are only useful if the information is reliable. You do not have to have a monthly audit to achieve reliability. It is generally sufficient that the bank be reconciled to the accounting records each month and that the reconciliation be reviewed periodically by the Finance Committee. The Finance Committee might also periodically (once or twice a year) make sure that amounts reported actually agree with those in the financial records.

While bank reconciliation will help ensure that all cash transactions are reported, it will not guarantee that all transactions have been classified properly.

In summary, to help ensure that data reported is reliable you should:

On a monthly basis reconcile all bank account balances with those reported to the Board of Directors.

Compare actual to budgeted amounts and explain variations. This procedure will help determine whether significant expense or revenue transactions have been misclassified.

Periodically (twice a year) compare amounts reported to the Board with those in the underlying accounting records.

Reported information must be timely

Reporting the results of operations and financial position on time is essential if corrective action is to be taken by the Board. For example, if you report September activity in January it may be too late to adjust salary expenses and/or fees to avert a pending financial crisis resulting from a drop in enrolment. Timely financial reports are essential!

Reporting financial information more than two months in arrears should raise warning flags for the Finance Committee and/or Board of Directors. Steps should be taken immediately to make sure that financial information reported is no more than one month old.

Inventory Control

Inventory Control is the process of managing the timing and the quantities of goods to be ordered and stocked, so that demands can be met satisfactorily and economically.

Inventories are accumulated commodities waiting to be used to meet anticipated demands. Inventory control policies are decision rules that focus on the trade-off between the costs and benefits of alternative solutions to questions of when and how much to order for each different type of item.

The possible reasons for carrying inventories are: uncertainty about the size of future demands; uncertainty about the duration of lead time for deliveries; provision for greater assurance of continuing production, using work-in-process inventories as a hedge against the failure of some of the machines feeding other machines; and speculation on future prices of commodities.

Some of the other important benefits of carrying inventories are: reduction of ordering costs and production setup costs (these costs are less frequently incurred as the size of the orders are made larger which in turn creates higher inventories); price discounts for ordering large quantities; shipping economies; and maintenance of stable production

rates and work-force levels which otherwise could fluctuate excessively due to variations in seasonal demand.

The benefits of carrying inventories have to be compared with the costs of holding them. Holding costs include the following elements: cost of capital for money tied up in the inventories; cost of owning or renting the warehouse or other storage spaces; materials handling equipment and labor costs; costs of potential obsolescence, pilferage, and deterioration; property taxes levied on inventories; and cost of installing and operating an inventory control policy. Inventories, when listed with respect to their annual costs, tend to exhibit a similarity to Pareto's law and distribution. A small percentage of the product lines may account for a very large share of the total inventory budget (they are called class A items).

Continuous-review and fixed-interval are two different modes of operation of inventory control systems. The former means the records are updated every time items are withdrawn from stock. When the inventory level drops to a critical level called reorder point, a replenishment order is issued. Under fixed-interval policies, the status of the inventory at each point in time does not have to be known. The review is done periodically.

Uncertainties of future demand play a major role in the cost of inventories. That is why the ability to better-forecast future demand can substantially reduce the inventory expenditures of a firm. Conversely, using ineffective forecasting methods can lead to excessive shortages of needed items and to high levels of unnecessary ones.

Payroll

Background

Employee compensation is one of the largest operating costs for many organizations. The long term success of a firm-perhaps even its survival –may depend on how well it can control employee costs and optimize employee efficiency.

In fact, some experts believe that figuring out how to best pay people has replaced downsizing as the human resources challenge.

Objectives.

(1) Make prompt payment in the proper amount to all persons entitled to be paid, in compliance with applicable laws, regulations, and legal decisions.

(2) Prepare adequate and reliable payroll records promptly.

(3) Make prompt accounting for and disposition of all authorized deductions from gross pay.

(4) Maintain adequate control over, and provide for proper retention and disposition of all payroll-related documents.

(5) Maintain individual pay records to show gross compensation (including allowances) by type and amount, deductions (including allotments) by type and amount and net pay for each pay period.

Who is an Employee?

An employee is somebody engaged in a contract of service.

The determining factors separating an employee from a self employed person are as follows:

1) The work the employee is carrying out is an integral part of the system.

2) The employee have fixed hours of work.

3) The employer supplies the tools.

4) The employee cannot delegate his duties under the contract

5) The employee is entitled to receive holiday pay or sick pay or any such benefits, which enhance his/her well being.

Remunerations

Remunerations are rewards for work done or service rendered. The basis of the remuneration can be measured work and/or unmeasured work.

Relevant factors to consider when choosing a type of remuneration include:

1) Efficiency in production: Volume or quality predominates

2) Effect on workers: Motivating?

3) Incidence of Overheads: Fixed remuneration or variable?

4) Ease of understanding and computation: less misunderstanding and bickering.

Types of Remuneration Systems

Salary Systems are systems of fixed compensation computed on weekly, biweekly, or monthly pay periods (e.g. N15,000 per month or N5,000 per week).

It’s probable that many people who graduated from the university will be paid a salary.

Hourly wage or day work is the system used for most blue collar and clerical workers. Often, employees must punch a time clock when they arrive at work and when they leave. Hourly wages vary greatly.

Piecework means that employees are paid according to the number of items they produce rather than by the hour or day. This system creates powerful incentives to work efficiently and productively.

Commission plans are often used to compensate salespeople. They actually resemble a piecework system; the commission is based on some percentage of sales.

Bonus plans are used for executives, salespeople, and many other employees. They earn bonuses for accomplishing or surpassing certain objectives.

Profit sharing plans give employees some share of profits over and above their normal pay.

Compensation Schemes

Compensation refers to ways of mitigating losses suffered by workers, usually as a consequence of the work they do or for loss of office.

A compensation method or type depends on the payroll policy of an organization, collective agreement with labour or legal and regulatory requirements.

Compensation can take any of the following:

Insurance Scheme Cash payment

Redundancy/Lay off

Others

Payroll Related Problems

- Payroll related expenses forms a large chunk of most organization’s total cost, especially in service organizations.

- Some problems that bedevil payroll administration are:• Ghost Workers• Fraudulently inflated pay packets• Under payments• Delayed payments to earn bank interest

- Causative factors of payroll problems include:• Lack of requisite experience• Frequent transfers or staff turnover• Lack of motivation• Lack of supervision• Poor employment practices• Tone at the top

Some ways of managing payroll problems are: Segregation of duties Use of passwords Use of checks such as , completeness test, hash totals, key

verification, range check. Training of staff Good recruitment practices-background screening of staff

Ethical and transparent tone at the top Vacation at least once a year.

The Role of Trade Unions

The impact of unions is felt through the collective bargaining process.

According to the International Labour Organization(ILO), collective bargaining is “the negotiation of working conditions and terms of employment between employers or group of employers on one hand and one or more representative workers organization on the other with a view to reviewing employment related agreement”.

ILO recognizes the following conditions as conducive for effective bargaining:

Freedom of Association

Stability of workers organization

Recognition of trade unions

Willingness of negotiating parties to give and take

Ability of parties to negotiate skillfully

Willingness to observe the collective agreement.

Trade Unions generally negotiate and ask for: Pay Rise Compensations Removal of Officers Retention of Officers Improved working conditions-tools, hours of work, environment,

etc. Non-casualisation of workers.

Part 3

Internal Accounting Controls

1. Authorization And Approval Limits

Signing of chequesAuthorized signatories to cheques shall be as follows:

Signatory A and Signatory B:

Capital ExpenditureAll capital expenditure above a certain amount must be approved by a certain level of Management/Board of Directors.

Petty cashImprest amount should be reasonable. Single payment from the float must not exceed a certain amount.

Loans and AdvancesThe sum advanced to all staff should not exceed the gratuity/fixed entitlement of the employee.

StockTo write off obsolete stock, the approval of the Board must be sought. The difference arising between the values shown in the financial records and the valuation obtained from the physical stocks check will be adjusted by amending the financial records to agree with the physical valuation after proper investigation by management.

Fixed assets revaluationRevaluation of any fixed asset will require the prior approval of the Board and may only be done by suitably qualified and independent valuers. Following the revaluation, the depreciation charge will be adjusted to reflect revised asset values.

Finance Committee

This committee is responsible for authorizing and approving all payments to be made by the company. At least two of the above must endorse a payment before the funds are released.

2. Income and Debtors

Control requirements

(1) Payment for goods is to be made by cheque or Bank draft. All customers’ cheque/ bank drafts must clear before goods are supplied.

(2) Sales must be made strictly on Cash and Carry basis except in the case of accredited credit customers.

(3) Down payment on order will be determined by Top Management before commencement of contracts and service jobs.

(4) Documented/Written Instruction to sell on credit must come from the Chairman.

(5) Service contract must be signed before service is rendered.

Investment Income

Investment income comprises:1) Interest earned from any fixed deposit account with

financial institution and any other income from investments.

2) Interest shall be earned when the company invest her income on fixed deposits or any financial instruments through the financial houses. Authority to invest in these instruments must be granted by the Board of Directors/Executive Chairman or Chief Operating Officer and the management of these investments should be done by the Accountant.

3. Purchases And Creditors

This section describes the documentation flow and procedures used in authorising, processing and accounting for purchases of goods and services.

The objectives of the procedures for the control of creditors and purchases are to ensure that:

- Goods purchased are actually needed and are of the type normally consumed by the company.

- Goods are received in good condition and services are properly performed.

- Capital and revenue expenditures are correctly distinguished and accounted for. Purchases in this regard will include the procurement of fuel and lubricants, spare parts, stationary and office supplies, electricity bills etc.

Control requirements

i) The company will operate a central buying system in order to enjoy the benefit of efficient purchasing.

ii) All purchase requisitions should be properly authorised by the Managing Director on the basis of the recommendation of the finance committee

iii) To ensure quality assurance of items to be purchased, the head of the requisitioning department should provide actual specifications of the items needed when the Purchase Requisition is raised.

iv) The Chief Operating Officer/Project Director is responsible for approving release of funds for cash purchases.

v) All local purchase order must be approved by the C.O.O/Project Director in accordance with the company’s authorization guidelines and approval links.

vi) Local Purchase Orders will only be raised for purchases other than those made by Staff for Cash Purchases.

vii) The Admin. Manager ensures that all purchase documents are duly approved. He is responsible for recommending a suitable supplier and maintaining up-to-date records of purchases.

viii) The Admin. Manager should liaise with the Supplier to ensure the prompt delivery of the items requisitioned.

ix) Suppliers should deliver the materials ordered directly to the store.A Goods Received Voucher (GRV) will be issued by the Storekeeper to evidence the receipt of the materials.

x) Suppliers should send their invoices directly to the accounts department.

xi) Invoices relating to goods should not be processed into the books of accounts until they are matched with relevant copies of the local purchase orders, good received notes, stock discrepancy/refund notes and waybills.

xii) Supplier’s statements should be reconciled each month with the relevant creditors’ account as shown on the creditors aged-analysis report.Goods/materials could be procured locally or if unavailable locally, imported.

4.0 Stores

Objectives

The procedures for accounting and control of stock are to ensure:

- the accuracy and completeness of stores records.

- that all items of stock (particularly items of high value) are properly received, stored, issued and controlled.

- that physical quantities are compared with books quantities for management reporting purposes.

- that adequate physical control exist to minimize loss arising from theft, misappropriation, pilferage and poor handling.

- that stock-out does not occur.

Control Requirements

1. The Stores Officer is responsible for the day-today control of the store. (This could be an officer or clerk from the Sales/Marketing Section of the company).

2. The Store Officer who is responsible for the custody of the stock should be totally independent of the stock procurement function which is the exclusive preserve of the Admin. Manager.

3. All Stock items purchased must be documented, recorded and posted in computer system.

4. Regular stock taking exercise should be organised by the Accountant and carried out by responsible officials who are independent of the stock function.

5. Regular reconciliation should be carried out between:

a) physical stock quantity (from stock count)

b) bin card balance, andc) stock ledger balance

5.0 Cash And Bank Procedures

It describes the steps to be followed in the balancing of the cash book and the reconciliation of the cash book to the statement on monthly basis.

Control Requirements

1. The Company will operate and maintain a cash book and bank accounts.

2. Daily collections (cash, cheques and drafts) must be banked before the close of business or in the morning of the day following the collection day. Collection must be banked intact.

3. A daily bank position statement must be issued by the Accountant and distributed to the Managing Director and Financial Controller.

4. Monthly bank reconciliation statement must be prepared by the Accounts Finance Mgr. and reviewed by Internal Auditor.

5. All cheque signatories must initial both the supporting documents and cheque payment vouchers when signing cheques.

6. A register of cheque booklets should be maintained by the Fin. Mgr.

7. Blank cheque books and payment vouchers must at all time be under the custody of the Accountant and kept under lock and key.

8. An out-going cheque register will be maintained to record all Cheque Payments by the Company. The register will contain the following information:

Date of cheque Name of Payee Particulars of payment Cheque Number Cheque amount Name of cheque collector Date of collection of cheque Signature of cheque collector

9. Cash forecast statement should be prepared by the Accountant andreviewed by the Managing Director and Financial Controller.

10. The Accountant will recompute the following on monthly basis to

ensure their correctness and appropriateness:

- Commission on turnover charged by banks.

- Interest charged on overdraft accounts.

- Interest receivable on bank deposits.

He should notify the Managing Director. in case of discrepancies. The Finance Mgr should follow up such discrepancies with the banks.

11. An in-coming cheque register will be maintained to record all cheque received by the company. The register will contain the following information.

Date of cheque Name of Payer Particulars of receipt Cheque Number Cheque amount

The register shall be maintained by the Secretary to the Managing Director.

Petty Cash Procedures

Summary of the systemThe main features of the petty cash system are as follows(a) Cash cheques are drawn to replenish the petty cash(b) All payments are made on the basis of approved petty cash

vouchers.(c) The transactions entered in the petty cash payment

vouchers are summarized at the end of each day using the petty cash summary sheet and the journal vouchers.

Petty Cash advance is limited to a certain amount. Where the expenditure exceeds this amount, it is batched along with others and paid for by cheque. The petty cash routine should start with an agreed cash float which is re-imbursed from time to time for the amount expended by cashed cheque in order to return the float to the initial amount.

Forms UsedThe principal forms used are as follows(a) Petty Cash Voucher(b) Petty Cash Summary Voucher/Analysis Sheet(c) Journal Voucher

6.0 Salaries And Wages Procedures

Objectives

These procedures are to ensure that:

* Staff employment is properly documented* Remuneration are properly authorised and paid to the

relevant staff.* Deductions from salaries are properly accounted for

pending payment to beneficiaries.

Control Requirements

The following internal controls are important:

1. Written authority is required for the engagement and dismissal of employees.

2. The use of personal history records for staff and where necessary, the keeping of time records for time worked.

3. The maintenance of attendance records for staff.

4. Occasional head count of staff by the Admin/HR Mgr.

7.0 Fixed Assets

A fixed assets is any item of capital expenditure, the benefit of which the Company will enjoy for more than one accounting period. The capitalisation policy shall be set by the Board of Directors.

Objectives

- To account fully for all items of fixed assets.- To ensure physical control of fixed assets by means of

frequent updating of the Fixed Assets Register and physical check for existence.

- To maximize efficiency in the utilization of fixed assets.

A register should be maintained for each major class of fixed assets.

Due to the usually larger sums involved, the authorisation of the purchase of fixed assets is done at the Board level. Major acquisitions should be duly budgeted for because of the impact on the liquidity of the company.

Control Requirements

1. There shall be a capital expenditure procedure to be established by the Board of Directors. This procedure must be followed whenever an asset is to be acquired.

2. All company assets must be registered and maintained in the name of the company.

3. All assets of the company shall bear unique identification numbers.

4. Access to all company assets shall be restricted to only persons authorised by the management.

5. Any disposal of company’s assets must be done with the express approval of the Board.

6. All assets must be physically inspected at least once a year.

8.0. Management Information Reports

Management information reports that will be prepared will include:

a) Daily Cash positionb) Monthly Trial Balancec) Monthly Profit and loss accountd) Monthly Manpower reporte) Half yearly stock taking reportf) Monthly balance sheet g) Monthly sales report h) Report on the Accounts.

a) Daily/Weekly Cash Position

The report should be prepared at the end of every working day by the officer in charge of the main cash book.

The report should show:

i) The opening balance of each bank account (per the company’s cash book)

ii) All lodgments into the bank during the day (per the bank paying-in-slip)

iii) All cheque payments during the day; andiv) The closing balance in each bank account.

A copy of this report shall be reviewed by the Accountant and distributed to:

- Managing Director

- General Manager.

b) Monthly Trial Balance

Individual posting on daily, weekly and at the month end are processed to relevant accounts in the general ledger through journal vouchers. The cumulative balance (DR or CR) in all ledger accounts at the end of each month is simply the Trial balance.

These balances must agree i.e. total DR must equal to total CR. If not, review posting and trace the difference.

The total accounts in the Trial balance comprise both balance sheet and profit and loss items.

c) Monthly Profit and Loss Account

Basic accounting data needed for the preparation of this account will be derived from Monthly trial Balance. The profit and loss account provides information on turnover, expenses and profit. The comparative figures could be the budget in which case the account will indicate how management has performed. This could also be compared with prior year figures on YTD and monthly basis.

d) Monthly Manpower Report

All manpower statistics generated by the personnel department (e.g. recruitment, dismissals, suspensions etc) must be sent to the Accounts Department. During the preparation of monthly Accounts, manpower data could be used in assessing the performance of the company i.e.

turnover per employee, profit per employee etc. Manpower statistics should be on departmental basis.

e) Half –yearly stock taking

The Account Officer will have responsibility for reporting to the Accountant the consolidated result of stocktaking during the six monthly periods. This report will highlight stocks at hand, in quantity and value, surpluses and shortages with explanations and general comments on stock management.

f) Monthly Balance Sheet

This is a follow-up of (b) and (c) above. The balance sheet will show the total assets and liabilities of the company. Appropriate notes to the accounts should highlight key area to management.

g) Monthly Sales Report

At the end of every month, the Accountant will prepare statistical reports with variances (Budget/Actual) for the following:

- Turnover (Unit/Value)- Expenses (direct/overhead)- Profit

h) Report on the Accounts

At the end of the company’s financial year, the Accountant should prepare the management accounts and report on the Accounts. The report should focus on significant and exceptional matters that needed to be brought to the attention of management. Comparison of actual results with budget should also be provided.

Concentration shall be in areas of performance evaluation:

- Turnover - Profitability- Market share- Liquidity and- Other relevant statistics

Fixed Assets

Fixed assets management is an accounting process that seeks to track fixed assets for the purposes of financial accounting, preventive maintenance, and theft deterrence.

Fixed Assets Register

A Fixed Asset Register (FAR) is an accounting method used for major resources of a business.

Fixed Assets are assets such as land, machines; office equipments, buildings, patents, trademarks, copyrights, etc. held for the purpose of production of goods or rendering of services and are not held for the purpose of sale in the ordinary course of business.

Fixed assets constitute a major chunk of the total assets in the case of all manufacturing entities. Even in the case of service entities such as hotels, banks, financial institutions, insurers, mobile / telephone service providers etc. it has become imperative to invest heavily in furnishing, equipment, and technology to attract, and retain customers.

Just as it is important for a person investing in the Capital Market to know those investments, so it is important for a business entity to have a list of its fixed assets. A Fixed Asset Register is that list of assets.

Objectives in maintaining a Fixed Asset Register (FAR)

A FAR must be kept in order to be in compliance with legislation governing corporations, companies, etc. It allows a company to keep track of details of each fixed asset, ensuring control and preventing misappropriation of assets. It also keeps track of the correct value of assets, which allows for computation of depreciation and for tax and

insurance purposes. The FAR generates accurate, complete, and customized reports that suit the needs of management.

A FAR also allows a company to keep track of fixed assets that are not under simple, direct control of the company. This means owned and leased assets, assets under construction, and imported assets.

Making entries in the FAR

Not all assets are capitalized. Keeping in view the concept of materiality, a company may have a policy to capitalize only those assets which cost more than a specified amount. Similarly, fixed assets which have a useful life of less than one year are not capitalized.

In some companies, improvements or alterations made to an asset are capitalized separately in the FAR. This is not correct. If such mistakes are made, it is highly probable that the auditors while undertaking physical verification of assets will notice irreconcilable differences. Where improvements or alterations made to an existing asset justifying capitalization, such additions should be made to the cost of the original asset.

The format of FAR Entries

The format / details to be provided in a FAR generally depends upon the following factors:

a) Nature of assets.

i. If moveable assets constitute a significant portion of total fixed assets, details will be necessary on their movement from one department / cost center / people to another.

ii. ii. Cost of assets. Greater control and security is required for costly equipment.

b) Customized Reports on fixed assets required by management. c) Disclosure norms / regulatory compliances as per statutory

laws applicable to the entity. d) Extent of owned, and assets taken on lease / hire purchase. e) Requirements of insurance company. f) Location of fixed assets. If fixed assets are located at

numerous locations, greater details will have to be given. In the case of a construction company, the assets are located at different work sites. These work sites maybe in different cities / countries / continents.

g) Maintenance costs. Some fixed assets require regular servicing to keep them running in an efficient and satisfactory manner. It would be necessary to keep a tab on the maintenance costs, dates of servicing etc. during a stated period.

Maintenance of a FAR in a Multi-National Corporation (MNC) can be onerous and complex due to different regulatory and compliance requirements in each country and different currencies.

Generally, a MNC sets up a subsidiary in the country in which it intends to start operations. Maintenance of FAR is decentralized. The FAR is maintained per the company’s policy, and regulatory requirements which are country specific.

If consolidation of holding company and its subsidiaries (whether domestic or foreign) is required by the law applicable to companies, and relevant Accounting Standards, the task may become a bit complex. The crucial point is related to selection of exchange rate for conversion of fixed assets. Most companies either use average annual rate or year-end exchange rate.

Identification of a fixed asset

In a large corporation, the task of identifying and locating a specific fixed asset can be difficult unless numbering is scientific, systematic, and up-to-date. A common problem in most companies is the improper maintenance of the FAR. Physical verification of fixed assets becomes a futile exercise unless the FAR is properly maintained.

It would be advisable to use a scientific numbering technique to identify fixed assets. The process of numbering fixed assets is called tagging. An identification number (combination of alphabets, and numbers) is written on the asset. Engraving the identification number on the asset is advisable in the case of Plant & Machinery where there is heavy wear and tear.

A tag verifies the existence of assets and their location, aids in maintenance, provides a common ground for communication between the Accounts Department and the end-users and recording the net book value of asset in case of sale / scrapping.

It is not necessary to tag all fixed assets. Land, buildings and vehicles all have independent systems of tracking in registration papers and survey numbers.

Bank Reconciliation

Term used when settling differences contained in the Bank Statement and the cash account in the books of the bank's customer. Rarely do the ending balances agree. To reflect the reconciling items, bank reconciliation is required. Once completed, the adjusted bank balance must prove to the adjusted book balance. When it does, it indicates that both records are correct. Journal entries are then prepared to update the records and to arrive at an ending balance in the cash account that agrees with the ending balance in the bank statement.

The bank balance is adjusted for items reflected on the books that are not on the statement. They include Outstanding Cheques(Unpresented Cheques), Uncredited Lodgments(Deposits in Transit), and bank errors in charging or crediting the company's account.

The book balance is adjusted for items shown on the bank statement that are not reflected on the books. They include bank charges, collections made by bank on the customer's behalf (e.g., collected notes receivable), interest earned, and errors on the books.

Bank Reconciliation Process

Step 1. Adjusting the Balance per BankThe first step is to adjust the balance on the bank statement to the true, adjusted, or corrected balance. The items necessary for this step are listed in the following schedule:

Step 1.

 Balance per Bank Statement on Dec, 31. 2007

 Adjustments:

     Add: Uncredited Lodgments

     Deduct: Unpresented Cheques

     Add or Deduct: Bank errors

 Adjusted/Corrected Balance per Bank

Uncredited Lodgments are amounts already received and recorded by the company, but are not yet recorded by the bank

Because uncredited lodgments are already included in the company's

Cash in Bank account, there is no need to adjust the company's records. However, uncredited deposits in transit are not yet on bank statement. Therefore, they need to be listed on the bank reconciliation as an increase to the balance per bank in order to report the true amount of cash. A helpful rule of thumb is "put it where it isn't." An uncredited lodgment is on the company's books, but it isn't on the bank statement. Put it where it isn't: as an adjustment to the balance on the bank statement.

Unpresented cheques are cheques that have been written and recorded in the company's Cash In Bank account, but have not yet been presented and cleared in the bank account. Cheques written during the last few days of the month plus a few older cheques are likely to be among the outstanding checks.

Because all cheques that have been written are immediately recorded in the company's Cash In Bank account, there is no need to adjust the company's records for the unpresented cheques. However, the unpresented cheques have not yet reached the bank and the bank statement. Therefore, unpresented cheques are listed on the bank reconciliation as a decrease in the balance per bank. Recall the helpful tip "put it where it isn't." An unpresented cheque is on the company's books, but it isn't on the bank statement. Put it where it isn't: as an adjustment to the balance on the bank statement. Bank errors are mistakes made by the bank. Bank errors could include the bank recording an incorrect amount, entering an amount that does not belong on a company's bank statement, or omitting an amount from a company's bank statement. The company should notify the bank of its errors. Depending on the error, the correction could increase or a decrease the balance shown on the bank statement. (Since the company did not make the error, the company's records are not changed.)

Step 2. Adjusting the Balance per BooksThe second step of the bank reconciliation is to adjust the balance in the company's Cash account so that it is the true, adjusted, or corrected balance. Examples of the items involved are shown in the following schedule:

Step 2.

 Balance per Books on Dec, 31 2007

 Adjustments:

     Deduct: Bank service charges

     Deduct: NSF cheque & fees

     Deduct: Cheque book printing charges

     Add: Interest earned

     Add: Direct Lodgment into the bank

  Add or Deduct: Errors in company's Cash in Bank account

 Adjusted/Corrected Balance per Books

Bank service charges are fees deducted from the bank statement for the bank's processing of the account activity (accepting deposits, posting cheques, mailing the bank statement, etc.) Other types of bank service charges include the fee charged when a company overdraws its current account and the bank fee for processing a stop payment order on a company's cheque.

The bank might deduct these charges or fees on the bank statement without notifying the company. When that occurs the company usually learns of the amounts only after receiving its bank statement.

Because the bank service charges have already been deducted on the bank statement, there is no adjustment to the balance per bank. However, the service charges will have to be entered as an adjustment to the company's books. The company's Cash In Bank account will need to be decreased by the amount of the service charges.

Recall the helpful tip "put it where it isn't." A bank service charge is already listed on the bank statement, but it isn't on the company's books. Put it where it isn't: as an adjustment to the Cash account on the company's books.

An NSF cheque is a cheque that was not honored by the bank of the person or company writing the cheque because that account did not have a sufficient balance. As a result, the check is returned without being honored or paid. (NSF is the acronym for not sufficient funds).

Often the bank describes the returned cheque as a return item. Others refer to the NSF cheque as a "rubber cheque" because the cheque "bounced" back from the bank on which it was written.) When the NSF

cheque comes back to the bank in which it was deposited, the bank will decrease the current account of the company that had deposited the cheque. The amount charged will be the amount of the cheque plus a bank fee.

Because the NSF cheque and the related bank fee have already been deducted on the bank statement, there is no need to adjust the balance per the bank. However, if the company has not yet decreased its Cash account balance for the returned cheque and the bank fee, the company must decrease the balance per books in order to reconcile.

Cheque book printing charges occur when a company arranges for its bank to handle the reordering of its cheques. The cost of the printed cheques will automatically be deducted from the company's current account.

Because the cheque printing charges have already been deducted on the bank statement, there is no adjustment to the balance per bank. However, the cheque printing charges need to be an adjustment on the company's books. They will be a deduction to company's Cash In Bank account. Recall the general rule, "put it where it isn't." A cheque printing charge is on the bank statement, but it isn't on the company's books. Put it where it isn't: as an adjustment to the Cash account on the company's books.

Interest earned will appear on the bank statement when a bank gives a company interest on its account balances. The amount is added to the checking account balance and is automatically on the bank statement. Hence there is no need to adjust the balance per the bank statement. However, the amount of interest earned will increase the balance in the company's Cash account on its books. Recall "put it where it isn't." Interest received from the bank is on the bank statement, but it isn't on the company's books. Put it where it isn't: as an adjustment to the Cash account on the company's books.

Notes Receivables are assets of a company. When notes come due, the company might ask its bank to collect the note receivable. For this service the bank will charge a fee. The bank will increase the company's current account for the amount it collected (principal and interest) and will decrease the account by the collection fee it charges. Since these amounts are already on the bank statement, the company must be certain that the amounts appear on the company's books in its Cash account. Recall the tip "put it where it isn't." The amounts collected by the bank and the bank's fees are on the bank statement, but they are not on the

company's books. Put them where they aren't: as adjustments to the Cash account on the company's books.

Errors in the company's Cash In Bank account result from the company entering an incorrect amount, entering a transaction that does not belong in the account, or omitting a transaction that should be in the account.

Since the company made these errors, the correction of the error will be either an increase or a decrease to the balance in the Cash In Bank account on the company's books.

Step3.Comparing the Adjusted BalancesAfter adjusting the balance per bank (Step 1) and after adjusting the balance per books (Step 2), the two adjusted amounts should be equal. If they are not equal, you must repeat the process until the balances are identical.

The balances should be the true, correct amount of cash as of the date of the bank reconciliation.

Step 4. Preparing Journal Entries

Journal entries must be prepared for the adjustments to the balance per books (Step 2). Adjustments to increase the cash balance will require a journal entry that debits Cash and credits another account.Adjustments to decrease the cash balance will require a credit to Cash and a debit toanother account.

Budgeting and Financial Planning

Financial Plan requires accurate and detailed projections of the business's finances. The financial needs and anticipated revenues should be based on realistic assumptions and projections. Questions to answer:

Budget: expenses How much money is needed to fund the business? How much money is needed to operate the business this year?

Where will you spend it? How much money is needed to operate the business for the next

three to five years? Where will you spend it?

Budget: income

How much revenue do you expect this year? Where will the revenue come from? How many sales? When do you expect the revenue to come into the business? Will

there be more revenue in some months and less in others?

Cash flow statement

Combine the expense and income budgets and projections

Break-even analysis

Based upon your cash flow statement, at what point will the company's expenses match the sales revenue?

If you are using the business plan for financing include:

Summary of financial needs

How much money do you need? Why? For how long? How will you spend the money? When and how will you pay the money back?

If your company has been in business in the past include:

Current balance sheet Current income (profit and loss) statement Other information and documents

Concluding Comment:Organize your accounting system by function. Having too few people doing all the accounting opens the door for fraud and embezzlement. Companies with more people assign functions in such a way that those done by the same person don't pose a control threat.

Having the same person draft the cheques and reconcile the bank account is a good example of how not to assign accounting duties.

Assignment of DutiesFigure out who is going to do what in your new accounting system. The duties and areas of responsibility you need to assign include

1. Overall responsibility for the accounting system 2. Management of the computer system (if you're using one)

3. Accounts receivable 4. Accounts payable 5. Order entry 6. Cost accounting 7. Monthly reporting 8. Inventory control 9. Payroll (even if you use an outside payroll service,

someone must be in control and responsible) 10. Internal accounting control 11. Fixed assets

In many cases the same person will do many of these things. However, these are the areas we'll be dealing with in setting up the accounting system. The person you assign to be in overall charge of the system should be the one who is most familiar with accounting. If you are just starting your company, you might want to think about the background of some of your new employees. At least one should have the capacity to run the accounting system.

ABOUT THE AUTHOR

Adesina Adedayo is the Managing Partner of Adesina Adedayo & Co. (Chartered Accountants) and Ade Adedayo Consulting (Chartered Tax Practitioners)

He was the Chairman of Lagos District Society of The Chartered Institute of Taxation of Nigeria between July 2005 and June 2006. He has been a Council Member of The Chartered Institute of Taxation of Nigeria from June 2007 to date.

Ade was educated at C.M.S. Grammar School, Bariga between the periods 1978 to 1983. He qualified as a Chartered Accountant in November 1992. He is also a Fellow of The Chartered Institute of Taxation of Nigeria.

He has worked variously at Messrs Akintola Williams Deloitte, Adetona Isichei & Co and Office of the Auditor General for the Federation.

Ade specializes in Financial Planning and Analysis with emphasis on Budgeting and Strategy Formulation.

For further details, contact

The Chief ExecutiveLinkgates Consulting

Postal: P.O.Box 2102, OshodiTel: 01-4322888, 08033005344,08074495469E-mail:linkgatesconsulting@yahoo.co.ukWebsite: www.aaps-ng.com