Chapter 3

Accounting Systems and

Internal Control

Slide 3.1
 Chapter 3 Learning
Objectives
Define an accounting system and identify its principal
elements.
Briefly describe how an accounting system is used to
record accounting data for a business each
accounting period.
Identify the key components of internal control.
Identify the principal differences between manual and
computer-based processing of accounting data and
the related internal control implications.
Discuss recent trends in computer processing and the
related implications for organizations’ accounting
and control functions.
Identify internal control issues stemming from the
growing trend toward multinational business
operations.

Slide 3.2
What is a “system?

“A coordinated network of
plans and procedures
designed to achieve a stated
goal in an orderly, effective,
and efficient manner.”

Slide 3.3
 Okay, what is an
“accounting system”?

“A systematic approach to collecting,

processing, and communicating
financial information to decision
makers.”

Slide 3.4
Principal Elements of an
Accounting System
Accounts
Chart of accounts
Journals and ledgers
The accounting cycle

Slide 3.5
 Accounts

The basic storage units for

financial data in an accounting
system.

Cash

4,200 900
700 600
400

Cash” balance”? $3,800

Slide 3.6
 Chart of accounts: An
address book for a company’s
accounts
101. Cash
102. Accounts Receivable
103. Supplies
.
201. Accounts Payable
.
300. Common Stock
.
401. Rental Revenue
402. Interest Revenue
.
501. Salaries Expense
502. Utilities Expense

Slide 3.7
Journals and Ledgers: The
Accounting “Books”

General journal: the accounting

record in which the dollar amounts
for transactions and other financial
events are initially recorded by
businesses that maintain only one
journal.
General ledger: the accounting
record that contains each of the
individual accounts for a business’s
assets, liabilities, owners’ or
stockholders’ equity, revenues, and
expenses.

Slide 3.8
 The accounting cycle: the set of
recurring accounting procedures
that must be performed for a
business each accounting period.
Task Accounting Activity
Record financial data Journalize transactions
Collate financial data Post transations to the
general ledger
Organize account Prepare trial balance
balances
Consolidate and Prepare financial
classify account statements
balances

Slide 3.9
 Internal Control for
Business Organizations

An accounting system is one

element of a larger system
that business executives
use to maintain effective
control over their
organizations.
Slide 3.10
Internal control is a
process--

effected by an entity’s board

of directors, management,
and other personnel--
designed to provide
reasonable assurance that
key entity objectives will be
accomplished.

Slide 3.11
 Key Components of
Internal Control
Accounting system
Control environment: the
degree of control
consciousness within an
organization
Control activities: the
policies and procedures
established to help ensure
that an entity’s primary
organizational objectives
are accomplished

Slide 3.12
 Examples of Control
Activities
Segregation of key functional
responsibilities
Proper authorization of transactions
Use of prenumbered accounting
documents
Periodic counts of inventory
Clerical tests
Periodic reconciliations

Slide 3.13
 Key Duties that Should Be
Segregated in an Accounting
System

Authorization

Recordkeeping Custodianship

Slide 3.14
Internal Control and Computer
Processing

Businesses, large and small, can benefit

significantly by integrating computer
processing into their accounting and
control functions.

Slide 3.15
Computer Processing and Internal
Control Implications

Uniformity in the processing of

transactions
Initiation and execution of transactions
Existence of transaction trails
Ability to segregate key functional
responsibilities
Potential for errors
Monitoring capability of management

Slide 3.16
 Examples of Control Activities in
Computer-based Accounting Systems

Maintain back-up copies of key computer

programs
Periodically process “test” transactions
Data input controls
Limit access to computers
Establish procedures to identify parties
accessing and operating each computer
Limit access to key data files and computer
programs

Slide 3.17
 Two Key Trends in Information
Processing Technology . . . and
Their Implications for Accountants

Outsourcing of information
systems
Electronic data interchange
(EDI)

Slide 3.18
Internal Control: An International
(Multinational) Perspective

Recent years have seen a dramatic

increase in multinational business
operations
This trend poses significant challenges
for accountants
Among these challenges is designing an
internal control process for a business
organization that cuts across several
cultures

Slide 3.19
 The Foreign Corrupt Practices Act of
1977 has Important Implications for
U.S. Companies

Prohibits payments of bribes and related

inducements to establish/maintain business
relationships in foreign countries
Requires all public companies to establish
internal controls that have a high likelihood
of preventing and detecting bribes and
similar payments

Slide 3.20