Accounting 528

 

Question # 1 (A) Critically examine the difference between various forms of organization exists in Pakistan. What Type of Business Organization is best for you?

Whether you are going it alone or with another person, it is best to consult a lawyer to determine which form of business organization will be best for you. Your choices and the benefits of each form are essentially as follows: SOLE PROPRIETORSHIPS

A sole proprietorship is a business owned and managed by one individual. A sole proprietorship is not a legal entity. It refers to an individual who owns the business and is personally responsible for its debts. Owners may freely commingle business and personal assets. Owners cannot raise capital by selling and interest in the business. The owner all income and expenses on the owner’s personal tax return.reports The business terminates on the owner’s death or withdrawal. However, an owner can sell the business, but can no longer remain the proprietor. ADVANTAGES OF SOLE PROPRIETORSHIP 1. EASY TO START:

 The format formation ion of so sole le pro propriet prietorship orship is quite easy tthan han par partners tnership hip and  joint stock stock c compan ompany. y. The There re are no le legal gal for formalit malities ies fo forr the starti starting ng thi this s business, like agreement, memorandum of association, or articles of  associations. 2. EASY TO DISSOLVE:

It is easy to dissolve because the sole trader is not required to take permission for the dissolution either from share holder in the general meeting as in the case of joint stock companies or consult all the partners in the case of partnership. 3. FREEDOM OF ACTION:

A sole trader has maximum freedom to take decision at his own end. His decision is final he may expand his business by adding new products or can discontinue oldfrom ones. Heplace can wind up his business or he can change his business place one to another.

 

4. FREEDOM OF GOVERNMENT CONTROL:

He is free from government control to a great extent than any other form of organization. A sole trader is not required to send his periodical balance sheet to the government. 5. OWNERS OF ALL PROFIT:

No other organization permits to retain cent percent profit they earn. But in sole proprietorship the sole trader is the master of his business and is entitled to retain the entire profit of the business. 6. LOW TAXES:

He has to pay minimum income tax and other taxes than in partnership and Joint Stock Company. In this manner he saves much out of his profit. 7. SECRECY:

Secrecy is base of a business and it should not be disclosed. Success of  business depends upon secrecy. A sole trader can maintain secrets of  his business but it is not possible to keep secret in partnership or Joint Stock Company. 8. LOW COST ORGANIZATION:

A sole trader is not required to pay registration fees as paid by stock company and legal fees in the formation of partnership. 9. FULL CONTROL:

He has got full control over his planning. Nobody is there to interfere in his business. 10. IMMEDIATE ACTION AND QIUCK DECISION:

In business it becomes very essential to take decision on particular times and for that purpose immediate action is required. Sole trader can take immediate action and decision but in partnership and joint stock companies actions cannot be taken without permission of owners and meetings should be called for this purpose. In this way business cannot take proper advantage of time.

 

DISADVANTAGES OF SOLE PROPRIETORSHIP

 The sole sole pro proprieto prietorship rship h has as som some e disad disadvanta vantages ges w which hich ar are e as fo follow llows: s: 1. LIMITED FINANCE:

 The sole sole pro proprieto prietorship rship c can an face financ financial ial pro problem blems. s. He c can an depe depend nd onl only y his own resources. It is neither safe nor easy for him to borrow large amount of money from banks or other financial institutions. 2. DIFFICULTIES IN MANAGEMENT:

Each individual has particular attitude or ability in particular respects. Modern business is full of complications airing especially from the changing nature of market and the various laws that are being enacted. An individual may not be expert in all matters. Therefore sometimes his decision may be unbalances and would lend to the failure of the business. 3. LIMITED SPAN OF SUPERVISION:

A sole proprietor however qualified and clever will find it hard to supervise the work of his sub ordinate beyond a certain limit e.g. in ease of large general store owned by single person, it will be difficult for the owner to keep an eye on all the departments and employee and to ensure that the customers are treated nicely. The problems will be more acute if store has its branches in other places. 4. LIMITATION ON SIZE:

Because of limitation of finance, managerial skills and span of  supervision a sole proprietor has to manger the size of the business up to a certain limit. This deprives the firm of the opportunity of reaping the economic of large scale production. 5. UNLIMITED LIABILITY:

He has great risks. It is true that he receives all the profits of the business but likewise he has to face the entire losses. Not only the assets of the business but also his private assets will be used to pay off  the firm’s debts and losses. Unlimited liability also discourages the expansion of business.

 

 GENERAL PARTNERSHIPS A general partnership is a business organization formed when 2 or more individuals or entities form a business for profit. All partners share in the management and in the profits and decide on matters of ordinary business operations by majority of the partners or by percentage ownership of each partner. Each partner is liable for all business debts and bears responsibility for the actions of the other partners. Each partner reports partnership income on their individual tax return. A partnership dissolves on the death or withdrawal of a partner unless the partnership agreement provides otherwise. Partnerships are relatively easy and inexpensive to form and require few ongoing formalities. DISADVANTAGES OF PARTNERSHIP 1. POSSIBILITY OF DISAGREEMENT BETWEEN THE PARTNERS:

 Two or mor more e me men n start out to togethe getherr as clo close se frie friends nds or as re relative latives. s. However they may over a year that willinterest make for unpleasantness anddevelop inabilitydifference to work together for the best of  their firm. 2. UNLIMITED LIABILITIES:

 The greate greatest st disad disadvanta vantage ge is tthat hat of u unlimi nlimited ted li liability ability of the partne partners. rs. At general partners are liable personally for the partnership debts. Where there are heavy losses the partner having much property will have to sustain the entire loss. 3. DIVIDED CONTROL/ DELAY IN DECISION MAKING:

In the partnership more than one person is involved in every decision reached. If partner are not active in the operations it may be necessary to delay the making of an important decision. Therefore divided control leads to delay in decision. 4. FROZEN OR BLOCK INVESTMENT:

For an individual who wishes to invest some money in a business, the partnership form may prove to be a poor investment from the view point of liquidity and transferability. It is correct to say that it is easy to invest money but is difficult to withdraw it, because it would mean the termination of business 5. LIMITATION ON SIZE:

 

Since maximum number of partners is 20, it might ne possible that at some time the capital becomes short. If it happens the business has to be converted into a joint stock s tock company. Therefore a big business cannot be started even if they get a chance to expand it, because the capital of 20 people may not be sufficient. LIMITED LIABILITY COMPANY 

A limited liability company is a new and flexible business organization of one or more owners that offers the advantages of liability protection with the simplicity of a partnership, i.e. partners are not liable for business debts. Each partner reports business income on their individual tax return. LLCs may dissolve on the death or withdrawal of an owner depending on state law. An LLC is not appropriate for businesses seeking to become public or raise capital. LLCs require few ongoing formalities but usually require periodic filings with the state and also require annual fees. LLCs are more expensive to form than partnerships. CORPORATIONS

A corporation is a legal entity that has most of the rights and duties of a natural person but with perpetual life and limited liability. Shareholders of a corporation appoint a board of directors and the board of directors appoints the officers for the corporation, who have the authority to manage the day-to-day operations of the corporation. Share holders are generally liable for the amount of their investment in corporate stock. A corporation pays its own taxes and shareholders pay tax on their dividends. However, in a subchapter S corporation, shareholders report their share of corporate profit or loss in their individual tax return. The corporation is its own legal l egal entity and can survive the death of owners, partners and shareholders. A corporation is the best entity for eventual public companies. Corporations can raise capital through the sale of  securities and can transfer ownership through the transfer of securities. Corporations require annual meetings and require owners and directors to observe certain formalities. Corporations are more expensive to form than partnerships and sole proprietorships. Corporations require periodic filings with the state and also require annual fees.

Question # 3 (A) Critically evaluate the difference between Perpetual and Periodic inventory system.  The differe difference nce be betwee tween n perp perpetual etual and pe periodic riodic inve inventory ntory s system ystem are

 

In perpetual Inventory System the inventory account is adjusted continually throughout the accounting period as they occur. Whereas the periodic inventory system the transactions are recorded periodically. Perpetual Inventory System One keeping continual track of additions or deletions in materials, workin-process, and cost of goods sold on a day-to-day basis. Physical inventory counts are usually taken at least once a year in order to check on the validity of the book records. Cost of goods sold therefore is kept on a day-to-day basis rather than being determined periodically. Periodic Inventory System One that does not require a day-to-day record of inventory changes. Costs of materials used and costs of goods sold cannot be calculated until ending inventories, determined by physical count, are subtracted from the sum of opening inventories and purchases (or costs of goods manufactured in the case of a manufacturer).

For calculating cost ending inventory, available: LIFO,the FIFO andofWeighted Average.there are several methods

Per erio iodi dic c In Inve vent ntor ory y Sy Syst stem em

Per erpe petu tual al In Inve vent ntor ory y Sy Syst stem em

Inventory account and cost of  goods sold are non-existent until the physical count at the end of  the year. Purchases account is used to record purchases.

Account and the balance of costs of  goods sold and inventory account exist all the time.

Purchase Return account is used to record Purchases Returns account.

Cost of goods sold or cost of sale is computed from the ending inventory figure For goods returned by customers there are no inventory entries.

No individual purchases account but the purchases are recorded in the Inventory Account. No individual Purchase Returns account but the purchases return are recorded in the Inventory Account. Record cost of goods sold/cost of  sale – inventory is reduced when there is a sale. Returns from customers are recorded by reducing the cost of  goods sold and adding back into inventory.

Periodic inventory method calculate ending stock at the end of the accounting period, which could be Month to Date or Year to Date, while

 

Perpetual inventory system calculates the ending stock on a continuous basis after each transaction (Purchase or Sell). Within Retail industry, periodic inventory method used for inventory valuation at the stores, whereas distributor like Supervalu (in US) follows perpetual inventory method to track inventory in their distribution centers. As a best practice, some s ome of the retail companies are using perpetual accounting method to track inventory available in warehouses and distribution centers. In an idealistic world, perpetual inventory method can provide the true and real time inventory information, however due to complexities in consolidating all the purchases, sales, shrinkages and other market factors, it is advisable for retail companies to follow periodic accounting method to analyze and review the results before presenting the inventory valuation results to internal and external agencies like Shareholders, Income Tax Authorities, et el. Perpetual inventory systems show all changes in inventory in the "Inventory" account. Purchase accounts are not used in a perpetual inventory system.

Example: (Unit cost is held constant to avoid the necessity of a using a cost flow assumption) Beginning inventory 100 units @ $6 = $ 600 Purchases 900 units @ $6 = $5,400 Sales 600 units @ $12 = $7,200 Ending inventory 400 units @ $6 = $2,400 Perpetual Inventory System | Periodic Inventory System ---------------------------------------------------------------------1. Beginning inve inventory ntory 100 units at $ $600 600 ---------------------------------------------------------------------Inventory account shows | Inventory account shows $600 in inventory. | $600 in inventory. ---------------------------------------------------------------------2. Purchase of 900 units at $6 per unit ---------------------------------------------------------------------Inventory 5,400 | Purchases 5,400 Acc. Payable 5,400 | Acc. Payable 5,400 ---------------------------------------------------------------------3. Sale of 600 units at a se selling lling price of $1 $12 2 per unit ---------------------------------------------------------------------Acc. Receivable Sales

7,200 7,200

| Acc. Receivable | Sales

7,200 7,200

 

| Cost of Goods Sold 3,600 | No entry Inventory 3,600 | ---------------------------------------------------------------------4. End-of-period entry for inventory adjustment ---------------------------------------------------------------------No entry needed. | Inventory 1,800 The ending balance of inventory | Cost of Goods Sold 3,600 Shows $2,400. | Purchases 5,400 ---------------------------------------------------------------------Note: The periodic inventory adjustment in transaction 4 adjusts Inventory to the physical count, closes out any purchase accounts, And runs any difference through cost of goods sold. Cost of Goods Sold in a Periodic Inventory System

Beginning Inventory Net Purchases Goods Available for Sale Ending Inventory Cost of Goods Sold

600 5,400 ------6,000 2,400 ------3,600 =======

Question # 5 Discuss different steps involved in developing accounting information system in an organization.

Accounting Systemsof (Accounting systems s) combine theInformation study and practice accountinginformation with the design, implementation, and monitoring of information i nformation systems. Such systems use modern information technology resources together with traditional accounting controls and methods to provide users the financial information necessary to manage their organizations.

Accounting information systems TECHNOLO TECHNOLOGY  GY  Input the input devices commonly associated with accounting information systems include: standard personal computers or workstations running applications; scanning devices for standardized data entry; electronic communication devices for electronic data interchange (EDI) and e-commerce. In addition, many financial systems

 

come ‘‘Web-enabled’’ to allow devices to connect to the World Wide Web. Process basic processing is achieved through computer systems ranging from individual personal computers to large-scale enterprise servers. However, conceptually, the underlying processing model is still the ‘‘double-entry’’ accounting system initially introduced in the fifteenth century. Output devices used include computer displays, impact and no impact printers, and electronic communication devices for f or EDI and e-comme e-commerce. rce.  The output output c conten ontentt may encom encompass pass alm almost ost any type of finan financial cial rrepor eports ts from budgets and tax reports to multinational financial statements. MANAGEMENT INFORMATION SYSTEMS (MIS)

MIS are interactive human/machine systems that support s upport decision making for users both in and out of traditional organizational boundaries. These systems are used to support an organization’s daily operational activities; andup future tactical decisions; and overall strategic direction. MIScurrent are made of several major applications including, but not limited to, the financial and human resources systems. Financial applications make up the heart of an Accounting information system in practice. Modules commonly implem implemented ented include: general ledger, payables, procurement/ purchasing, receivables, billing, inventory, assets, projects, and budgeting. Human resource applications make up another major part of modern information systems. Modules commonly integrated with the Accounting information systems include: human resources, benefits administration, pension administration, payroll, and time and labor reporting. Accounting information systems — INFORMATION SYSTEMS IN CONTEXT

Accounting information systems s cover all business functions from backbone accounting transaction processing systems to sophisticated financial management planning and processing systems. Financial reporting starts at the operational levels of the organization, where the transaction processing systems capture important business events such as normal production, purchasing, and selling activities. These events (transactions) are classified and summarized for internal decision making and for external financial reporting. Cost accounting systems are used in manufacturing and service environments. These allow organizations to track costs associated the production of goods and/or performance ofthe services. In addition,with the Accounting information

 

systems can provide advanced analyses ana lyses for improved resource allocation and performance tracking. Management accounting systems are used to allow organizational planning, monitoring, and control for a variety of activities. This allows managerial-level employees to have access to advanced reporting and statistical analysis. The systems can be used to gather information, to develop various scenarios, and to choose an optimal answer among alternative scenarios. DEVELOPMENT

 The develop developmen mentt of an A Accoun ccounting ting in inform formation ation sy system stem includ includes es fiv five e basic phases: planning, analysis, design, implementation, and support.  The time time pe period riod as associ sociated ated w with ith e each ach of tthese hese p phases hases c can an be a as s shor shortt as a few weeks or as long as several years. Planning—project management management objectives and techniques the first phase of systems development is the planning of the project. This entails determination of the scope and objectives of the project, the

definition of project responsibilities, requirements, project phases, project budgets, and projectcontrol deliverables. Analysis the analysis phase is used to both determine and document the accounting and business processes used by the organization. Such processes are redesigned to take advantage of best practices or of the operating characteristics of modern system solutions.

Data analysis is a thorough review of the accounting information that is currently being collected by an organization. Current data are then compared to the data that the organization should be using for managerial purposes. This method is used primarily when designing accounting transaction processing systems. Decision analysis is a thorough review of the decisions a manager is responsible for making. The primary decisions that managers are responsible for are identified on an individual basis. Then models are created to support the manager in gathering financial and related information to develop and design alternatives, and to make actionable choices. This method is valuable when decision support is the system’s primary objective. Process analysis is a thorough review of the organization’s business processes. Organizational processes are identified and segmented into a series of events that either add or change data. These processes can then be modified or of reengineered to improve the organization’s operations in terms lowering cost, improving service, improving

 

quality, or improving management information. This method is appropriate when automation or reengineering is the system’s primary objective. Design The design phase takes the conceptual results of the analysis phase and develops detailed, specific designs that can be implemented in subsequent phases. It involves the detailed design of all inputs, processing, storage, and outputs of the proposed accounting system. Inputs may be defined using screen layout tools and application generators. Processing can be shown through the use of flowcharts or business process maps that define the system logic, operations, and work flow. Logical data storage designs are identified by modeling the relationships among the organization’s resources, events, and agents through diagrams. Also, entity relationship diagram (ERD) modeling is used to document large-scale database relationships. Output designs are documented through the use of a variety of reporting tools such as report writers, data extraction tools, query tools, and on-line analytical processing tools. In addition, all aspects of the design phase can be performed with software tool sets provided by specific software

manufacturers. Reporting is the driving force behind an Accounting information systems development. If the system analysis and design are successful, the reporting process provides the information that helps drive management decision making. Accounting systems make use of a variety of  scheduled and on-demand reports. The reports can be tabular, showing data in a table or tables; graphic, using images to convey information in a picture format; or matrices, to show complex relationships in multiple dimensions. There are numerous characteristics to consider when defining reporting requirements. The reports must be accessible through the system’s interface. They should convey information in a proactive manner. They must be relevant. Accuracy must be maintained. Lastly, reports must meet the information processing (cognitive) style of the audience they are to inform. Reports are of three basic types: A filter report that separates select data from a database, such as a monthly check register; a responsibility report to meet the needs of a specific user, such as a weekly sales report for a regional sales manager; a comparative report to show period differences, percentage breakdowns and variances between actual and budgeted expenditures. An example would be the financial statement analytics showing the expenses from the current year and prior year as a percentage of sales. Screen and system interfaces are the primary data capture devicesdesigns of accounting information systems s and are developed through

 

a variety of tools. Storage is achieved through the use of normalized databases that assure functionality and flexibility. Business process maps and flowcharts are used to document the operations of the systems. Modern Accounting information systems s use specialized databases and processing designed specifically for accounting operations. This means that much of the base processing capabilities come delivered with the accounting or enterprise software. Implementation the implementation phase consists of two primary parts: construction and delivery. Construction includes the selection of  hardware, software and vendors for the implementation; building and testing the network communication systems; building and testing the databases; writing and testing the new program modifications; and installing and testing the total system from a technical standpoint. Delivery is the process of conducting final system and user acceptance testing; preparing the conversion plan; installing the production database; training the users; and converting all operations to the new system.

 Tool sets sets are a vari variety ety o off applic application ation deve developm lopment ent aid aids s that are v vendor endor-specific and used for customization of delivered systems. They allow the addition of fields and tables to the database, along with ability to create screen and other interfaces for data capture. In addition, they help set accessibility and security levels for adequate internal control within the accounting applications. Security exists in several forms. Physical security of the system must be addressed. In typical Accounting information systems s the equipment is located in a locked room with access granted only to technicians. Software access controls are set at several levels, depending on the size of the Accounting information systems. The first level of security occurs at the network level, which protects the organization’s communication systems. Next is the operating system level security, which protects the computing environment. Then, database security is enabled to protect organizational data from theft, corruption, or other forms of damage. Lastly, application security is used to keep unauthorized persons from performing operations within the Accounting information systems.  Testing is pe  Testing perform rformed ed at fo four ur le levels. vels. Stub o orr unit testi testing ng is us used ed to iinsure nsure the proper operation of individual modifications. Program testing involves the interaction between the individual modification and the program it enhances. System testing is used to determine that the program modifications work within the Accounting information systems as a whole. Acceptance testing ensures that the modifications meet user

 

expectations and that the entire Accounting information systems performs as designed. Conversion entails the method used to change from an old Accounting information systems to a new Accounting information systems . There are several methods for achieving this goal. One is i s to run the new and old systems in parallel for a specified period. A second method is to directly cut over to the new system at a specified point. A third is to phase in the system, either by location or system function. A fourth is to pilot the new system at a specific s pecific site before converting the rest of the organization. Support the support phase has two objectives. The first is to update and maintain the Accounting information systems. This includes fixing problems and updating the system for business and environmental changes. For example, changes in generally accepted accounting principles (GAAP) or tax laws might necessitate changes to conversion or reference tables used for financial reporting. The second objective of  support to continue developme development nt by continuously improving the businessisthrough adjustments to the Accounting information systems caused by business and environmental changes. These changes might result in future problems, new opportunities, or management or governmental directives requiring additional system modifications. ATTESTATION

Accounting information systems s change the way internal controls are implemented and the type of audit trails that exist within a modern organization. The lack of traditional forensic evidence, such as paper, necessitates the involvement of accounting professionals in the design of such systems. Periodic involvement of public auditing firms can be used to make sure the Accounting information systems is in compliance with current internal control and financial reporting standards. After implementation, the focus of attestation is the review and verification of  system operation. This requires adherence to standards such as a s ISO 9000-3 for software design and development as well as standards for control of information technology. Periodic functional business reviews should be conducted to be sure the Accounting information systems remains in compliance with the intended business functions. Quality standards dictate that this review should be done according to a periodic schedule.