The Accounting Cycle
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The organization is a medium sized production business that has five members of the accounting department. The CFO functions as the head of the department, as a CPA, and supervises the other accountants. The types of business transactions that occur are purchasing of materials and the payment of overhead costs, and the sale of finished goods to customers on both cash and credit terms.
Accrual Method of Accounting
The firm uses the accrual method of accounting. The accounting department relies heavily on the use of ACCPAC Advantage accounting software that connects the sales and purchasing department with the accounting department. It also works closely with the various department heads in the firm in order to establish budgets for purchasing and operations and to insure that activities involving financial transactions are properly reported to the accounting department. The accounting policies are written and distributed to the various managers in the organization.
The financial transactions that involve purchasing among the various operational departments require the use of a purchase order in order to insure that all purchase transactions are reported to accounting. The purchase order is matched against a list of vendors and the operational budget prior to the issuance of the final purchase order to the vendor. Prior to payment, the ordering department must certify that the goods have been received and are in accordance with specifications. This system permits the accounting department to effectively analyze liabilities. The system is designed so that no ordering can occur without prior acceptance of the order from the accounting department, which supports the flow of transactional information from the operational departments to accounting.