Lecture 3 - Double entry bookkeeping

Question 1

(!!!!!) Describe double entry bookkeeping (DEB) in general, its benefits & critiques & purposes?

Answer 1

General:
- Dual impact transactions have on accounts
- Earlier text based & praising god
- Logical system
- Monitor money, assets & profitability
- Today most SEB: No need double check since tech
- Rational appeal for arguments: Logos

__________

Benefits:
- Detect errors
- Standards make system comparable
- Accurately record financial transactions

Critiques:
- Lack “why”
- Numbers reduce real life

__________

Purposes:

Aid managerial DM:
- Detailed accounts: Not sufficient. Solve with SEB

Solve agency problems:
- Transparency by transactions with two entities create reliability: Yet no more than SEB
- Account for different interests

Created need for knowledge:
- Knowledge = Status/power

Question 2

(!) Describe bookkeeping in general & relate it to CM

Answer 2

• Backbone of accounting: Serve financial, MA & CM
• Record all financial transaction
• Basis for financial statement
• Data often need adjustment

Question 3

(!!) Describe the four stages of a CM system

Answer 3

General:
- Ref. Copper & Kaplan

Stage 1: Broken

General:
- No record purpose
- No link between data
- Inadequate for financial reporting
- Very simple
- Typically new & mature companies
- Poor internal control

• Problems with one of the three cost systems:
  —1. Value inventory
  —2. Measure COGS
  —3. Reporting purposes
• Lack two key managerial purposes:
  —1. Estimate costs
  —2. Provide feedback

__________

Stage 2: Financial reporting driven

General:
- Data recorded by accounting logic
- Add individual product costs to same simple aggregated methods in financial reporting
- External users ok with roughly correct numbers
- Aggregated numbers
- Direct costing system for managerial DM
- Lack two key managerial purposes:
—1. Estimate costs
—2. Provide feedback

__________

Stage 3: Customized/stand alone:

General
- Simplify stage 2 system
- Managerial functions performed by new, customized systems
- Few cost centers
- Simple allocation basis for external reporting
- MA systems for available info
- Monthly > Yearly
- ABC
- Managerial financial system: Day-to-day feedback
- Data is not updated
- Often this organizations comes back to
- Often only local
- Eg. Quality costing
- Eg. Target costing

___________

Stage 4: Integrated

General:
- ABC & operational feedback integrated in ERP
- ABC & operational feedback basis for preparing external financial statements
- Most organizations placed here
- “Ideal”, but problems with understandability
- “What we measure is all we get”
- Eg. ERP like SAP

Question 4

(?) Describe the difference between management accountants historically & now

Answer 4

Earlier:
- Scorekeepers
- Neutral observers
- Distant from actions
- Periodic reports from financial accounting system
- Standard & variance reporting emphasized stability, control & efficiency of isolated machines, workers & departments

Now:
- Continuous & discontinuous improvement
- Cross-functional integration for quick responses

Question 5

What is meant by debit and credit?

Answer 5

General:
- Key components for DEB
- Classification method
- Identify economic value flow of transactions
- “From a source, credit, to a destination, debit”
- Unique, specific meaning in accounting: Not positive/negative, increasing/decreasing

Credit:
- To entrust something
- Eg. Bank lending money

Debit:
- To owe something
- No relation to debt
- Eg. Business owing bank money

Question 6

What is the difference between counting and accounting?

Answer 6

• Accounting is counting based on certain criteria
• Make the invisible hand visible

Question 7

(?) Describe the financial reporting function

Answer 7

General:
- Assigns expenses each period to output produced

External needs:
- Investors, creditors, regulators, tax authorities

Internal needs:
- Accurate & timely cost info

Question 8

(?) What does double entry bookkeeping (DEB) refer to?

Answer 8

Transaction:
- Everything with financial impact
- Everything not recorded
- Something changing state or form: “Trans”

Daybook:
- Record transactions
- What has been going on

Journal:
- Summarize daybooks

Ledgers/general ledger:
- Bookkeeping
- Summarize journals
- Not only T-accounts
- Kind of argumentation