INTRODUCTION TO ADMINISTRATIVE PROCESSES (STUDY OBJECTIVE 1)

The previous chapters described many processes that occur within an organization, including sales of products and services, cash collections, purchases of materials and fixed assets, payroll, cash disbursements, and conversion processes. While these are all different processes, they do have several things in common. Each of these processes involves a regular transaction process that occurs daily or at another recurring interval. These processes usually generate a large number of transactions that must be recorded in the accounting system. In addition, top management has usually established procedures and controls that allow these processes to occur without intervention or specific authorization by management. For example, a salesperson does not have to wait for specific approval for each sale she negotiates.

The previous chapters described the processes that collect data within these business processes, record the transaction data, and trigger subsequent events to occur. This chapter will focus on two different sets of remaining processes. Both are administrative processes and are depicted in Exhibit 12-2.

The first set of processes presented in this chapter is shown in the lower left-hand box of Exhibit 12-2. These processes are unlike those described in the previous chapters, because they are not regular, recurring, or high-volume processes. Examples of such processes are the sale of stocks or bonds; the initiation of loans, bonds, or notes payable; and the investment of funds in marketable securities. These types of processes can be categorized as either source of capital processes or investment processes. They are not routine, but occur only when the need arises. Moreover, the nature of these processes usually dictates that specific authorization for each transaction would be necessary. For example, a company would initiate the sale of common stock only upon approval of the top management or board of directors. Even though these are not regular, recurring events, there must be established processes, procedures, and controls to conduct, record, and report the results of the transactions. Without established procedures and internal controls, the processes might not be properly authorized, recorded, or reported.

The second type of administrative processes is shown in the middle and right-hand boxes of Exhibit 12-2. Each of the transactions and processes on the left-hand side boxes of Exhibit 12-2 must result in financial information being recorded in general ledger accounts. That is, any sale, cash collection, expense, or payment must eventually affect general ledger accounts such as revenue accounts, expense accounts, and cash accounts. Therefore, there must be processes within the organization that funnel all of the transaction information from each of these processes into general ledger accounts. The general ledger account balance information and other information are then used to prepare reports for both internal and external users.

Exhibit 12-2 Overall View of Transactions, Processes, and Resulting Reports

Each of the processes just described is an administrative process. Administrative processes are transactions and activities that either are specifically authorized by top managers or are used by managers to perform administrative functions. Investment of excess funds and raising capital funds are nonroutine processes that occur when specifically authorized. On the other hand, the general ledger and reporting processes provide feedback to owners and managers and assist these groups in the administration of the organization. These administrative processes are further described in the following sections.