Accounting Information Systems Chapter 7

ACCOUNTING INFORMATION SYSTEMS

An accounting information system is

the combination of personnel, records and procedures that provides financial data

ACCOUNTING INFORMATION SYSTEMS

An accounting information system

involves collecting and processing data and disseminating financial information to interested parties. An AIS may either be manual or computerized.

Basic Features
Control
Compatibility Flexibility Cost/benefit relationship

Basic Features
Internal controls are the methods and

procedures used to authorize transactions and safeguard assets. Compatibility means that the system works smoothly with operations, personnel, and the organizational structure.

Basic Features
Flexibility relates to the systems ability to

accommodate changes in the organization.

A cost/benefit relationship indicates that the

cost of controls do not exceed their value to the organization.

PRINCIPLES OF AN EFFICIENT AND EFFECTIVE ACCOUNTING INFORMATION SYSTEM

Technological Advances

Government Regulation and Deregulation

Changing Accounting Principles

PRINCIPLES OF AN EFFICIENT AND EFFECTIVE ACCOUNTING INFORMATION SYSTEM

Cost s

Benefit s

The accounting system must be cost effective. Benefits of information must outweigh the cost of providing it.

MANUAL ACCOUNTING SYSTEMS

In a manual accounting system, each of the

steps in the accounting cycle is performed by hand. This means that transactions are entered into a journal and then posted to the ledger. Financial statements are thus derived from many manual computations from ledger balances. So.....why study manual systems if the real world uses computerized systems?

MANUAL VS. COMPUTERIZED SYSTEMS

Small businesses still abound and most of them

begin operations with manual accounting systems and convert to computerized systems as business grows. To understand what computerized accounting systems do, one must understand how manual accounting systems work.

Computerized Accounting System

Hardware

Software Company Personnel

Computerized Accounting System

Hardware is the electronic equipment that

makes up a computer system.

Software is a system of instructions that

drive the computer to perform various functions.

Properly trained personnel are critical to the

successful operations of the system.

Three Stages of Data Processing

(Source documents) Input

Processing (Financial statements)

Output

Computerized Accounting System

ACCOUNTING RECORDS PERSONNEL
input transactions, request reports, protect records

Journals, Ledgers, Other records accessed for reports

posted

HARDWARE INPUT DATA

entered, edited

SOFTWARE PROCESSING

printed to paper, screen

OUTPUT REPORTS

Designing an Accounting System

Design of the accounting system begins

with the chart of accounts. The chart of accounts lists all accounts and their account number in the ledger.

Menu-Driven Accounting System

Computer systems are organized by

function or task. Computer systems usually have a choice of processing options on a menu.

Menu-Driven Accounting System

General Receivables Payables Inventory Payroll Reports Utilities

Posting Account Maintenance Closing Use arrow keys to make choice. Press <return> to access choice. Press F7 <escape> to leave menu.

COMPUTERIZED ACCOUNTING SYSTEM

MAIN

Preparing Accounting Reports

Trial Financial Accounts Accounts Daily Cash Balance Statements Receivable Detail Payable Detail Report

Income Statement Balance Sheet

Statement of Owners Equity Statement of Cash Flows

Use arrow keys to make choice. Press <return> to access choice. Press F7 <escape> to leave menu.

REPORTS

Integrated Accounting Systems

Computerized accounting systems are

organized by modules. These modules are separate but integrated units. A sales transaction entry will update two modules: 1 Accounts Receivable/Sales 2 Inventory/Cost of Goods Sold

Use the sales journal, the cash receipts journal, and the accounts receivable ledger.

SPECIAL JOURNALS
Special journals are accounting journals used to

record one specific type of transaction. They are used to group similar types of transactions. If a transaction cannot be recorded in a special journal, it is recorded in the general journal. Special journals permit greater division of labor and reduce time needed to complete the posting process.

USE OF SPECIAL JOURNALS AND THE GENERAL JOURNAL

Sales Journal

Cash Receipts Journal

Purchases Journal

Cash Payments Journal

General Journal

Used for: All sales of merchandise on account

Used for: All cash received (including cash sales)

Used for: All purchases of merchandise on account

Used for: All cash paid (including cash purchases)

Used for: Transactions that cannot be entered in a special journal, including correcting, adjusting, and closing entries

The types of special journals used depend largely on the types of transactions that occur frequently in a business enterprise.

JOURNALIZING THE SALES JOURNAL PERPETUAL INVENTORY SYSTEM

KARNS WHOLESALE SUPPLY
SALES JOURNAL
Date 2002 May 3 7 14 19 21 24 27 Account Debited Abbot Sisters Babson Co. Carson Bros. Deli Co. Abbot Sisters Deli Co. Babson Co. Invoice No. 101 102 103 104 105 106 107 Ref. Accts. Receivable Dr. Sales Cr. 10,600 11,350 7,800 9,300 15,400 21,210 14,570 90,230

51
Cost of Goods Sold Dr. Merchandise Inventory Cr. 6,360 7,370 5,070 6,510 10,780 15,900 10,200 62,190

Under a perpetual inventory system, one entry at selling price in the Sales

Journal results in a debit to Accounts Receivable and a credit to Sales. Another entry at cost results in a debit to Cost of Goods Sold and a credit to Merchandise Inventory. Only one line is needed to record each transaction and all entries are made from sales invoices.

Subsidiary Ledger
A subsidiary ledger is often used to provide

details on individual balances of... customers (accounts receivable) and... suppliers (accounts payable).

SUBSIDIARY LEDGERS
A subsidiary ledger is a group of accounts

with a common characteristic, such as accounts receivable. The subsidiary ledger is assembled together to facilitate the recording process by freeing the general ledger from details concerning individual balances.

A Control Account
What is a control account?
It is the general ledger account. It equals the sum of the individual account

balances in a subsidiary ledger.

CONTROL ACCOUNT
The general ledger account that

summarizes subsidiary ledger data is called a control account. Each general ledger control account balance must equal the composite balance of the individual accounts in the subsidiary ledger.

PROVING THE EQUALITY OF THE POSTINGS FROM THE SALES JOURNAL

Postings to General Ledger

General Ledger Credits Merchandise Inventory Sales Debits Accounts Receivable Cost of Goods Sold

Debit Postings to the Accounts Receivable Subsidiary Ledger

Subsidiary Ledger
$ 62,190 90,230 $ 152,420 $ 90,230 62,190 $ 152,420

Abbot Sisters Babson Co. Carson Bros. Deli Co.

$ 26,000 25,920 7,800 30,510 $ 90,230

To prove the ledgers it is necessary to determine that 1 the total of the general ledger debit balances must equal the total of the general ledger credit balances and 2 the sum of the subsidiary ledger balances must equal the balance in the control account.

ADVANTAGES OF A SALES JOURNAL

1 One-line entry for each sales transaction saves time. It is not necessary to write out the four account titles for each transaction. 2 Only totals, rather than individual entries, are posted to the general ledger. This saves posting time and reduces the possibilities of errors in posting. 3 A division of labor results, because one individual can take responsibility for the sales journal.

Cash Receipts Journal

Additional columns are provided to enter

other account descriptions and amounts. Cash receipts amounts affecting subsidiary ledger accounts are posted daily to keep customer balances up to date. At month end, foot and crossfoot the journal and post to the general ledger.

CASH RECEIPTS JOURNAL

The total of the Other Accounts column is not posted. The individual amounts comprising the total are posted separately to the general ledger accounts specified in the Accounts Credited column The individual amounts in a column are posted daily to the subsidiary ledger account specified in the Accounts Credited column

CASH RECEIPTS JOURNAL

KARNS WHOLESALE SUPPLY Cash Receipts Journal
Date 2002 May 1 7 10 12 17 22 23 28 Accounts Credited Ref. Cash Dr. 5,000 1,900 10,388 2,600 11,123 6,000 7,644 9,114 53,769 Sales Discounts Dr. Accounts Receivable Cr. Sales Cr. Other Accounts Cr. 5,000 1,900 212 227 156 186 781 10,600 2,600 11,350 6,000 7,800 9,300 39,050

D. A. Karns, Capital Abbot Sisters Babson Co. Notes Payable Carson Bros. Deli Co.

4,500

11,000

Has debit columns for cash and sales discounts and credit columns

for accounts receivable, sales, and other accounts Posting the cash receipts journal involves posting all column totals once at the end of the month to the appropriate accounts

PROVING THE EQUALITY OF THE CASH RECEIPTS JOURNAL

Debits Cash Sales Discounts Cost of goods sold $ 53,769 781 2,930 $ 57,480

Credits Accounts Receivable Sales Other Accounts Merchandise Inventory $ 39,050 4,500 11,000 2,930 $ 57,480

When the journalizing of a multi-column journal has been completed, the amount columns are totaled (footing), and the totals are compared to prove the equality of the debits and credits (cross-footing).

PROVING THE LEDGERS AFTER POSTING THE SALES AND THE CASH RECEIPTS JOURNALS

Accounts Receivable Subsidiary Ledger

General Ledger Debits

Abbot Sisters Babson Co. Deli Co.

$ 15,400 14,570 21,210 $ 51,180

Cash Accounts Receivable Sales Discounts Cost of Goods Sold

After the posting of the cash receipts journal is completed, it is necessary to prove the ledgers. The general ledger totals are in agreement . Also, the sum of the subsidiary ledger balances equals the control account balance.

$ 53,769 51,180 781 65,120 $ 170,850

Credits Notes Payable D. A. Karns, Capital Sales Merchandise Inventory $ 6,000 5,000 94,730 65,120 $ 170,850

Purchases Journal
This is designed to account for all purchases

of inventory, supplies, services, and other assets on account.

Purchases Journal
Cash purchases are recorded in the cash

disbursements journal. At month end the journal is footed and crossfooted. Posting to the general ledger is similar to posting from sales and cash receipts journals.

PURCHASES JOURNAL
KARNS WHOLESALE SUPPLY Purchases Journal
Date 2002 May 6 10 14 19 26 29 Account Credited Jasper Manufacturing Inc. Eaton and Howe Inc. Fabor and Son Jasper Manufacturing Inc. Fabor and Son Eaton and Howe Inc. Terms 2/10, 3/10, 1/10, 2/10, 1/10, 3/10, n/30 n/30 n/30 n/30 n/30 n/30 Ref. Merchandise Inventory Dr. Accounts Payable Cr. 11,000 7,200 6,900 17,500 8,700 12,600 63,900

Each entry results in a debit to Merchandise Inventory and a credit to Accounts Payable All entries are made from purchase invoices Postings are made daily to the accounts payable subsidiary journal and monthly to the

general ledger

PROVING THE EQUALITY OF THE PURCHASES JOURNAL

Postings to General Ledger

Merchandise Inventory (debit) Accounts Payable (credit) $ 63,900 $ 63,900

Credit Postings to Accounts Payable Ledger Eaton and Howe, Inc. $ 19,800 Fabor and Son 15,600 Jasper Manufacturing Inc. 28,500 $ 63,900

To prove the ledgers it is necessary to determine that 1 the total of the general ledger debit balances equals the total of the general ledger credit balances and 2 the sum of the subsidiary ledger balances equals the balance in the control account.

Cash Disbursements (Payment) Journal

Most payments are by check and are

recorded in the cash disbursements journal. The cash disbursements journal is also called: check register cash payments journal

Cash Disbursements Journal

This has columns for :

date
check number

payee
cash amount (credit) accounts payable (debit) description and amount of other debits

and credits

CASH PAYMENTS JOURNAL

KARNS WHOLESALE SUPPLY Cash Payments Journal
Date 2002 May 1 3 8 10 19 23 28 30 Ck. No. 101 102 103 104 105 106 107 108 Accounts Debited Ref. Other Accounts Dr. 1,200 100 400 11,000 7,200 6,900 17,500 500 2,200 42,600 220 216 69 350 855 Accounts Payable Dr. Merchandise Inventory Cr. Cash Cr. 1,200 100 400 10,780 6,984 6,831 17,150 500 43,945

Prepaid Insurance Merchandise Inventory Merchandise Inventory Jasper Manufacturing Inc. Eaton and Howe Inc. Fabor and Son Jasper Manufacturing Inc. D. A. Karns, Drawing

Has multiple columns because of the multiple reasons that cash payments may be made Journalizing procedures are similar to cash receipts journal All entries are made from pre-numbered checks Posting procedures are also like the cash receipts journal

EFFECTS ON GENERAL JOURNAL

Only transactions that cannot be entered

in a special journal are recorded in the general journal. When the entry involves both control and subsidiary accounts: 1 In journalizing, control and subsidiary accounts must be identified 2 In posting there must be a dual posting (to the control account and subsidiary ledger)

General Journal
Special journals save much time in

recording repetitive transactions and posting to the ledger. However, some transactions do not fit into any of the special journals.

General Journal
Every accounting system needs a general

journal. What entries are recorded in the general journal? depreciation expiration of prepaid insurance accrual of salaries payable adjusting and closing entries

General Journal
Many companies record sales returns and

allowances and purchase returns in the general journal. A credit memorandum is the document issued by the seller for a credit to a customers Accounts Receivable.

Purchase Returns and Allowances

A debit memorandum is the business

document that states that the buyer no longer owes the seller for the amount of the returned purchases. The buyer debits the Accounts Payable to the seller and credits Inventory.

Balancing the Ledgers

At the end of the accounting period:

Total debits and credits of account balances

in the general ledger are equal. Control account balances are equal to the sum of the appropriate subsidiary ledger accounts.

JOURNALIZING AND POSTING THE GENERAL JOURNAL

Karns Wholesale Supply GENERAL JOURNAL
Date 2002 May 31 Account Titles and Explanation Accounts Payable Fabor and Son Merchandise Inventory (Received credit for returned goods) Debit Credit

500 500

GENERAL LEDGER
ACCOUNTS PAYABLE SUBSIDIARY LEDGER Fabor and Son Debit Credit 6,900 6,900 8,700

Date 2002 May 14 23 26 31

Ref. P1 CP1 P1 G1

Balance 6,900 0 8,700 8,200

Date 2002 May 31 31 31

Ref. P1 CP1 G1

Accounts Payable Debit Credit 63,900 42,600

Balance 63,900 21,300 20,800

500
Merchandise Inventory Debit Credit

500

Date 2002 May 31

Ref. G1

Balance (500)

500

End of Chapter 7