ACCOUNTING

Chapter
INFORMATION1
SYSTEM
 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.
 PRINCIPLES OF AN EFFICIENT AND
EFFECTIVE ACCOUNTING
INFORMATION SYSTEM

The accounting
system must
be cost
effective.
Benefits of
information
must outweigh
Costs Benefits
the cost of
providing it.
PRINCIPLES OF AN EFFICIENT AND
EFFECTIVE ACCOUNTING
INFORMATION SYSTEM

It must be Balance
relevant! It must be
Sheet timely!
It must be Income
reliable!
Statement It must be
accurate!
Other
Financial
Reports
 PRINCIPLES OF AN EFFICIENT AND
EFFECTIVE ACCOUNTING
INFORMATION SYSTEM

Technological
Advances

Government Changing
Regulation and Accounting
Deregulation Principles
 PHASES IN THE DEVELOPMENT
OF AN ACCOUNTING SYSTEM

Analysis
Planning and
identifying
information needs
and sources
Follow-up Design

Monitoring and Creating forms,

documents,
correcting any
procedures, job
weaknesses descriptions & reports

Implementation
Installing the system,
training personnel, &
making the system
wholly operational
 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
 MANUAL SYSTEMS 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
SYSTEMS
General ledger accounting systems are
software programs that integrate the
various accounting functions related to
Sales,
Purchases,
Receivables,
Payables,
Cash receipts and disbursements,
Payroll
 COMPUTERIZED ACCOUNTING
SYSTEMS (CONTD)
Choosing a Software Package:
To identify the right software for his/her
business, one must understand his/her
companys operations.
The company might have specific needs that
are not supported by all software systems.
Choosing the right system is critical because
installation of even a basic system is time-
consuming, and learning a new system will
require many hours of employee time.
 COMPUTERIZED ACCOUNTING
SYSTEMS (CONTD)
Entry-level Software:
Software publishers tend to classify
businesses into groups based on revenue
and the number of employees.
Companies with revenues of less than $5
million and up to 20 employees generally
use entry-level programs.
Quality entry-level packages typically
involve more than recording transactions
and preparing financial statements.
 COMPUTERIZED ACCOUNTING
SYSTEMS (CONTD)
Entry-level Software (Contd):
Common features and benefits:
Easy data access and report preparation
Audit trail
Internal controls
Customization
Network-compatibility
 COMPUTERIZED ACCOUNTING
SYSTEMS (CONTD)
Enterprise Resource Planning Systems:
Typically used by manufacturing companies
with more than 500 employees and $500
million in sales
They integrate all aspects of the organization,
including accounting, sales, human resource
management, and manufacturing.
Because of the complexity of an ERP system,
implementation can take three years and cost
five times as much as the purchase price of
the system
 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.
Two common subsidiary ledgers are the
Accounts Receivable Ledger and the Accounts
Payable Ledger.
 GENERAL LEDGER &
CONTROL ACCOUNT
A general ledger account summarizes the
detailed data from a subsidiary ledger.
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.
 GENERAL LEDGER &
CONTROL ACCOUNT
At the end of an accounting period, each
general ledger control account balance
must equal the composite balance of the
individual accounts in the related subsidiary
ledger.
 RELATIONSHIP OF GENERAL
LEDGERS AND SUBSIDIARY
ACCOUNTS
Accounts receivable controls a Accounts payable controls a
subsidiary ledger of many different subsidiary ledger of many different
customers. creditors.

General Accounts Accounts Owners

Ledger Cash
Receivable Payable Capital

Subsidiary
Ledgers
Customer Customer Customer Creditor Creditor Creditor
A B C X Y Z
 RELATIONSHIP BETWEEN
LEDGERS

ACCOUNTS RECEIVABLE SUBSIDIARY LEDGER GENERAL LEDGER

Aaron Co. Accounts Receivable

Date Ref. Debit Credit Balance Date Ref. Debit Credit Balance
2002 2002
Jan. 31 12,000 12,000
Jan. 10 6,000 6,000 31 8,000 4,000
19 4,000 2,000

Branden Inc.
Date Ref. Debit Credit Balance
2002
Jan. 12 3,000 3,000
21 3,000 0 The subsidiary ledger is separate
from the general ledger.
Caron Co.
Date Ref. Debit Credit Balance
2002
Jan. 20
29
3,000
1,000
3,000
2,000
Accounts Receivable is
a control account.
RELATIONSHIP BETWEEN
LEDGERS
Sales and collection transactions
 SUBSIDIARY LEDGERS:
ADVANTAGES
Subsidiary Ledgers:
1. Show transactions affecting one customer or
one creditor in a single account.
2. Free the general ledger of excessive details.
3. Help locate errors in individual accounts by
reducing the number of accounts in one ledger
and by using control accounts.
4. Make possible a division of labor in posting.
One employee posts to the general ledger while
someone else posts to the subsidiary ledger.
 SPECIAL JOURNALS
To expedite journalizing and posting, most
companies use special journals
Special journals 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 Cash Receipts Purchases Cash Payments General

Journal Journal Journal Journal Journal

Used for: Used for: Used for: Used for: Used for:

All sales of All cash All purchases All cash paid Transactions
merchandise received of merchandise (including that cannot
on account (including on account cash be entered
cash sales) purchases) 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.
 SALES JOURNAL
In the sales journal, companies record
sales of merchandise on account.
Cash sales of merchandise go in the
cash receipts journal.
Credit sales of assets other than
merchandise go in the general journal.
 SALES JOURNAL: PERPETUAL
INVENTORY SYSTEM
KARNS WHOLESALE SUPPLY
SALES JOURNAL 51
Invoice Accts. Receivable Dr. Cost of Goods Sold Dr.
Date Account Debited No. Ref. Sales Cr. Merchandise Inventory Cr.
2002
May 3 Abbot Sisters 101 10,600 6,360
7 Babson Co. 102 11,350 7,370
14 Carson Bros. 103 7,800 5,070
19 Deli Co. 104 9,300 6,510
21 Abbot Sisters 105 15,400 10,780
24 Deli Co. 106 21,210 15,900
27 Babson Co. 107 14,570 10,200
90,230 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.
 ILLUSTRATION 7-9
PROVING THE EQUALITY OF THE POSTINGS
FROM THE SALES JOURNAL
Postings to Debit Postings to the Accounts
General Ledger Receivable Subsidiary Ledger
General Ledger Subsidiary Ledger

Credits Abbot Sisters $ 26,000

Merchandise Inventory $ 62,190 Babson Co. 25,920
Sales 90,230 Carson Bros. 7,800
$ 152,420 Deli Co. 30,510
Debits $ 90,230
Accounts Receivable $ 90,230
Cost of Goods Sold 62,190
$ 152,420

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
KARNS WHOLESALE SUPPLY
Cash Receipts Journal
Sales Accounts Other
Date Accounts Credited Ref. Cash Discounts Receivable Sales Accounts
Dr. Dr. Cr. Cr. Cr.
2002
May 1 D. A. Karns, Capital 5,000 5,000
7 1,900 1,900
10 Abbot Sisters 10,388 212 10,600
12 2,600 2,600
17 Babson Co. 11,123 227 11,350
22 Notes Payable 6,000 6,000
23 Carson Bros. 7,644 156 7,800
28 Deli Co. 9,114 186 9,300
53,769 781 39,050 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
 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
 ILLUSTRATION 7-11
PROVING THE EQUALITY OF
THE CASH RECEIPTS JOURNAL

Debits Credits

Cash $ 53,769 Accounts Receivable $ 39,050

Sales Discounts 781 Sales 4,500
Cost of goods sold 2,930 Other Accounts 11,000
$ 57,480 Merchandise Inventory 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).
 STUDY OBJECTIVE 5

Indicate how a multi-column journal is

posted.
 ILLUSTRATION 7-12
PROVING THE LEDGERS AFTER POSTING THE
SALES AND THE CASH RECEIPTS JOURNALS
Accounts Receivable General Ledger
Subsidiary Ledger
Debits

Abbot Sisters $ 15,400 Cash $ 53,769

Babson Co. 14,570
Accounts Receivable 51,180
Deli Co. 21,210
Sales Discounts 781
$ 51,180 Cost of Goods Sold 65,120
$ 170,850
After the posting of the
cash receipts journal is
completed, it is necessary Credits
to prove the ledgers. The
general ledger totals are Notes Payable $ 6,000
in agreement . Also, the D. A. Karns, Capital 5,000
sum of the subsidiary Sales 94,730
ledger balances equals Merchandise Inventory 65,120
the control account $ 170,850
balance.
 PURCHASES JOURNAL
KARNS WHOLESALE SUPPLY
Purchases Journal
Merchandise
Inventory Dr.
Date Account Credited Terms Ref. Accounts Payable Cr.
2002
May 6 Jasper Manufacturing Inc. 2/10, n/30 11,000
10 Eaton and Howe Inc. 3/10, n/30 7,200
14 Fabor and Son 1/10, n/30 6,900
19 Jasper Manufacturing Inc. 2/10, n/30 17,500
26 Fabor and Son 1/10, n/30 8,700
29 Eaton and Howe Inc. 3/10, n/30 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
 ILLUSTRATION 7-15
PROVING THE EQUALITY OF THE
PURCHASES JOURNAL

Postings to Credit Postings to

General Ledger Accounts Payable Ledger
Merchandise Inventory (debit) $ 63,900
Eaton and Howe, Inc. $ 19,800
Accounts Payable (credit) $ 63,900 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 PAYMENTS JOURNAL
KARNS WHOLESALE SUPPLY
Cash Payments Journal
Other Accounts Merchandise
Date Ck. Accounts Debited Ref. Accounts Payable Inventory Cash
No. Dr. Dr. Cr. Cr.
2002
May 1 101 Prepaid Insurance 1,200 1,200
3 102 Merchandise Inventory 100 100
8 103 Merchandise Inventory 400 400
10 104 Jasper Manufacturing Inc. 11,000 220 10,780
19 105 Eaton and Howe Inc. 7,200 216 6,984
23 106 Fabor and Son 6,900 69 6,831
28 107 Jasper Manufacturing Inc. 17,500 350 17,150
30 108 D. A. Karns, Drawing 500 500
2,200 42,600 855 43,945

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)
 ILLUSTRATION 7-19
JOURNALIZING AND POSTING
THE GENERAL JOURNAL
Karns Wholesale Supply
GENERAL JOURNAL
Date Account Titles and Explanation Debit Credit
2002
May 31 Accounts Payable Fabor and Son 500
Merchandise Inventory
(Received credit for returned 500
goods)

GENERAL LEDGER
ACCOUNTS PAYABLE SUBSIDIARY LEDGER
Accounts Payable
Fabor and Son Date Ref. Debit Credit Balance
Date Ref. Debit Credit Balance 2002
2002 May 31 P1 63,900 63,900
May 14 P1 6,900 6,900 31 CP1 42,600 21,300
23 CP1 6,900 0 31 G1 500 20,800
26 P1 8,700 8,700
31 G1 500 8,200
Merchandise Inventory
Date Ref. Debit Credit Balance
2002
May 31 G1 500 (500)