Acct 474 Fall15 SUA - Ron

Systems Understanding AID
Accounting 474: Accounting Information

Systems (AIS)
Fall 2015
University of Illinois-Chicago
College of Business Administration
Everything you ever wanted to know

about...
The
Accounting
Cycle
Todays Agenda
Review of the manual Accounting Cycle
6 Major Subcycles
Begin the SUA
Internal Controls in the SUA
The Accounting Cycle

SUA Reference p.10
Prepare
Documents
Record in
Journals
Transactions
Occur
Prepare
Closing
Entries
Post to
Ledgers
Prepare
Unadjusted
Trial Balance
Prepare
Financial
Statements
Prepare
Adjusted Trial
Balance
Prepare and
Post Adjusting
Entries
The Accounting Cycle

Subcycle (transaction cycle):
Group of related business activities
that result in repetitive patterns of
transactions
6 Major Subcycles
Revenue
Cycle
Expenditure
Cycle
General
Ledger and
Reporting
Cycle
Human
Resources
Cycle
Production Financing
Cycle
Cycle
Revenue Cycle in SUA

Instructions pp. 18-21
Consists of:
Credit Sales
Cash Sales
Bad Debt Write-offs
Sales Returns
Cash Receipts
Revenue
Cycle
Revenue Cycle in SUA

Credit Sale
1. Customer Purchase Order

2. Approve Credit
3. Bill of Lading
4. Sales Invoice
5. Pack and ship order
6. Review and approve documents
7. Mail invoice to customer
8. Make the entry in the Sales Journal and then
update the A/R Subsidiary Ledger
Introduction to SUA
Waren Sports Supply
SUA
package materials
Supplemental materials
Worksheet
Introduction to SUA
SUA package materials
Reference book
Documents Folder
Other file tabs
Journal book
Instructions/Flowcharts/Ledgers book
Introduction to SUA
Supplemental materials
Assignment Schedule
File System page
Check Figures
Grading Sheet
Transaction List (Alternate)Document No.1
Price Lists (Alternate) Document No. 3
Introduction to SUA
Worksheet
Worksheet is already prepared as Excel

spreadsheet
Download this spreadsheet from the 474
Blackboard (you dont need the
spreadsheet worksheet until SUA 3)
Alter the SUA package!!!

From your Documents File, throw away:
the blue Transaction List A
the green Transactions List B
(we will be using the Transaction List
in the course packet handout)
Alter the SUA package!!!

Also, from your Documents File, throw away:
1 green Worksheet
1 green Post-closing Trial Balance
Price Lists Document 3 (we will be using
Price list in the packet)
We will use the Excel spreadsheet
worksheet instead (in SUA 3).
Warens Subcycles
Revenue cycle (Waren: Sales and cash receipts

cycle)
Expenditure cycle (Waren: Purchases and cash
disbursements cycle)
Human resources cycle (Waren: Payroll cycle)
General Ledger and Reporting cycle (Waren:
not specifically mentioned)
Production cycle (doesnt apply to Waren)
Financing cycle (Waren doesnt have much
external financing)
Warens Subcycles
Revenue cycle (Waren: Sales and cash receipts

cycle)
Expenditure cycle (Waren: Purchases and cash
disbursements cycle)
Human resources cycle (Waren: Payroll cycle)
General Ledger and Reporting cycle (Waren:
not specifically mentioned)
Production cycle (doesnt apply to Waren)
Financing cycle (Waren doesnt have much
external financing)
SUA Assignments
SUA 1 - Sales and cash receipts cycle
SUA 2 - Purchases and cash disbursements
cycle
SUA 3 - Payroll cycle and G/L cycle
Waren Personnel
Ray Kramer Salaried manager
Jim Adams Hourly accounting clerk
Nancy Ford Hourly production and billing
Use this semesters transaction

set and your own numbers
Lets get started...

Label the transactions
9 S&CR, 8 P&CD, 2 Payroll
SUA 1
SUA reference - chapter 3
Flowcharts - pp. 18-21
Review all S&CR transactions
Do December 19 S&CR transaction credit
sale to Clayborn University
How to do the SUA

1.
2.
3.
4.
5.
Pull out the documents involved

GO TO THE FLOWCHART TO FIND WHERE TO
BEGIN
Follow all the legs of the flowchart to their ends
Not every item involves a journal entry
Every journal entry goes in ONE journal ONCE.
Update subsidiary ledgers as necessary.
NEVER enter anything in the General Ledger.
Working with flowcharts
Flowcharts are written in a compact form,

to cover multiple possibilities. You have to
mentally edit them to fit each particular
case.
Notes on Revenue Cycle
Cash receipts
Cash is always handled the same way.

Endorse
check
Write on prelist
Put on deposit slip
Make an entry in the Cash Receipts Journal
Update the A/R subsidiary ledger, IF NECESSARY!
All checks for the day are put together on a

deposit slip and taken to the bank at the end of
the day. You have 3 deposit slips.
A/R Write-offs
2 methods:
Direct Write-off Method
Allowance Method (Warens method)

No Allowance is made for write-offs ahead of

time. GAAP permits this when write-offs are
INFREQUENT & IMMATERIAL.
When write-off occurs:

???
XXX
???
XXX

No Allowance is made for write-offs ahead of

time. GAAP permits this when write-offs are
INFREQUENT & IMMATERIAL.
When write-off occurs:

Bad Debts Expense
A/R
XXX
XXX
Allowance Method (Warens Method)
Sales Returns on credit sale

Approve sales return
Receive goods, fill out receiving report,
process credit memo to credit customer acct.
On to controls
Todays Agenda
Finish SUA 1
Begin SUA 2
Review Expenditure Cycle
Inventory Systems
Internal Controls & AIS (Ch. 6)
How to do the SUA

1.
2.
3.
4.
5.
Pull out the documents involved

GO TO THE FLOWCHART TO FIND WHERE TO
BEGIN
Follow all the legs of the flowchart to their ends
Not every item involves a journal entry
Every journal entry goes in ONE journal ONCE.
Update subsidiary ledgers as necessary.
NEVER enter anything in the General Ledger.
Working with flowcharts
Flowcharts are written in a compact form,

to cover multiple possibilities. You have to
mentally edit them to fit each particular
case.
At the end of SUA 1...

All documents in S&CR are properly
processed and filed
All necessary entries are made in journals
and Subsidiary Ledgers
Monthly statement for customer is
complete
A/R aged trial balance (p. 45) is complete
(Exclude zero balances!)
A/R Aged Trial Balance

(Reference Manual p.45 )
2013
How to make good schedules

Type up in Excel
Line up numbers in columns
Show pennies, even when .00
Use Accounting number format
Underline columns, double underline totals
Hard Work Often Pays Off Over Time,

But Laziness Always Pays Off Now
Expenditure Cycle in SUA

Instructions pp. 22-24
Consists of:
Credit Purchases
Cash Purchases
Purchase Returns
Cash Disbursements
Expenditure
Cycle

Credit Purchase
1. Prepare purchase order (p.o.)

2. Approve purchase order
3. Send p.o. to vendor
4. Receive goods, prepare receiving report
5. Receive vendor invoice
6. Match documents and approve for payment
7. Make the entry in the Purchases Journal
and then update the A/P Subsidiary Ledger
Inventory Systems
There are two basic types of inventory
systems:
1) Perpetual Inventory
2) Periodic Inventory
Which one is becoming more common?
Perpetual
Inventory Systems
Perpetual Inventory
In Perpetual Inventory:
1) Use an Inventory Subsidiary Ledger
2) No Purchases account
3) Count inventory to determine shrinkage
(not necessarily every period)
Inventory Systems
Perpetual Inventory - Entries
Sales Entries:
Purchases Entry:
Inventory xx
A/P
xx
A/P
xx
Purchase Returns
A/P
xxx
Cash
Purchase Discounts
A/R
Sales
xx
xx
xx
xxx
COGS
xx
Inventory
xxx
xx
Inventory Systems
Perpetual Inventory
Advantages:
1) Better control over inventory
2) Essential for JIT
3) Becoming essential to be competitive
Disadvantages:
More costly than periodic, though costs
are decreasing with better
technology.
Inventory Systems
Periodic Inventory
In Periodic Inventory (Warens method):

1) No Inventory Subsidiary Ledger
2) Use Purchases account
3) At end of period count inventory to
determine COGS at end of every period
(shrinkage will be included)
Inventory Systems
Periodic Inventory - Entries
Sales Entries:
Purchases Entry:
Purchases xx
A/P
xx
A/P
xx
Purchase Returns
A/P
xxx
Cash
Purchase Discounts
A/R
Sales
xx
xx
xx
xxx
xxx
Inventory Systems
Periodic Inventory - Calculating Ending Inventory
1) Count the inventory items (# of units)

2) Calculate ending inventory:
(# of units)(cost per unit) = Ending Inv. Value
3) In an adjusting entry, replace old inventory
balance with new balance, close out purchases
accounts and Freight-In, and record (plug)
COGS
(You do this in SUA 3 , an example entry is in the
Reference book p. 79)
Inventory Systems
Periodic Inventory
Advantages:
1) Cheaper recordkeeping
Disadvantages:
1) Less control over inventory
2) Cant be used with JIT
3) Less competitive strategy in high tech
environment
Warens System
Notes:
Waren uses the periodic system, they have a
Purchases account
The Purchases journal is used for any kind of
purchase, (fixed assets, small expenses,
inventory), but only inventory purchases are
debited to the Purchases account
In the purchase of laptop computers on
12/31/13, only process the purchase, do not pay
the invoice, even though the payment terms
state: Due on receipt of invoice.
A/P Trial Balance

Waren Sports Supply
Accounts Payable Trial Balance
December 31, 2013
Vendor No.
503
510
545
Name
Amount
Payable
$ 356.30
3,496.00
2,450.00
Sears
Brown & Root
Lapland & Co.
TOTAL
$ 6,302.30
Todays Agenda
Finish SUA 2
Review SUA 3
Internal Controls, Financial Statements
and Auditing
At the end of SUA 2...
All documents in P&CD are properly

processed and filed
All necessary entries are made in journals

and Subsidiary Ledgers
A/P trial balance is complete
A/P Trial Balance

Waren Sports Supply
Accounts Payable Trial Balance
December 31, 2013
Vendor No.
503
510
545
Name
Amount
Payable
$ 356.30
3,496.00
2,450.00
Sears
Brown & Root
Lapland & Co.
TOTAL
$ 6,302.30
SUA 3
Payroll Cycle - 2 transactions
General Ledger and Reporting Cycle

Do end of period procedures
AJEs
Financial Statements
Closing entries
Prepare SUA for submission
Payroll Cycle in SUA

Instructions p. 24
Consists of:
Timekeeping
Payments
Payroll
Cycle

1. Hourly Employees work and fill in time cards
2. Approve hours on time cards and give to
accounting department
3. Calculate payroll amounts
4. Record in Payroll Journal and Employee Earnings
Subsidiary Ledger
5. Generate paychecks
6. Review and sign paychecks
7. Distribute paychecks to employees
8. Make the entry in the Cash Disbursements Journal
Lets do a Payroll Clinic
There are 2 entries made for payroll
Salaries Expense Entry

Salaries & Wages Expense
XXX
Federal Income Tax Withholding Payable

State Income Tax Withholding Payable
FICA Payable
Cash
XX
XX
XX
XX
This entry looks different in the Payroll Journal, but it is the same entry
Payroll Tax Expense Entry

Payroll Tax Expense
XXX
FUTA Payable
SUTA Payable
FICA Payable
XX
XX
XX
Make this entry in the General Journal
Employment Arrangements
Employee
Independent Contractor
http://www.irs.gov/pub/irs-pdf/p15.pdf
Independent Contractor
self-employed
Schedule C on 1040 tax form
Self employment tax
FICA x 2
Self employment tax > 13%
Notes on Payroll Cycle
Be careful with Time Card calculation
Hours are calculated in hundredths (1/100) of an hour,

not minutes (1/60).
Nancy Fords time card for December 26

16.86
- 7.50
9.36 hours
The pay increase on Dec. 20th applies to the whole

pay period, ie. from Dec. 16th
The withholding amounts for employees income

taxes are given to you in the Dec. 20th
transaction; you dont have to calculate them.
SUTA & FUTA percentages (2.7%, 0.8%)

are given in instruction manual page 13.
Apply to only first $7000 of annual income.
How much have employees already earned?
Calculate SUTA & FUTA only on Nancy

Fords pay!
FICA tax is 6.2% + 1.45% = 7.65%.
(p. 8 of Instructions book)

6.2% Social Security wages up to $102,000
1.45% Medicare - all wages
So, per employee:
For first $102,000 x 7.65%

For amounts over $102,000 x 1.45%
No Waren employee has earned over $102,000, so

use combined rate of 7.65%
The payroll check numbers can be in any

order as long as you have all of them.
Ray Kramer signs all the checks, including

his own paycheck!
End of Period Procedures
Follow instructions in project - do all procedures

not done in previous parts of SUA (follow the
Assignment Schedule)
Month-end procedures 1-7
Bank reconciliation, unemployment taxes, etc.

Note: These are not adjusting entries, they are normal
entries of the period
Year-end procedures 1-7
worksheet
Adjusting entries 5 AJEs (4 + 1)
Closing entries 3 Closing entries (no Dividends)
Adjusting Journal Entry Notes
Depreciation policy is the half-year convention.
Bad Debts method is given on last page of

Transaction List
Ending Inventory figure given on last page of

Transaction List
The form of Inventory AJE is shown on p. 79

of the Reference book. (next slide)
AJE for Inventory

Inventory
Purchase Discounts
Purchase Returns
Cost of Goods Sold
Purchases
Freight-In
DR
CR
xx or xx
xx
xx
PLUG
xx
xx
AJE for Inventory

Inventory
Purchase Discounts
Purchase Returns
Cost of Goods Sold
Purchases
Freight-In
CR
DR
xx or xx
xx
xx
PLUG
xx
xx
Closing Entries
1.
2.
3.
4.
Close Revenues & Gains to Income Summary

Close Expenses & Losses to Income Summary
Close Income Summary to Retained Earnings
Close Dividends to Retained Earnings
(Sample Entries: p. 23 Reference Book)
Notes:
Use worksheet spreadsheet on web site
AJE for income tax accrual: Use worksheet
Financial Statements automatically prepared on
spreadsheet
The only columns you need to fill in on the
worksheet are the Unadjusted Trial Balance
and the Adjustments (green columns)

Finding Errors in the worksheet
Calculate the difference between DR and CR

and:
1.
2.
3.
Look for that number in your entries and posting

(you may have forgotten to post the number)
Look for an amount that is exactly half of that
difference (you may have posted a debit as a credit
or vice versa)
Divide the difference by 9 and see if it divides with
no remainder (indicates a transposition error)
Postings include:
Cash
25
A/R
25
Resulting Post-Closing Trial Balance:

DR
CR
Cash
50
A/R
100
A/P
75
Common Stock
75
150
150
If you mispost:
Cash 25
A/R
25
As:
Cash 25
A/P
25

DR
CR
Cash
50
A/R
125
A/P
100
Common Stock
75
150
150
No Difference!!!
If you mispost:
Cash 25
A/R
25
As:
Cash
A/R
25
25

DR
CR
Cash
50
A/R
150
A/P
75
Common Stock
75
200
150
200 150 = 50 / 2 = $25 error
If you mispost:
Cash 25
A/R
25
As:
Cash 25
A/R
52

DR
CR
Cash
50
A/R
73
A/P
75
Common Stock
75
123
150
150 123 = 27 / 9 = 3.000 no remainder
must be a TRANSPOSITION ERROR
Fixed Asset Trial Balance

Do after depreciation AJE is made and posted
Waren Sports Supply
December 31, 2013
ASSET
Cost
Computers
Furniture
Equipment
Accumulated
Depreciation
$ 15,000.00 $12,000.00
10,000.00
10,000.00
25,000.00
8,000.00
Net
Book Value
$ 3,000.00
0.00
17,000.00
TOTALS
$ 50,000.00
$ 20,000.00
$ 30,000.00
SUA 3 - Completing the project

Notes:
All AJEs and Closing entries are made in
General Journal and are posted to G/L
Foot all journals and ledgers
From the spreadsheet, print off the
Worksheet, the Income Statement, and the
Balance Sheet and put in SUA envelope
Total manual G/L balances and make sure they
agree with the worksheet balances
DO NOT DO A STATEMENT OF CASH FLOWS
SUA 3 - Completing the project

A/R Trial Balance
A/P Trial Balance
Bank Reconciliation
MUST BE PRINTED OUT AND IN GOOD FORM
HANDWRITTEN WORK WILL NOT RECEIVE
CREDIT
How to make good schedules

Type up in Excel
Line up numbers in columns
Show pennies, even when .00
Use Accounting number format
Underline columns, double underline totals
Use this semesters transaction

set and your own numbers
Prepare project for submission
Tape grading sheet to front of envelope and

fill in name and section day
Make sure that your documents are all filed
according to the File System page
Remove the Reference Manual
Tape envelope shut
Hand in
Have a beer
Internal Controls & Auditing
What is Internal Control?
Internal Control is a process implemented by the

BOD and management that gives reasonable
assurance that these objectives are achieved:
Safeguard assets
Ensure accurate and reliable accounting (and other)
information
Improve operational efficiency
Promote adherence to managerial policies
Financial statements are prepared using GAAP
Comply with laws and regulations
What is Internal Control?
Internal Control is a process implemented by the

BOD and management that gives reasonable
assurance that these objectives are achieved:
Safeguard assets
Ensure accurate and reliable accounting (and

other) information
Improve operational efficiency
Promote adherence to managerial policies
Financial statements are prepared using GAAP

Comply with laws and regulations
Financial Statement Assertions

Who owns the financial
statements of a company?

Who owns the financial
statements of a company?
Management
Every number on the financial

statements represents a set of
claims being made by
management known as:
Assertions

Sales
$ 1,500,000.00
This statement asserts:

1. All sales are properly included,
you have left none out
2. All sales actually occurred, number
represents actual sales made
3. Sales are properly valued, net of
returns, allowances, discounts
4. You have proper claim to revenue
generated, sales belong to you

Sales
$ 1,500,000.00

COMPLETENESS

Sales
$ 1,500,000.00

COMPLETENESS
EXISTENCE

Sales
$ 1,500,000.00

COMPLETENESS
EXISTENCE
VALUATION

Sales
$ 1,500,000.00

COMPLETENESS
EXISTENCE
VALUATION
RIGHTS/
OBLIGATIONS
Computerization does
not change the
assertions!!!
What changes in a
computerized system is
the design of the
internal controls.
Auditing and Risk
Auditors must give an opinion about the fairness

of the financial statements.
To do this they use their knowledge of

transaction cycles, assertions and the audit trail
Auditors cannot review every transaction, they

must focus their audit work with an assessment
of risk
Auditing and Risk

Sales
$ 1,500,000.00
To audit Sales:
1. What is the risk of misstatement with Sales?
2. Which assertions may be false?
3. Use the Sales audit trail to design audit
testing of Sales
Internal Controls
The Audit Trail
The Audit Trail is the documentary

evidence that links the source
documents to the final numbers
on the financial statements.
Auditing Sales
Credit Sale

2. Approve Credit
3. Bill of Lading
4. Sales Invoice
Auditing Sales
Credit Sale

2. Approve Credit
3. Bill of Lading
4. Sales Invoice
Auditing Sales
Credit Sale

2. Approve Credit
3. Bill of Lading
G/L
F/S
4. Sales Invoice

Credit Purchase


Credit Purchase


Credit Purchase


Credit Purchase

G/L
F/S

2. Approve hours on time cards and give to accounting
department
Subsidiary Ledger

department
Subsidiary Ledger

department
Subsidiary Ledger
G/L
F/S
Auditing Sales
Credit Sale

2. Approve Credit
3. Bill of Lading
G/L
F/S
4. Sales Invoice
Auditing Sales
Credit Sale
Overstatement risk
Existence assertion must be investigated

Test by vouching back up the audit trail
ie. Sample entries in sales journal and look for

matching customer p.o.s and sales invoices
Understatement risk
Completeness assertion must be investigated

Test by tracing forward down the audit trail
ie. Sample customer p.o.s and sales invoices and

look for matching entries in sales journal
Very Common Audit Tests

Sales - Existence
A/P - Completeness
Fixed Assets - Valuation
A/R - Existence and Valuation
For next class do the

Auditing Questions in the
course packet

END
Expenditure Cycle
Auditing Questions
Population to sample? Examine what?
Were all goods billed by vendor properly

authorized for purchase?
Sample Vendor Invoices, vouch back to approved

pos.
Were all authorized pos properly received?
Sample approved pos, trace forward to receiving

reports

Credit Purchase

Payroll Cycle
Auditing Questions
Population to sample? Examine what?
Were all paychecks issued for authorized

hours worked?
Sample Paychecks, vouch back to approved

timecards
Were Salaries payable accruals understated?
Sample timecards, trace forward to AJEs for

salaries

department
Subsidiary Ledger
END
Audit Trail in the SUA

Credit Sale

2. Approve Credit
3. Bill of Lading
4. Sales Invoice
Hard Work Often Pays Off After Time, But

Laziness Always Pays Off Now

Acct 474 Fall15 SUA - Ron

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Systems Understanding AID

Accounting 474: Accounting Information

Everything you ever wanted to know

The Accounting Cycle

The Accounting Cycle

Revenue Cycle in SUA

Revenue Cycle in SUA

1. Customer Purchase Order

Worksheet is already prepared as Excel

Alter the SUA package!!!

Alter the SUA package!!!

Revenue cycle (Waren: Sales and cash receipts

Revenue cycle (Waren: Sales and cash receipts

Use this semesters transaction

Lets get started...

How to do the SUA

Pull out the documents involved

Working with flowcharts

Flowcharts are written in a compact form,

Notes on Revenue Cycle

Cash is always handled the same way.

All checks for the day are put together on a

Notes on Revenue Cycle

Notes on Revenue Cycle

No Allowance is made for write-offs ahead of

When write-off occurs:

Notes on Revenue Cycle

No Allowance is made for write-offs ahead of

When write-off occurs:

Notes on Revenue Cycle

Allowance Method (Warens Method)

Notes on Revenue Cycle

Sales Returns on credit sale

How to do the SUA

Pull out the documents involved

Working with flowcharts

Flowcharts are written in a compact form,

At the end of SUA 1...

A/R Aged Trial Balance

How to make good schedules

Hard Work Often Pays Off Over Time,

Expenditure Cycle in SUA

Expenditure Cycle in SUA

1. Prepare purchase order (p.o.)

In Periodic Inventory (Warens method):

Periodic Inventory - Calculating Ending Inventory

1) Count the inventory items (# of units)

A/P Trial Balance

At the end of SUA 2...

All documents in P&CD are properly

All necessary entries are made in journals

A/P trial balance is complete

A/P Trial Balance

Payroll Cycle - 2 transactions

General Ledger and Reporting Cycle

Prepare SUA for submission

Payroll Cycle in SUA

Payroll Cycle in SUA

Lets do a Payroll Clinic

There are 2 entries made for payroll

Salaries Expense Entry

Federal Income Tax Withholding Payable

Payroll Tax Expense Entry

Make this entry in the General Journal