Accounting Systems Chapter 5

Learning Objectives Define and describe an accounting system. Journalize and post transactions in a manual accounting system that uses subsidiary ledgers and special journals. Describe and illustrate the use of a computerized accounting system. Describe the basic features of e-commerce. Use segment analysis in evaluating the operating performance of a company.

Define and describe an accounting system. Learning Objective 1 Define and describe an accounting system. 3

Basic Accounting Systems LO 1 Basic Accounting Systems An accounting system is the methods and procedures for collecting, classifying, summarizing, and reporting a business’s financial and operating information.

Basic Accounting Systems LO 1 Basic Accounting Systems As a business grows and changes, accounting systems also change in the following three-step process. Analyze user information needs. Design the system to meet the user needs. Implement the system.

Basic Accounting Systems LO 1 Basic Accounting Systems

Basic Accounting Systems LO 1 Basic Accounting Systems Internal controls are the policies and procedures that protect assets from misuse, ensure that business information is accurate, and ensure that laws and regulations are being followed.

LO 1 Processing Methods Processing methods are the means by which the accounting system collects, summarizes, and reports accounting information. These methods may be either manual or computerized.

Learning Objective 2 Define and describe an accounting system. Journalize and post transactions in a manual accounting system that uses subsidiary ledgers and special journals.

Manual Accounting Systems LO 2 Manual Accounting Systems Understanding a manual accounting system is useful in identifying relationships between accounting data and reports.

LO 2 Subsidiary Ledgers A large number of individual accounts with a common characteristic can be grouped together in a separate ledger called a subsidiary ledger.

LO 2 Subsidiary Ledgers The primary ledger, which contains all of the balance sheet and income statement accounts, is called a general ledger.

LO 2 Subsidiary Ledgers Each subsidiary ledger is represented in the general ledger by a summarizing account, called a controlling account.

LO 2 Subsidiary Ledgers The individual customer accounts are arranged in alphabetical order in a subsidiary ledger called the accounts receivable subsidiary ledger, or customers ledger.

LO 2 Subsidiary Ledgers The individual creditor accounts are arranged in alphabetical order in a subsidiary ledger called the accounts payable subsidiary ledger, or creditors ledger.

LO 2 Subsidiary Ledgers

LO 2 Special Journal One method of processing transactions more efficiently in a manual system is to use special journals. Special journals are designed to be used for recording a single kind of transaction that occurs frequently.

LO 2 Special Journals SELLING BUYING

LO 2 Special Journals The all-purpose two-column journal, called the general journal or simply the journal, can be used for entries that do not fit into any of the special journals.

The revenue journal is used for recording fees earned on account. LO 2 Special Journals The revenue journal is used for recording fees earned on account.

Cash fees earned would be recorded in the cash receipts journal. LO 2 Special Journals Cash fees earned would be recorded in the cash receipts journal.

LO 2 Special Journals Purchases made on account (on credit) are recorded in the purchases journal.

All cash payments are recorded in the cash payments journal. LO 2 Special Journals All cash payments are recorded in the cash payments journal.

LO 2 Special Journals NetSolutions had the following selected general ledger balances as of March 1, 2012: Account Number Account Balance 11 Cash $6,200 12 Accounts Receivable 3,400 14 Supplies 2,500 18 Office Equipment 2,500 21 Accounts Payable 1,230

LO 2 Revenue Journal If NetSolutions recorded its revenue transactions in the general journal, the following entries would have to be made:

Each invoice is normally numbered in sequence for future reference. LO 2 Revenue Journal Revenues are normally recorded to the revenue journal when the company sends a bill, referred to as an invoice, to the customer. Each invoice is normally numbered in sequence for future reference.

LO 2 Revenue Journal If NetSolutions journalized these same fees earned on account entries in the revenue journal, the process is simplified, as you can see in Exhibit 2.

LO 2

LO 2 Revenue Journal Let’s take a step-by-step look at the process used to post the first entry. This entry was made on March 2, 2012, when NetSolutions issued Invoice No. 615 to Accessories By Claire for fees earned of $2,200.

Exhibit 3 (in steps) LO 2 (continued) Revenue Journal 1 2 3 4 5 6 Invoice Post Accts. Rec. – Debit Date No. Account Debited Ref. Fees Earned – Credit Page 35 1 2 3 4 5 6 2012 Mar. 2 615 Accessories By Claire 2 2 0 0 00 6 616 RapZone 1 7 5 0 00 18 617 Web Cantina 2 6 5 0 00 27 618 Accessories by Claire 3 0 0 0 00 Click here to skip “Exhibit 3 (in Steps)” (continued)

Exhibit 3 (in steps) LO 2 (continued) Revenue Journal 1 2 3 4 5 6 1 2 Page 35 2012 Mar. 2 615 Accessories By Claire 2 2 0 0 00 Invoice Post Accts. Rec. – Debit Date No. Account Debited Ref. Fees Earned – Credit 1 2 3 4 5 6 1 2 3 4 5 6 6 616 RapZone 1 7 5 0 00 18 617 Web Cantina 2 6 5 0 00 27 618 Accessories by Claire 3 0 0 0 00 Accounts Receivable Subsidiary Ledger Accessories By Claire Date Item P.R. Debit Credit Balance Mar. 2 R35 2,200 2,200 2012 (continued)

Exhibit 3 (in steps) LO 2 (continued) Revenue Journal 1 2 3 4 5 6 1 2 Page 35 Invoice Post Accts. Rec. – Debit Date No. Account Debited Ref. Fees Earned – Credit 1 2 3 4 5 6 2012 1 2 3 4 5 6 Mar. 2 615 Accessories By Claire 2 2 0 0 00 6 616 RapZone 1 7 5 0 00 18 617 Web Cantina 2 6 5 0 00 27 618 Accessories by Claire 3 0 0 0 00 Accounts Receivable Subsidiary Ledger Accessories By Claire Date Item P.R. Debit Credit Balance Mar. 2 R35 2,200 2,200 2012 (continued)

LO 2 Exhibit 3 (in steps) Revenue Journal Page 35 Invoice Post Accts. Rec. – Debit Date No. Account Debited Ref. Fees Earned – Credit 1 2 3 4 5 6 2012 1 2 3 4 5 6 6 616 RapZone 1 7 5 0 00 18 617 Web Cantina 2 6 5 0 00 27 618 Accessories by Claire 3 0 0 0 00 Mar. 2 615 Accessories By Claire 2 2 0 0 00 The same procedure would be used to post the other transactions to the individual accounts in the accounts receivable subsidiary ledger. (continued)

Exhibit 3 (in steps) LO 2 Next, the amount column would be totaled. Revenue Journal Page 35 Invoice Post Accts. Rec. – Debit Date No. Account Debited Ref. Fees Earned – Credit 1 2 3 4 5 6 2012 1 2 3 4 5 6 6 616 RapZone 1 7 5 0 00 18 617 Web Cantina 2 6 5 0 00 27 618 Accessories by Claire 3 0 0 0 00 Mar. 2 615 Accessories By Claire 2 2 0 0 00 31 9 6 0 0 00 Next, the amount column would be totaled. (continued)

LO 2 Exhibit 3 (in steps) The debit total is posted from the revenue journal to Accounts Receivable in the general ledger. ACCOUNT Accounts Receivable Account No. 12 Post. Ref. Balance Date Item Dr. Cr. Dr. Cr. 2012 Mar. 1 Balance 3 400 00 31 R35 9 600 00 13 000 00 Revenue Journal, page 35 (continued)

LO 2 Exhibit 3 (in steps) Revenue Journal Invoice Post Accts. Rec. – Debit Date No. Account Debited Ref. Fees Earned – Credit Page 35 1 2 3 4 5 6 2012 6 616 RapZone 1 7 5 0 00 18 617 Web Cantina 2 6 5 0 00 27 618 Accessories by Claire 3 0 0 0 00 31 9 6 0 0 00 Mar. 2 615 Accessories By Claire 2 2 0 0 00 (12) Indicates a debit posting of $9,600 to Accounts Receivable (General Ledger Account 12) (continued)

LO 2 Exhibit 3 (in steps) The credit total is posted from the revenue journal to Fees Earned in the general ledger. ACCOUNT Fees Earned Account No. 41 Post. Ref. Balance Date Item Dr. Cr. Dr. Cr. Mar. 31 2012 R35 9 600 00 9 600 00 Revenue Journal, page 35 (continued)

LO 2 Exhibit 3 (in steps) Revenue Journal Invoice Post Accts. Rec. – Debit Date No. Account Debited Ref. Fees Earned – Credit Page 35 1 2 3 4 5 6 2012 6 616 RapZone 1 7 5 0 00 18 617 Web Cantina 2 6 5 0 00 27 618 Accessories by Claire 3 0 0 0 00 31 9 6 0 0 00 Mar. 2 615 Accessories By Claire 2 2 0 0 00 (12) (41) Indicates a credit posting of $9,600 to Fees Earned (General Ledger Account 41)

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LO 2 Cash Receipts Journal All transactions that involve the receipt of cash are recorded in a cash receipts journal. Every entry recorded in the cash receipts journal will involve a debit to the “Cash Dr.” column.

LO 2

Exhibit 4 (in steps) LO 2 GENERAL LEDGER (continued) 42 CASH RECEIPTS JOURNAL Page 14 Other Accounts Post Accounts Receivable Cash Date Account Credited Ref. Cr. Cr. Dr. 2012 42 Mar. 1 Rent Revenue 400 400 19 Web Cantina 3,400 3,400 28 Accessories By Claire 2,200 2,200 30 RapZone 1,750 1,750 GENERAL LEDGER ACCOUNT Rent Revenue Acct. No. 42 Date Item P.R. Debit Credit Cr. Bal. Click the button to skip “Exhibit 4 (in Steps)” Mar. 1 2012 CR14 400 400 (continued)

Exhibit 4 (in steps) LO 2 (continued) 42 CASH RECEIPTS JOURNAL Page 14 Other Accounts Post Accounts Receivable Cash Date Account Credited Ref. Cr. Cr. Dr. 2012 42 Mar. 1 Rent Revenue 400 400 19 Web Cantina 3,400 3,400 28 Accessories By Claire 2,200 2,200 30 RapZone 1,750 1,750 Accounts Receivable Subsidiary Ledger Web Cantina Date Item P.R. Debit Credit Balance Mar. 1 Bal. 3,400 18 R35 2,650 6,050 2012 19 CR14 3,400 2,650 (continued)

LO 2 Cash Receipts Journal After all journalizing and posting to individual accounts for the month is complete, the columns are totaled.

LO 2 Exhibit 4 (in steps) CASH RECEIPTS JOURNAL Page 14 Other Accounts Post Accounts Receivable Cash Date Account Credited Ref. Cr. Cr. Dr. 2012 42 Mar. 1 Rent Revenue 400 400 19 Web Cantina 3,400 3,400 28 Accessories By Claire 2,200 2,200 30 RapZone 1,750 1,750 31 400 7,350 7,750 ( ) 12 ( ) ( ) 11 A check mark indicates that items in this column are posted individually. (continued)

Accounts Receivable Account LO 2 Accounts Receivable Account The total of the accounts in the accounts receivable subsidiary ledger should match the balance in the general ledger’s Accounts Receivable account.

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LO 2 Purchases Journal The purchases journal is designed for recording all purchases on account.

LO 2

Exhibit 5 (in steps) LO 2 (continued) PURCHASES JOURNAL Page 11 Accts. Other Post Payable Supplies Accounts Post Date Account Credited Ref. Cr. Dr. Dr. Ref. Amount 2012 Mar. 3 Howard Supplies 600 600 7 Donnelly Supplies 420 420 12 Jewett Bus. Sys. 2,800 Off. Equip. 2,800 19 Donnelly Supplies 1,450 1,450 27 Howard Supplies 960 960 Click on button to skip “Exhibit 5 (in steps)” (continued)

LO 2 Exhibit 5 (in steps) PURCHASES JOURNAL PURCHASES JOURNAL Page 11 Accts. Other Post Payable Supplies Accounts Post Date Account Credited Ref. Cr. Dr. Dr. Ref. Amount 2012 Mar. 3 Howard Supplies 600 600 7 Donnelly Supplies 420 420 12 Jewett Bus. Sys. 2,800 Off. Equip. 2,800 19 Donnelly Supplies 1,450 1,450 27 Howard Supplies 960 960 Note that the March 12 purchase of office equipment for $2,800 is recorded as a debit in the “Other Accounts Dr.” column. Also note that the account title is written in for proper posting. (continued)

Exhibit 5 (in steps) LO 2 (continued) PURCHASES JOURNAL PURCHASES JOURNAL Page 11 Accts. Other Post Payable Supplies Accounts Post Date Account Credited Ref. Cr. Dr. Dr. Ref. Amount 2012 Mar. 3 Howard Supplies 600 600 7 Donnelly Supplies 420 420 12 Jewett Bus. Sys. 2,800 Off. Equip. 2,800 19 Donnelly Supplies 1,450 1,450 27 Howard Supplies 960 960 Accounts Payable Subsidiary Ledger Howard Supplies Date Item P.R. Dr. Cr. Balance 2012 Mar. 3 P11 600 600 (continued)

LO 2 Exhibit 5 (in steps) PURCHASES JOURNAL PURCHASES JOURNAL Page 11 Accts. Other Post Payable Supplies Accounts Post Date Account Credited Ref. Cr. Dr. Dr. Ref. Amount 2012 Mar. 3 Howard Supplies 600 600 7 Donnelly Supplies 420 420 12 Jewett Bus. Sys. 2,800 Off. Equip. 2,800 19 Donnelly Supplies 1,450 1,450 27 Howard Supplies 960 960 The other entries to the accounts payable subsidiary ledger are recorded using the same procedure. (continued)

LO 2 Exhibit 5 (in steps) PURCHASES JOURNAL Page 11 Accts. Other Post Payable Supplies Accounts Post Date Account Credited Ref. Cr. Dr. Dr. Ref. Amount 2012 2012 Mar. 3 Howard Supplies 600 600 7 Donnelly Supplies 420 420 12 Jewett Bus. Sys. 2,800 Off. Equip. 2,800 19 Donnelly Supplies 1,450 1,450 27 Howard Supplies 960 960 18 This posting reference indicates that Office Equipment (Account 18) is debited in the general ledger for $2,800.

LO 2 Purchases Journal At the end of March, all columns are totaled and the equality of debits and credits is verified. Then the total amounts in the “Accounts Payable Cr.” and “Supplies Dr.” columns are posted. Because Office Equipment was posted earlier, the $2,800 total is not posted.

LO 2 Exhibit 5 (in steps) PURCHASES JOURNAL Page 11 Accts. Other Post Payable Supplies Accounts Post Date Account Credited Ref. Cr. Dr. Dr. Ref. Amount 2012 Mar. 3 Howard Supplies 600 600 7 Donnelly Supplies 420 420 12 Jewett Bus. Sys. 2,800 Off. Equip. 18 2,800 19 Donnelly Supplies 1,450 1,450 27 Howard Supplies 960 960 31 6,230 3,430 2,800 ( ) ( ) ( ) 21 Supplies would be debited for $3,430 and 14 written in the parentheses. GENERAL LEDGER ACCOUNT Accounts Payable No. 21 Date Item P.R. Debit Credit Balance 2012 Mar. 1 Bal 1,230 31 P11 6,230 7,460

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LO 2 Cash Payments Journal All transactions involving a credit to Cash are recorded in the cash payments journal.

LO 2

On March 2, 2012, issued Check 150 for rent of $1,600. LO 2 Exhibit 6 (in steps) CASH PAYMENTS JOURNAL PAGE 7 Other Accounts Ck. Post Accounts Payable Cash Date No. Account Debited Ref. Dr. Dr. Cr 2012 Mar. 2 150 Rent Expense 1,600 1,600 On March 2, 2012, issued Check 150 for rent of $1,600. Click button to skip “Exhibit 6 (in steps)” (continued)

LO 2 Cash Payments Journal The amounts listed in the “Other Accounts Dr.” column are posted on a regular basis. The $1,600 for Rent Expense is posted to Account No. 52.

Exhibit 6 (in steps) LO 2 (continued) CASH PAYMENTS JOURNAL PAGE 7 Other Accounts Ck. Post Accounts Payable Cash Date No. Account Debited Ref. Dr. Dr. Cr 2012 Mar. 2 150 Rent Expense 1,600 1,600 52 General Ledger Account Rent Expense Account No. 52 Date Item P.R. Dr. Cr. Balance 2012 Mar. 2 1,600 1,600 CP7 (continued)

LO 2 Exhibit 6 (in steps) CASH PAYMENTS JOURNAL PAGE 7 Other Accounts Ck. Post Accounts Payable Cash Date No. Account Debited Ref. Dr. Dr. Cr 2010 Mar. 2 150 Rent Expense 1,600 1,600 52 15 151 Grayco Supplies 1,230 1,230 On March 15, issued Check 151 to Grayco Supplies for $1,230. (continued)

LO 2 Cash Payments Journal Let’s post to the accounts payable subsidiary ledger at this time to keep the creditors’ accounts current.

Exhibit 6 (in steps) LO 2 (continued) CASH PAYMENTS JOURNAL PAGE 7 Other Accounts Ck. Post Accounts Payable Cash Date No. Account Debited Ref. Dr. Dr. Cr 2012 Mar. 2 150 Rent Expense 1,600 1,600 52 15 151 Grayco Supplies 1,230 1,230  Accounts Payable Subsidiary Ledger Grayco Supplies Mar. 1 Bal. 1,230 Date Item P.R. Dr. Cr. Balance 2012 15 CP7 1,230 --- (continued)

LO 2 Cash Payments Journal Now, let’s journalize the remainder of March’s cash disbursements. Following that, let’s post to the individual creditors’ accounts.

Exhibit 6 (in steps) LO 2 (continued) CASH PAYMENTS JOURNAL PAGE 7 Other Accounts Ck. Post Accounts Payable Cash Date No. Account Debited Ref. Dr. Dr. Cr 2010 Mar. 2 150 Rent Expense 1,600 1,600 52 15 151 Grayco Supplies 1,230 1,230  21 152 Jewett Business Sys. 2,800 2,800 22 153 Donnelly Supplies 420 420 30 154 Utilities Expense 1,050 1,050 31 155 Howard Supplies 600 600 (continued)

Exhibit 6 (in steps) LO 2 (continued) CASH PAYMENTS JOURNAL PAGE 7 Other Accounts Ck. Post Accounts Payable Cash Date No. Account Debited Ref. Dr. Dr. Cr 2012 Mar. 2 150 Rent Expense 1,600 1,600 52 15 151 Grayco Supplies 1,230 1,230  21 152 Jewett Business Sys. 2,800 2,800 22 153 Donnelly Supplies 420 420 30 154 Utilities Expense 1,050 1,050 31 155 Howard Supplies 600 600  54 (continued)

LO 2 Cash Payments Journal The journal is ruled, summed, and verified for the equality of the debits and the “Cash Cr.” column.

Cash Payments Journal LO 2 (continued) CASH PAYMENTS JOURNAL Other Accounts Ck. Post Accounts Payable Cash Date No. Account Debited Ref. Dr. Dr. Cr PAGE 7 CASH PAYMENTS JOURNAL Other Accounts Ck. Post Accounts Payable Cash Date No. Account Debited Ref. Dr. Dr. Cr PAGE 7 2008 Mar. 2 150 Rent Expense 1,600 1,600 2012 Mar. 2 150 Rent Expense 1,600 1,600 52 15 151 Grayco Supplies 1,230 1,230 15 151 Grayco Supplies 1,230 1,230  21 152 Jewett Business Sys. 2,800 2,800 22 153 Donnelly Supplies 420 420 30 154 Utilities Expense 1,050 1,050 31 155 Howard Supplies 600 600 21 152 Jewett Business Sys. 2,800 2,800 22 153 Donnelly Supplies 420 420 30 154 Utilities Expense 1,050 1,050 31 155 Howard Supplies 600 600  54 31 2,650 5,050 7,700 (continued)

Cash Payments Journal LO 2 Other Accounts Ck. Post Accounts Payable Cash Date No. Account Debited Ref. Dr. Dr. Cr PAGE 7 CASH PAYMENTS JOURNAL Other Accounts Ck. Post Accounts Payable Cash Date No. Account Debited Ref. Dr. Dr. Cr PAGE 7 2012 2008 Mar. 2 150 Rent Expense 1,600 1,600 Mar. 2 150 Rent Expense 1,600 1,600 52 15 151 Grayco Supplies 1,230 1,230 15 151 Grayco Supplies 1,230 1,230  21 152 Jewett Business Sys. 2,800 2,800 22 153 Donnelly Supplies 420 420 30 154 Utilities Expense 1,050 1,050 31 155 Howard Supplies 600 600 21 152 Jewett Business Sys. 2,800 2,800 22 153 Donnelly Supplies 420 420 30 154 Utilities Expense 1,050 1,050 31 155 Howard Supplies 600 600  54 31 2,650 5,050 7,700 (21) (11) ( )   The totals for “Accounts Payable Dr.” and “Cash Cr.” are posted. (continued)

Accounts Payable Account LO 2 Accounts Payable Account After all posting has been completed, the balances in the accounts payable subsidiary ledger should equal the balance of the accounts payable controlling account in the general ledger.

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Learning Objective 3 Define and describe an accounting system. Journalize and post transactions in a manual accounting system that uses subsidiary ledgers and special journals. Describe and illustrate the use of a computerized accounting system.

Computerized Accounting System LO 3 Computerized Accounting System Computerized accounting systems have the following three main advantages over manual systems: Computerized systems simplify the record-keeping process by recording transactions in electronic forms and, at the same time, posting them electronically to general and subsidiary ledger accounts.

Computerized Accounting System LO 3 Computerized Accounting System Computerized systems are generally more accurate than manual systems. Computerized systems provide management with current account balance information to support decision making, since account balances are posted as the transactions occur.

Computerized Accounting Systems LO 3 Computerized Accounting Systems (continued)

Computerized Accounting Systems LO 3 Computerized Accounting Systems (continued)

Computerized Accounting Systems LO 3 Computerized Accounting Systems (concluded)

Define and describe an accounting system. Learning Objective 4 Define and describe an accounting system. Journalize and post transactions in a manual accounting system that uses subsidiary ledgers and special journals. Describe and illustrate the use of a computerized accounting system. Describe the basic features of e-commerce. 80

LO 4 E-Commerce Using the Internet to perform business transactions is termed e-commerce.

LO 4 E-Commerce When transactions are between a company and a consumer, it is termed B2C (business-to-consumer) e-commerce.

E-Commerce Supply chain management (SCM) LO 4 E-Commerce Three more advanced areas where the Internet is being used for business purposes are: Supply chain management (SCM) Consumer relationship management (CRM) Product life-cycle management (PLM)

Learning Objective 5 Define and describe an accounting system. Journalize and post transactions in a manual accounting system that uses subsidiary ledgers and special journals. Describe and illustrate the use of a computerized accounting system. Describe the basic features of e-commerce. Use segment analysis in evaluating the operating performance of a company.

LO 5 Segment Analysis One way to report revenue is by different segments. Businesses may be segmented by region, by product or service, or by type of customer.

LO 5 Segment Analysis Intuit Inc.

LO 5 Segment Analysis Intuit Inc.

LO 5 Segment Analysis Intuit Inc.

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Accounting Systems The End