1. Copyright © by Houghton Mifflin Company. All rights reserved.1 Principles of Financial Accounting 2002e Belverd E. Needles, Jr. Marian Powers Susan Crosson - - - - - - - - - - - Multimedia Slides by: Harry Hooper Santa Fe Community College

2. Chapter 7 Accounting Information Systems

3. Copyright © by Houghton Mifflin Company. All rights reserved.3 LEARNING OBJECTIVES 1.Identify the principles of accounting systems design. 2.Describe how general ledger software and spreadsheet software are used in accounting. 3.Describe the use of microcomputer systems in small businesses. 4.Explain how accountants use the Internet.

4. Copyright © by Houghton Mifflin Company. All rights reserved.4 LEARNING OBJECTIVES (continued…) 5.Explain the objectives and uses of special-purpose journals. 6.Explain the purposes and relationships of controlling accounts and subsidiary ledgers. 7.Construct and use a sales journal, purchases journal, cash receipts journal, cash payments journal, and other special-purpose journals as needed.

5. Accounting Systems Design OBJECTIVE 1 Identify the principles of accounting systems design.

6. Copyright © by Houghton Mifflin Company. All rights reserved.6 Principles of Accounting Systems Design u Accounting systems summarize financial data about a business and organize it into useful forms. u Most businesses use computerized accounting systems to provide timely and useful information to decision makers. u Accountants must have an understanding of accounting and computer systems.

7. Copyright © by Houghton Mifflin Company. All rights reserved.7 Design Principles u Four general principles of accounting systems design: 4 Cost-benefit principle. 4 Control principle. 4 Compatibility principle. 4 Flexibility principle.

8. Copyright © by Houghton Mifflin Company. All rights reserved.8 Cost-Benefit Principle u The cost-benefit principle holds that the benefits derived from an accounting system and the information it generates must be equal to or greater than the system’s cost. u Costs may either be tangible or intangible. u Tangible costs include personnel, forms, and equipment. u Intangible costs include the cost of wrong decisions.

9. Copyright © by Houghton Mifflin Company. All rights reserved.9 Control Principle u The control principle requires that an accounting system provide internal control features in order to protect a firm’s assets and ensure that data are reliable.

10. Copyright © by Houghton Mifflin Company. All rights reserved.10 Compatibility Principle u The compatibility principle holds that the design of an accounting system must be in harmony with the organizational and human factors of the business.

11. Copyright © by Houghton Mifflin Company. All rights reserved.11 Flexibility Principle u The flexibility principle holds that an accounting system must be flexible enough to allow the volume of transactions to grow and organizational changes to be made.

12. Copyright © by Houghton Mifflin Company. All rights reserved.12 Discussion Q. Q.What are the four general principles of accounting systems design? A. A.The four general principles of accounting systems design are: (1) cost- benefit, (2) control, (3) compatibility, and (4) flexibility.

13. Computer Software for Accounting OBJECTIVE 2 Describe how general ledger software and spreadsheet software are used in accounting.

14. Copyright © by Houghton Mifflin Company. All rights reserved.14 General Ledger Software u General ledger software is a group of integrated programs that an accountant uses to perform major functions such as accounting for sales and accounts receivable, purchases and accounts payable, and payroll. u Most systems are Windows® based and operate with a graphical user interface (GUI).

15. Copyright © by Houghton Mifflin Company. All rights reserved.15 Accounting Software u Two general ledger software programs available for this book include: 4 Peachtree ® Complete Accounting for Windows ®. 4 General Ledger Software. u Spreadsheet software is often used in addition to general ledger software. These include such programs as: 4 Windows ® Excel. 4 Lotus 1-2-3.

16. Copyright © by Houghton Mifflin Company. All rights reserved.16 Graphical User Interface

17. Copyright © by Houghton Mifflin Company. All rights reserved.17Discussion Q. Q.What are two types of software that accountants typically use? A.The two types of software often used by accountants are general ledger software and spreadsheet software.

18. OBJECTIVE 3 Describe the use of microcomputer systems in small business. Computerized Accounting Systems

19. Copyright © by Houghton Mifflin Company. All rights reserved.19 Computerized Accounting Systems u The computer system is the nerve center of the company. u Enterprise Resource Management (ERM) systems use powerful computers linked together to provide communication and data transfer around the world. u ERMs integrate all functions of a business. u The Internet links microcomputers in small and large companies, providing communications and supporting business transactions.

20. Copyright © by Houghton Mifflin Company. All rights reserved.20 Microcomputer Systems u Most businesses purchase commercial accounting software. u Most software consists of modules. 4 Sales/accounts receivable. 4 Purchases/accounts payable. 4 Cash receipts. 4 Cash disbursements. 4 Payroll. 4 General journal.

21. Copyright © by Houghton Mifflin Company. All rights reserved.21 Microcomputer Systems u Modules should work together to form an integrated accounting program. u Each transaction that enters the system should be supported by a source document. u Source documents verify the validity of a transaction and provide necessary details.

22. Copyright © by Houghton Mifflin Company. All rights reserved.22 Microcomputer Systems u After transactions are processed, a procedure is followed to post them to and update the ledgers and to prepare a trial balance. u The final step is the preparation of financial statements and other accounting reports.

23. Copyright © by Houghton Mifflin Company. All rights reserved.23 Microcomputer Systems u Computerization typically results in: 4 Reduced processing time. 4 Improved arithmetic accuracy. 4 Increased data dependability.

24. Copyright © by Houghton Mifflin Company. All rights reserved.24Discussion Q. Q.Identify three source documents that would support entries into an accounting system. A. A.Typical source documents would include: customer invoices, vendor invoices, deposit slips, checks, and time cards.

25. Copyright © by Houghton Mifflin Company. All rights reserved.25 Microcomputer Accounting System Using General Ledger Software

26. OBJECTIVE 4 Explain how accountants use the Internet. Accountants and the Internet

27. Copyright © by Houghton Mifflin Company. All rights reserved.27Internet u World’s largest computer network. u Access to the Internet requires a communication device (modem) with a connection to an Internet service provider (ISP).

28. Copyright © by Houghton Mifflin Company. All rights reserved.28 Internet Capabilities u Electronic mail (E-mail). 4 Sending and receiving of communications over the network. u World Wide Web. 4 A vast repository of information accessible via a browser. u Information retrieval. 4 Downloading of files from the network to individual computers.

29. Copyright © by Houghton Mifflin Company. All rights reserved.29 Internet Capabilities u Bulletin boards. 4 Allow people with common interests to share information and ideas over the network. u E-business. 4 Any use of the Internet by business.

30. Copyright © by Houghton Mifflin Company. All rights reserved.30 Internet Capabilities u Electronic commerce. 4 Businesses and customers are increasingly using the Internet to sell/buy products. 4 Creates many new challenges for accountants u Search Engines. 4 Internet sites that enable the user to research or search for information.

31. Copyright © by Houghton Mifflin Company. All rights reserved.31Discussion Q. Q.What are five capabilities that the Internet offers? A. A.There are numerous benefits of the Internet, five of which are: (1) E-mail, (2) World Wide Web, (3) information retrieval, (4) bulletin boards, and (5) electronic commerce.

32. OBJECTIVE 5 Explain the objectives and uses of special-purpose journals. Manual Data Processing: Journals and Procedures

33. Copyright © by Houghton Mifflin Company. All rights reserved.33 Steps and Devices in a Manual Accounting System

34. Copyright © by Houghton Mifflin Company. All rights reserved.34 Special-Purpose Journals u Special-purpose journals offer a more efficient and economical way to process similar repetitive transactions. u A general journal is still required even if special-purpose journals are used. It is used to record transactions that do not fall into any of the special categories.

35. Copyright © by Houghton Mifflin Company. All rights reserved.35 Special-Purpose Journals u Most business transactions fit into one of four categories and can be recorded in a special-purpose journal. 1.Sale of merchandise on credit: recorded in sales journal. 2.Purchase on credit: recorded in purchases journal. 3.Receipt of cash: recorded in cash receipts journal. 4.Disbursement of cash: recorded in cash payment

36. Copyright © by Houghton Mifflin Company. All rights reserved.36 Special-Purpose Journals u Using a special-purpose journal greatly reduces the work involved in entering and posting transactions. u Instead of posting every debit and credit for each transaction the use of special- purpose journals allows the posting of column totals (representing many transactions).

37. Copyright © by Houghton Mifflin Company. All rights reserved.37Discussion Q. Q.True or False: If a firm uses special- purpose journals it no longer needs a general journal. A. A.False. A general journal is still required even if special-purpose journals are used. It is used to record transactions that do not fall into any of the special categories.

38. OBJECTIVE 6 Explain the purposes and relationships of controlling accounts and subsidiary ledgers. Controlling Accounts and Subsidiary Ledgers

39. Copyright © by Houghton Mifflin Company. All rights reserved.39 Controlling Accounts and Subsidiary Ledgers u A controlling account (control account) is an account in the general ledger that maintains the total balance of all related accounts in a subsidiary ledger. u A subsidiary ledger is a ledger separate from the general ledger that contains a group of related accounts. u The total of the balances in the subsidiary ledger accounts equals the balance in the corresponding controlling account.

40. Copyright © by Houghton Mifflin Company. All rights reserved.40 Controlling Accounts and Subsidiary Ledgers u Example: 4 The balance in the Accounts Receivable controlling account in the general ledger should equal the total of the account maintained for each customer in the subsidiary ledger. 4 Postings to the controlling account in the general ledger are made at least once a month, whereas postings to subsidiary ledgers should be made daily.

41. Copyright © by Houghton Mifflin Company. All rights reserved.41 Relationship of Subsidiary Accounts to the Controlling Account

42. Copyright © by Houghton Mifflin Company. All rights reserved.42 Controlling Accounts and Subsidiary Ledgers u Most companies have subsidiary ledgers for: 4 Accounts Receivable. 4 Accounts Payable. 4 Notes Receivable. 4 Short-Term Investments. 4 Equipment.

43. Copyright © by Houghton Mifflin Company. All rights reserved.43 Controlling Accounts and Subsidiary Ledgers u Subsidiary ledgers should be used when management needs information on individual items composing the balance in a general ledger (controlling) account.

44. Copyright © by Houghton Mifflin Company. All rights reserved.44Discussion Q. Q.What is a controlling account? A. A.A controlling account (control account) is an account in the general ledger that maintains the total balance of all related accounts in a subsidiary ledger.

45. OBJECTIVE 7 Construct and use a sales journal, purchases journal, cash receipts journal, cash payments journal, and other special-purpose journals as needed. Constructing and Using Special-Purpose Journals

46. Copyright © by Houghton Mifflin Company. All rights reserved.46 Sales Journal u The sales journal contains all credit sales. u Cash sales would be recorded in the cash receipts journal.

47. Copyright © by Houghton Mifflin Company. All rights reserved.47 Sales Journal Date Account Debited Invoice Number Terms Post. Ref. Amount (Dr. / Cr. A/R / Sales) July 1P. Clark7212/10,n/30 750 5G. Jones7222/10,n/30 500 8E. Cumberland7232/10,n/30 335 1,585 Posted to A/R Posted to Sales x x x

48. Copyright © by Houghton Mifflin Company. All rights reserved.48 Sales Journal u Procedural Steps. 1.Enter each sales invoice in the sales journal on a single line. Record date, customer name, invoice number, and amount. 2.At the end of each day, post each individual sale to customer’s Accounts Receivable account in the ledger. Mark the Post. Ref. column to indicate it has been posted.

49. Copyright © by Houghton Mifflin Company. All rights reserved.49 Sales Journal u Procedural Steps (continued…) 3.At the end of the month, sum the Amount column to determine the total credit sales and post the total to the general ledger accounts (debit Accounts Receivable and credit Sales). 4.Verify the posting accuracy by adding the account balances of the accounts receivable ledger and matching the total with the Accounts Receivable controlling account.

50. Copyright © by Houghton Mifflin Company. All rights reserved.50 Sales Journal u Because the individual accounts in the subsidiary ledger are updated daily, and the controlling account in the general ledger is updated monthly, they are only equal once a month.

51. Copyright © by Houghton Mifflin Company. All rights reserved.51 Sales Taxes u Taxes collected for city or state. u Requires an additional Sales Tax Payable column in the sales journal. u Foot column once a month and post to the Sales Tax Payable account in the general ledger.

52. Copyright © by Houghton Mifflin Company. All rights reserved.52 Purchases Journal u The purchases journal is used to record purchases on credit. u Cash purchases are recorded in the cash payments journal, not the purchases journal. u Single column purchases journal is used for merchandise purchases only. Other purchases are entered in the general journal. u Multi column purchases journal is used for other purchase accounts (e.g. supplies).

53. Copyright © by Houghton Mifflin Company. All rights reserved.53 Purchases Journal u Procedural Steps. 1.Enter each purchase invoice in the purchases journal on a single line. 2.At the end of each day, post each individual purchase to the supplier’s account in the accounts payable subsidiary ledger. Indicate in the Post. Ref. column that a purchase has been posted.

54. Copyright © by Houghton Mifflin Company. All rights reserved.54 Purchases Journal u Procedural Steps (continued…) 3.At the end of the month, sum the Amount column to determine the total purchases and post the total to the general ledger accounts (debit Purchases and credit Accounts Payable). 4.Verify the posting accuracy by adding the account balances of the accounts payable ledger and matching the total with the Accounts Payable controlling account.

55. Copyright © by Houghton Mifflin Company. All rights reserved.55 Cash Receipts Journal u All transactions involving the receipt of cash are recorded in the cash receipts journal. u Examples of transactions recorded in cash receipts journal: 4 Cash sales. 4 Cash from credit customers. 4 Cash from other sources.

56. Copyright © by Houghton Mifflin Company. All rights reserved.56 Cash Receipts Journal u Cash receipts journal has more than one column since the receipt of cash will always result in a debit to cash. The credit may be to various accounts (e.g., Accounts Receivable, Sales).

57. Copyright © by Houghton Mifflin Company. All rights reserved.57 Cash Receipts Journal u Debit columns may include: 4 Cash. 4 Sales Discounts. 4 Other Accounts. u Credit columns may include: 4 Accounts Receivable. 4 Sales. 4 Other Accounts.

58. Copyright © by Houghton Mifflin Company. All rights reserved.58 Cash Receipts Journal u Procedural Steps. 1.At the end of each day, post each individual cash sale to the accounts receivable account in the accounts receivable subsidiary ledger. Indicate in the Post. Ref. column that a transaction has been posted.

59. Copyright © by Houghton Mifflin Company. All rights reserved.59 Cash Receipts Journal u Procedural Steps (continued…) 2.At the end of each day, post each transaction in the Other Accounts column. As each transaction is posted, write the account number in the Post. Ref. column to indicate that the posting has been done.

60. Copyright © by Houghton Mifflin Company. All rights reserved.60 Cash Receipts Journal u Procedural Steps (continued…) 3.At the end of the month, total the column in the cash receipts journal. The sum of the Debits column totals must equal the sum of the Credits column totals. 4.Post the Debits column totals by posting the total of the Cash column as a debit to the Cash account and the total of the Sales Discounts column as a debit to the Sales Discounts account.

61. Copyright © by Houghton Mifflin Company. All rights reserved.61 Cash Receipts Journal u Procedural Steps (continued…) 5.Post the Credits column totals: n Total of the Accounts Receivable column as a credit to the Accounts Receivable controlling account. n Total of the Sales column as a credit to the Sales account. 6.Write the account numbers below each column as the totals are posted. 7.Other accounts are checked at the bottom

62. Copyright © by Houghton Mifflin Company. All rights reserved.62 Cash Payments Journal u All transactions involving the payments of cash are entered in the cash payments journal (cash disbursements journal).

63. Copyright © by Houghton Mifflin Company. All rights reserved.63 Cash Payments Journal u Credit columns usually consist of: 4 Cash. 4 Purchases Discounts. 4 Other Accounts. u Debit columns usually consist of: 4 Accounts Payable. 4 Other Accounts.

64. Copyright © by Houghton Mifflin Company. All rights reserved.64 Cash Payments Journal u Procedural Steps. 1.Post the Accounts Payable column daily to the individual accounts in the accounts payable subsidiary ledger. Indicate in the Post. Ref. column that the transaction has been posted. 2.Post the debits/credits in the Other Accounts columns to the general ledger daily. When posted, write the account number in the Post. Ref. column to indicate the posting has been made.

65. Copyright © by Houghton Mifflin Company. All rights reserved.65 Cash Payments Journal u Procedural Steps (continued…) 3.At the end of the month, the sum of the Credits column totals must equal the sum of the Debits column totals. 4.Post the column totals for Cash, Purchases Discounts, and Accounts Payable at the end of the month to their respective accounts in the general ledger. Indicate in the Post. Ref. column that postings have been made.

66. Copyright © by Houghton Mifflin Company. All rights reserved.66 General Journal u Transactions that do not involve sales, purchases, cash receipts, or cash payments should be recorded in the general journal. u Typically there will be only a few transactions that are entered directly in the general journal. u Adjusting and closing entries are also recorded in the general journal.

67. Copyright © by Houghton Mifflin Company. All rights reserved.67 The Flexibility of Special-Purpose Journals u Special-purpose journals reduce and simplify the work of accounting and allow for the division of labor. u Special-purpose journals should be designed to fit the business in which they are used.

68. Copyright © by Houghton Mifflin Company. All rights reserved.68Discussion Q. Q.What are the two primary benefits of using special-purpose journals? A. A.Special-purpose journals reduce and simplify the work of accounting and allow for the division of labor.

69. Copyright © by Houghton Mifflin Company. All rights reserved.69 OK, LET’S REVIEW… 1.Identify the principles of accounting systems design. 2.Describe how general ledger software and spreadsheet software are used in accounting. 3.Describe the use of microcomputer systems in small businesses. 4.Explain how accountants use the Internet.

70. Copyright © by Houghton Mifflin Company. All rights reserved.70 WE ALSO COVERED… 5.Explain the objectives and uses of special-purpose journals. 6.Explain the purposes and relationships of controlling accounts and subsidiary ledgers. 7.Construct and use a sales journal, purchases journal, cash receipts journal, cash payments journal, and other special-purpose journals as needed.