ACCOUNTING INFORMATION SYSTEMS Accounting Principles, Eighth Edition CHAPTER 7 ACCOUNTING INFORMATION SYSTEMS Accounting Principles, Eighth Edition

Study Objectives Identify the basic concepts of an accounting information system. Describe the nature and purpose of a subsidiary ledger. Explain how companies use special journals in journalizing. Indicate how companies post a multi-column journal. 1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements? Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases). Forward-looking Information Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image). Timeliness (no real time financial information)

Accounting Information Systems Basic Concepts of Accounting Information Systems Subsidiary Ledgers Special Journals Computerized accounting systems Manual accounting systems Example Advantages Sales journal Cash receipts journal Purchases journal Cash payments journal Effects of special journals on general journal Service Cost - Actuaries compute service cost as the present value of the new benefits earned by employees during the year. Future salary levels considered in calculation. Interest on Liability - Interest accrues each year on the PBO just as it does on any discounted debt. Actual Return on Plan Assets - Increase in pension funds from interest, dividends, and realized and unrealized changes in the fair market value of the plan assets. Amortization of Unrecognized Prior Service Cost - The cost of providing retroactive benefits is allocated to pension expense in the future, specifically to the remaining service-years of the affected employees. Gain or Loss - Volatility in pension expense can be caused by sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation. Two items comprise the gain or loss: difference between the actual return and the expected return on plan assets and, amortization of the unrecognized net gain or loss from previous periods

Basic Concepts of AIS The accounting information system (AIS) collects and processes transaction data and communicates financial information to decision makers. Includes: All steps in the accounting cycle. Documents that provide evidence of transactions. Manual or computerized accounting system. LO 1 Identify the basic concepts of an accounting information system.

Cost Effectiveness - Benefits must outweigh the costs. Basic Concepts of AIS Cost Effectiveness - Benefits must outweigh the costs. Illustration 7-1 Principles of an efficient and effective AIS. Useful Output Flexibility - The system should be sufficiently flexible to meet the resulting changes in the demands made upon it. LO 1 Identify the basic concepts of an accounting information system.

Computerized Accounting Systems Basic Concepts of AIS Computerized Accounting Systems Software programs (functions include sales, purchases, receivables, payables, cash receipts and disbursements, and payroll). Generate financial statements. Advantages: Typically enter data only once. Many human errors are eliminated. More timely information. LO 1 Identify the basic concepts of an accounting information system.

Computerized Accounting Systems Basic Concepts of AIS Computerized Accounting Systems Choosing a software package Entry-Level Software Common features and benefits: Easy data access and report preparation Audit trail Enterprise Resource Planning Systems LO 1 Identify the basic concepts of an accounting information system.

Manual Accounting Systems Basic Concepts of AIS Manual Accounting Systems Perform each step in the accounting cycle by hand. Satisfactory in a company with a low volume of transactions. Must understand manual accounting systems to understand computerized accounting systems. LO 1 Identify the basic concepts of an accounting information system.

Subsidiary Ledgers Used to keep track of individual balances. Two common subsidiary ledgers are: Accounts receivable (customers’) Accounts payable (creditors’) Each general ledger control account balance must equal the composite balance of the individual accounts in the related subsidiary ledger. LO 2 Describe the nature and purpose of a subsidiary ledger.

Subsidiary Ledgers Relationship of general ledger and subsidiary ledgers Illustration 7-3 LO 2 Describe the nature and purpose of a subsidiary ledger.

Advantages of Subsidiary Ledgers 1. Show in a single account transactions affecting one customer or one creditor. 2. Free the general ledger of excessive details. 3. Help locate errors in individual accounts. 4. Make possible a division of labor. LO 2 Describe the nature and purpose of a subsidiary ledger.

Special Journals Used to record similar types of transactions. Illustration 7-5 If a transaction cannot be recorded in a special journal, the company records it in the general journal. LO 3 Explain how companies use special journals in journalizing.

Review Question Special Journals Each of the following is a subsidiary ledger except the: accounts receivable ledger. accounts payable ledger. customer’s ledger. general ledger. LO 3 Explain how companies use special journals in journalizing.

Special Journals Sales Journal Illustration 7-6 Under a perpetual inventory system, one entry at selling price in 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. LO 3 Explain how companies use special journals in journalizing.

POSTING THE SALES JOURNAL Special Journals Illustration 7-7 POSTING THE SALES JOURNAL Companies make daily postings from the sales journal to the individual accounts receivable in the subsidiary ledger. LO 3 Explain how companies use special journals in journalizing.

Special Journals Posting to the general ledger is done monthly. Illustration 7-7 POSTING THE SALES JOURNAL Posting to the general ledger is done monthly. LO 3 Explain how companies use special journals in journalizing.

Advantages of Sales Journal Special Journals Advantages of Sales Journal One-line entry for each sales transaction saves time. Only totals, rather than individual entries, are posted to the general ledger. A division of labor results. LO 3 Explain how companies use special journals in journalizing.

Special Journals Cash Receipts Journal Illustration 7-9 In the cash receipts journal, companies record all receipts of cash. The posting of the cash receipts journal is similar to the posting of the sale journal. See complete Illustration 7-9 in the text. LO 3 Explain how companies use special journals in journalizing.

Review Question Special Journals Cash sales of merchandise are recorded in the: cash payments journal. cash receipts journal. general journal. sales journal. LO 3 Explain how companies use special journals in journalizing.

Review Question Special Journals Which of the following is not one of the credit columns in the cash receipts journal: Other accounts. Accounts payable. Accounts receivable. Sales. LO 3 Explain how companies use special journals in journalizing.

Special Journals Purchases Journal Illustration 7-13 Purchases Journal Daily postings are made from the purchases journal to the accounts payable subsidiary ledger. LO 4 Indicate how companies post a multi-column journal.

Special Journals Purchases Journal Illustration 7-13 Purchases Journal At the end of the accounting period, the company posts totals to the general ledger. LO 4 Indicate how companies post a multi-column journal.

Review Question Special Journals All of the following are advantages of using subsidiary ledgers except they: show transactions affecting one customer or one creditor in a single account. free the general ledger of excessive details. eliminate errors in individual accounts. make possible a division of labor. LO 3 Explain how companies use special journals in journalizing.

Special Journals Cash Payments Journal Illustration 7-16 In a cash payments (cash disbursements) journal, companies record all disbursements of cash. The procedures for posting the cash payments journal are similar to those for other journals. LO 4 Indicate how companies post a multi-column journal.

Review Question Special Journals Credit purchases of equipment or supplies other than merchandise are recorded in the: cash payments journal. cash receipts journal. general journal. purchases journal. LO 4 Indicate how companies post a multi-column journal.

Review Question Special Journals Cash payments of merchandise are recorded in the: cash payments journal. cash receipts journal. general journal. purchases journal. LO 4 Indicate how companies post a multi-column journal.

Special Journals Effects of Special Journals on the General Journal Special journals substantially reduce the number of entries that companies make in the general journal. Only transactions that cannot be entered in a special journal are recorded in the general journal. Also, correcting, adjusting, and closing entries are made in the general journal. LO 4 Indicate how companies post a multi-column journal.

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