CHAPTER 7 ACCOUNTING INFORMATION SYSTEMS After studying this chapter, you should be able to: 1 Identify the basic principles of accounting information systems. 2 Explain the major phases in the development of an accounting system. 3 Describe the nature and purpose of a subsidiary ledger. 4 Explain how special journals are used in journalizing. 5 Indicate how a multi-column journal is posted.

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.

The accounting system must be cost effective. ILLUSTRATION 7-1 PRINCIPLES OF AN EFFICIENT AND EFFECTIVE ACCOUNTING INFORMATION SYSTEM The accounting system must be cost effective. Benefits of information must outweigh the cost of providing it. Cost Effectiveness Costs Benefits

Other Financial Reports ILLUSTRATION 7-1 PRINCIPLES OF AN EFFICIENT AND EFFECTIVE ACCOUNTING INFORMATION SYSTEM It must be relevant! It must be reliable! It must be accurate! It must be timely! Balance Sheet Income Statement Other Financial Reports

ILLUSTRATION 7-1 PRINCIPLES OF AN EFFICIENT AND EFFECTIVE ACCOUNTING INFORMATION SYSTEM Government Regulation and Deregulation Organizational Growth Increased Competition Changing Accounting Principles Technological Advances

ILLUSTRATION 7-2 PHASES IN THE DEVELOPMENT OF AN ACCOUNTING SYSTEM Analysis Planning and identifying information needs and sources Follow-up Design Monitoring and correcting any weaknesses Creating forms, documents, procedures, job descriptions, and reports Implementation Installing the system, training personnel, and 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. So.....why study manual systems if the real world uses computerized systems?

MANUAL 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.

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.

CONTROL ACCOUNT 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.

ILLUSTRATION 7-3 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 Ledger Accounts Receivable Accounts Payable Owner’s Capital Cash Subsidiary Ledgers Customer A Customer B Customer C Creditor X Creditor Y Creditor Z

ILLUSTRATION 7-4 RELATIONSHIP BETWEEN LEDGERS The subsidiary ledger is separate from the general ledger. Accounts Receivable is a control account.

SUBSIDIARY LEDGERS Subsidiary ledgers have several advantages. They: 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 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.

ILLUSTRATION 7-6 USE OF SPECIAL JOURNALS AND THE GENERAL JOURNAL Sales Journal Cash Receipts Purchases Journal Cash Payments General Used for: All sales of merchandise on account All cash received (including cash sales) All purchases of merchandise All cash paid cash purchases) Transactions that cannot be entered 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.

ILLUSTRATION 7-7 JOURNALIZING THE SALES JOURNAL PERPETUAL INVENTORY SYSTEM 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 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 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

ILLUSTRATION 7-11 PROVING THE EQUALITY OF THE CASH RECEIPTS JOURNAL 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).

ILLUSTRATION 7-12 PROVING THE LEDGERS AFTER POSTING THE SALES AND THE CASH RECEIPTS JOURNALS After the posting of the cash receipts journal is completed, it is necessary to prove the ledgers. The general ledger totals are in agreement . Also, the sum of the subsidiary ledger balances equals the control account balance.

PURCHASES JOURNAL 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 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 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

ILLUSTRATION 7-19 JOURNALIZING AND POSTING THE GENERAL JOURNAL 500 500 500 500 500