Accounting Principles, Ninth Edition Chapter 7 Accounting Information Systems Accounting Principles, Ninth 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. SO 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. SO 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. SO 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. SO 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. See illustration 7-2 page 306 SO 2 Describe the nature and purpose of a subsidiary ledger.

Subsidiary Ledgers Relationship of general ledger and subsidiary ledgers Illustration 7-3

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. SO 2 Describe the nature and purpose of a subsidiary ledger.

Do it See page 307

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. SO 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.

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. SO 3 Explain how companies use special journals in journalizing.

See illustration 7-8 page 311 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. Proving the equality See illustration 7-8 page 311

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. SO 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. SO 3 Explain how companies use special journals in journalizing.