1. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Accounting Systems Chapter 5

2. Learning Objectives 1. Define and describe an accounting system. 2. Journalize and post transactions in a manual accounting system that uses subsidiary ledgers and special journals. 3. Describe and illustrate the use of a computerized accounting system. 4. Describe the basic features of e-commerce. 5. Use segment analysis in evaluating the operating performance of a company.

3. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objective Define and describe an accounting system. 1

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

5. B ASIC A CCOUNTING S YSTEMS 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.

6. B ASIC A CCOUNTING S YSTEMS

7. Basic Accounting Systems o 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.

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

9. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objective Journalize and post transactions in a manual accounting system that uses subsidiary ledgers and special journals. 2

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

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

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

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

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

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

16. S UBSIDIARY L EDGERS

17. Special Journal o 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.

18. S PECIAL J OURNALS BUYING SELLING

19. Special Journals o 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.

20. Special Journals o The revenue journal is used for recording fees earned on account.

21. Special Journals o Cash fees earned would be recorded in the cash receipts journal.

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

23. Special Journals o All cash payments are recorded in the cash payments journal.

24. Special Journals o NetSolutions had the following selected general ledger balances as of March 1, 2014: Account Number Account Balance 11Cash$6,200 12Accounts Receivable3,400 14Supplies2,500 18Office Equipment2,500 21Accounts Payable1,230

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

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

27. R EVENUE J OURNAL 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.

29. Revenue Journal o Let’s take a step-by-step look at the process used to post the first entry. This entry was made on March 2, 2014, when NetSolutions issued Invoice No. 615 to Accessories By Claire for fees earned of $2,200.

30. E XHIBIT 3 ( IN STEPS ) Click here to skip “Exhibit 3 (in Steps)” (continued) Revenue Journal Invoice Post Accts. Rec. – Debit Date No. Account Debited Ref. Fees Earned – Credit Page 35 123456123456 123456123456 2014 Mar. 2615Accessories By Claire 2 2 0 0 00 6616RapZone1 7 5 0 00 18617Web Cantina2 6 5 0 00 27618Accessories by Claire3 0 0 0 00

31. E XHIBIT 3 ( IN STEPS ) 123456123456 123456123456 6616RapZone1 7 5 0 00 18617Web Cantina2 6 5 0 00 27618Accessories by Claire3 0 0 0 00 (continued) Date Item P.R. Debit CreditBalance Mar. 2R352,2002,200 2014 Accounts Receivable Subsidiary Ledger Accessories By Claire Revenue Journal Page 35 2014 Mar. 2615Accessories By Claire 2 2 0 0 00 Invoice Post Accts. Rec. – Debit Date No. Account Debited Ref. Fees Earned – Credit

32. E XHIBIT 3 ( IN STEPS ) Revenue Journal Invoice Post Accts. Rec. – Debit Date No. Account Debited Ref. Fees Earned – Credit Page 35 123456123456 123456123456 Mar. 2615Accessories By Claire 2 2 0 0 00 (continued) 2014 6616RapZone1 7 5 0 00 18617Web Cantina2 6 5 0 00 27618Accessories by Claire3 0 0 0 00 Date Item P.R. Debit CreditBalance Mar. 2R352,2002,200 2014 Accounts Receivable Subsidiary Ledger Accessories By Claire

33. E XHIBIT 3 ( IN STEPS ) Revenue Journal Invoice Post Accts. Rec. – Debit Date No. Account Debited Ref. Fees Earned – Credit Page 35 123456123456 123456123456 2014 Mar. 2615Accessories By Claire 2 2 0 0 00 (continued) 6616RapZone1 7 5 0 00 18617Web Cantina2 6 5 0 00 27618Accessories by Claire3 0 0 0 00 The same procedure would be used to post the other transactions to the individual accounts in the accounts receivable subsidiary ledger.

34. E XHIBIT 3 ( IN STEPS ) Revenue Journal Page 35 123456123456 123456123456 2014 Mar. 2615Accessories By Claire 2 2 0 0 00 (continued) 6616RapZone1 7 5 0 00 18617Web Cantina2 6 5 0 00 27618Accessories by Claire3 0 0 0 00 Invoice Post Accts. Rec. – Debit Date No. Account Debited Ref. Fees Earned – Credit Next, the amount column would be totaled. 9 6 0 0 0031

35. E XHIBIT 3 ( IN STEPS ) ACCOUNT Accounts Receivable Account No. 12 Balance Dr. Cr. Date Dr.Cr. Item Post. Ref. 2014 Mar.1Balance 3 400 00 319 600 00 13 000 00R35 The debit total is posted from the revenue journal to Accounts Receivable in the general ledger. Revenue Journal, page 35 (continued)

36. E XHIBIT 3 ( IN STEPS ) Revenue Journal Invoice Post Accts. Rec. – Debit Date No. Account Debited Ref. Fees Earned – Credit Page 35 123456123456 123456123456 ( 12 ) Indicates a debit posting of $9,600 to Accounts Receivable (General Ledger Account 12) 2014 Mar. 2615Accessories By Claire 2 2 0 0 00 6616RapZone1 7 5 0 00 18617Web Cantina2 6 5 0 00 27618Accessories by Claire3 0 0 0 00 319 6 0 0 00 (continued)

37. E XHIBIT 3 ( IN STEPS ) ACCOUNT Fees Earned Account No. 41 Balance Date Dr.Cr. Item Post. Ref. 9 600 00 R35 The credit total is posted from the revenue journal to Fees Earned in the general ledger. 9 600 00 Dr. Cr. (continued) Revenue Journal, page 35 Mar.31 2014

38. E XHIBIT 3 ( IN STEPS ) Indicates a credit posting of $9,600 to Fees Earned (General Ledger Account 41 ) Revenue Journal Invoice Post Accts. Rec. – Debit Date No. Account Debited Ref. Fees Earned – Credit Page 35 123456123456 123456123456 ( 12 ) 2014 Mar. 2615Accessories By Claire 2 2 0 0 00 6616RapZone1 7 5 0 00 18617Web Cantina2 6 5 0 00 27618Accessories by Claire3 0 0 0 00 319 6 0 0 00 ( 41 )

39. Cash Receipts Journal o 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.

41. E XHIBIT 4 ( IN STEPS ) Mar. 1 Rent Revenue400 400 CASH RECEIPTS JOURNAL OtherAccounts PostAccounts ReceivableCash DateAccount Credited Ref.Cr.Cr.Dr. Page 14 2014 19 Web Cantina3,4003,400 28Accessories By Claire2,2002,200 30 RapZone 1,7501,750 Date Item P.R. Debit CreditCr. Bal. ACCOUNT Rent Revenue Acct. No. 42 GENERAL LEDGER 42 CR14 Click the button to skip “Exhibit 4 (in Steps)” Mar. 1 2014 400 (continued) 400

42. E XHIBIT 4 ( IN STEPS ) Date Item P.R. Debit CreditBalance Web Cantina Mar. 1 Bal.3,400 18R352,6506,050 2014 3,400 2,650 19 Mar. 1 Rent Revenue400 400 CASH RECEIPTS JOURNAL OtherAccounts PostAccounts ReceivableCash DateAccount Credited Ref.Cr.Cr.Dr. Page 14 2014 19 Web Cantina3,4003,400 28Accessories By Claire2,2002,200 30 RapZone 1,7501,750 Accounts Receivable Subsidiary Ledger CR14 (continued) 42

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

44. E XHIBIT 4 ( IN STEPS ) Mar. 1 Rent Revenue400400 CASH RECEIPTS JOURNAL OtherAccounts PostAccounts ReceivableCash DateAccount Credited Ref.Cr.Cr.Dr. Page 14 2014 19 Web Cantina3,4003,400 28Accessories By Claire2,2002,200 30 RapZone 1,7501,750 42 4007,3507,750 ( ) A check mark indicates that items in this column are posted individually. 1211 (continued) 31

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

46. Purchases Journal o The purchases journal is designed for recording all purchases on account.

48. E XHIBIT 5 ( IN STEPS ) Accts.Other Post Payable SuppliesAccountsPost DateAccount CreditedRef.Cr.Dr.Dr.Ref.Amount PURCHASES JOURNAL Page 11 2014 Mar. 3Howard Supplies600600 7Donnelly Supplies420420 12Jewett Bus. Sys. 2,800Off. Equip.2,800 19Donnelly Supplies1,4501,450 27Howard Supplies960960 Click on button to skip “Exhibit 5 (in steps)” (continued)

49. E XHIBIT 5 ( IN STEPS ) PURCHASES JOURNAL Page 11 7Donnelly Supplies420420 12Jewett Bus. Sys.2,800Off. Equip.2,800 19Donnelly Supplies1,4501,450 27Howard Supplies960960 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) Accts.Other Post Payable SuppliesAccountsPost DateAccount CreditedRef.Cr.Dr.Dr.Ref.Amount PURCHASES JOURNAL 2014 Mar. 3Howard Supplies600600

50. E XHIBIT 5 ( IN STEPS ) PURCHASES JOURNAL Page 11 7Donnelly Supplies420420 12Jewett Bus. Sys.2,800Off. Equip.2,800 19Donnelly Supplies1,4501,450 27Howard Supplies960960 Accts.Other Post Payable SuppliesAccountsPost DateAccount CreditedRef.Cr.Dr.Dr.Ref.Amount PURCHASES JOURNAL 2014 Mar. 3Howard Supplies600600 DateItemP.R. Dr.Cr.Balance 2014 P11 (continued) Accounts Payable Subsidiary Ledger Howard Supplies 600 Mar. 3 600

51. E XHIBIT 5 ( IN STEPS ) PURCHASES JOURNAL Page 11 7Donnelly Supplies420420 12Jewett Bus. Sys.2,800Off. Equip.2,800 19Donnelly Supplies1,4501,450 27Howard Supplies960960 Accts.Other Post Payable SuppliesAccountsPost DateAccount CreditedRef.Cr.Dr.Dr.Ref.Amount PURCHASES JOURNAL 2014 Mar. 3Howard Supplies600600 (continued) The other entries to the accounts payable subsidiary ledger are recorded using the same procedure.

52. E XHIBIT 5 ( IN STEPS ) PURCHASES JOURNAL Page 11 2014 Mar. 3Howard Supplies600600 7Donnelly Supplies420420 12Jewett Bus. Sys.2,800 Off. Equip.2,800 19Donnelly Supplies1,4501,450 27Howard Supplies960960 This posting reference indicates that Office Equipment (Account 18) is debited in the general ledger for $2,800. Accts.Other Post Payable SuppliesAccountsPost DateAccount CreditedRef.Cr.Dr.Dr.Ref.Amount 18

53. Purchases Journal o 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.

54. E XHIBIT 5 ( IN STEPS ) 7Donnelly Supplies420420 12Jewett Bus. Sys.2,800Off. Equip.182,800 19Donnelly Supplies1,4501,450 27Howard Supplies960960 316,2303,4302,800 ( ) ( )( ) Accts.Other PostPayable SuppliesAccountsPost DateAccount CreditedRef.Cr. Dr.Dr.Ref.Amount PURCHASES JOURNAL Page 11 2014 Mar. 3Howard Supplies600600 21 ACCOUNT Accounts Payable No. 21 GENERAL LEDGER DateItemP.R. DebitCreditBalance Mar. 1Bal1,230 6,2307,460 31P11 2014 Supplies would be debited for $3,430 and 14 written in the parentheses.

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

57. E XHIBIT 6 ( IN STEPS ) CASH PAYMENTS JOURNAL OtherAccounts Ck.PostAccounts PayableCash DateNo.Account DebitedRef.Dr.Dr.Cr PAGE 7 2014 Mar. 2150Rent Expense1,6001,600 On March 2, 2014, issued Check 150 for rent of $1,600. Click button to skip “Exhibit 6 (in steps)” (continued)

58. Cash Payments Journal o 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.

59. E XHIBIT 6 ( IN STEPS ) CASH PAYMENTS JOURNAL OtherAccounts Ck.PostAccounts PayableCash DateNo.Account DebitedRef.Dr.Dr.Cr PAGE 7 2014 Mar. 2150Rent Expense1,6001,600 General Ledger Account Rent Expense 1,600 1,600 DateItemP.R. Dr.Cr.Balance Account No. 52 52 (continued) 2014 Mar. 2 CP7

60. E XHIBIT 6 ( IN STEPS ) 15151Grayco Supplies1,2301,230 CASH PAYMENTS JOURNAL PAGE 7 OtherAccounts Ck.PostAccounts PayableCash DateNo.Account DebitedRef.Dr.Dr.Cr 2014 Mar. 2150Rent Expense1,6001,600 On March 15, issued Check 151 to Grayco Supplies for $1,230. 52 (continued)

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

62. E XHIBIT 6 ( IN STEPS ) CASH PAYMENTS JOURNAL OtherAccounts Ck.PostAccounts PayableCash DateNo.Account DebitedRef.Dr.Dr.Cr PAGE 7 2014 Mar. 2150Rent Expense1,6001,600 15151Grayco Supplies1,2301,230  52 Accounts Payable Subsidiary Ledger Grayco Supplies Mar. 1Bal. 1,230 DateItemP.R. Dr.Cr.Balance 1,230 --- 15CP7 2014 (continued)

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

64. E XHIBIT 6 ( IN STEPS ) CASH PAYMENTS JOURNAL OtherAccounts Ck.PostAccounts PayableCash DateNo.Account DebitedRef.Dr.Dr.Cr PAGE 7 2014 Mar. 2150Rent Expense1,6001,600 15151Grayco Supplies1,2301,230  21152Jewett Business Sys.2,8002,800 22153Donnelly Supplies420420 30154Utilities Expense1,0501,050 31155Howard Supplies600600 52 (continued)

65. E XHIBIT 6 ( IN STEPS ) PAGE 7 2014 Mar. 2150Rent Expense1,6001,600 15151Grayco Supplies1,2301,230  52    54 21152Jewett Business Sys.2,8002,800 22153Donnelly Supplies420420 30154Utilities Expense1,0501,050 31155Howard Supplies600600 (continued) CASH PAYMENTS JOURNAL OtherAccounts Ck.PostAccounts PayableCash DateNo.Account DebitedRef.Dr.Dr.Cr

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

67. CASH PAYMENTS JOURNAL OtherAccounts Ck.PostAccounts PayableCash DateNo.Account DebitedRef.Dr.Dr.Cr PAGE 7 2008 Mar. 2150Rent Expense1,6001,600 15151Grayco Supplies1,2301,230 21152Jewett Business Sys.2,8002,800 22153Donnelly Supplies420420 30154Utilities Expense1,0501,050 31155Howard Supplies600600 CASH PAYMENTS JOURNAL OtherAccounts Ck.PostAccounts PayableCash DateNo.Account DebitedRef.Dr.Dr.Cr PAGE 7 2014 Mar. 2150Rent Expense1,6001,600 15151Grayco Supplies1,2301,230 312,6505,0507,700 52    54  21152Jewett Business Sys.2,8002,800 22153Donnelly Supplies420420 30154Utilities Expense1,0501,050 31155Howard Supplies600600 (continued) C ASH P AYMENTS J OURNAL

68. OtherAccounts Ck.PostAccounts PayableCash DateNo.Account DebitedRef.Dr.Dr.Cr PAGE 7 2008 Mar. 2150Rent Expense1,6001,600 15151Grayco Supplies1,2301,230 21152Jewett Business Sys.2,8002,800 22153Donnelly Supplies420420 30154Utilities Expense1,0501,050 31155Howard Supplies600600 CASH PAYMENTS JOURNAL OtherAccounts Ck.PostAccounts PayableCash DateNo.Account DebitedRef.Dr.Dr.Cr PAGE 7 2014 Mar. 2150Rent Expense1,6001,600 15151Grayco Supplies1,2301,230 21152Jewett Business Sys.2,8002,800 22153Donnelly Supplies420420 30154Utilities Expense1,0501,050 31155Howard Supplies600600 312,6505,0507,700 52    54  (21) (11)( )   The totals for “Accounts Payable Dr.” and “Cash Cr.” are posted. (continued)

69. Accounts Payable Account o 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.

70. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objective Describe and illustrate the use of a computerized accounting system. 3

71. Computerized Accounting System o 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.

72. 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.

73. C OMPUTERIZED A CCOUNTING S YSTEMS (continued)

74. C OMPUTERIZED A CCOUNTING S YSTEMS (continued)

75. C OMPUTERIZED A CCOUNTING S YSTEMS (concluded)

76. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objective Describe the basic features of e- commerce. 4

77. E-Commerce o Using the Internet to perform business transactions is termed e-commerce.

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

79. E-C OMMERCE Three more advanced areas where the Internet is being used for business purposes are:  Supply chain management (SCM)  Customer relationship management (CRM)  Product life-cycle management (PLM)

80. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objective Use segment analysis in evaluating the operating performance of a company. 5

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

82. S EGMENT A NALYSIS

83. USING SEGMENT INFORMATION TO PERFORM HORIZONTAL ANALYSIS

84. USING SEGMENT INFORMATION TO PERFORM VERTICAL ANALYSIS

85. c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Accounting Systems The End