Appendix B Accounting Information Systems

Appendix B Accounting Information Systems

Appendix B Learning Objectives
Describe an effective accounting information system Journalize and post sales and cash receipts in a manual accounting information system using special journals and subsidiary ledgers © 2018 Pearson Education, Inc.

WHAT IS AN ACCOUNTING INFORMATION SYSTEM?
An accounting information system (AIS) provides information that is useful for decision makers. An AIS collects, records, stores, and processes accounting data to produce information that is useful for decision makers. An accounting information system (AIS) collects, records, stores, and processes accounting data to produce information that is useful for decision makers. Businesses must have a way to collected and store data for a large number of transactions and then use those data to produce reports that investors and management can use to make decisions. © 2018 Pearson Education, Inc.

WHAT IS AN ACCOUNTING INFORMATION SYSTEM?
Exhibit B-1 shows examples of business transactions and activities that are completed when using an accounting information system. © 2018 Pearson Education, Inc.

Effective Accounting Information Systems
An effective accounting information system provides: Control Compatibility Flexibility Relevance Positive cost/benefit relationship An accounting information system must provide adequate controls of the business’s assets and data. Internal controls can safeguard a business’s assets and reduce the likelihood of fraud and errors. An accounting system creates the structure to encourage adherence to management procedures. A compatible system works smoothly with the business’s employees and organizational structure. A large company needs a system that can handle multiple branches and track revenues and expenses in all divisions of the business. An accounting system must be flexible to accommodate changes in business over time. An effective accounting information system provides information that is relevant. In other words, it improves decision making and reduces uncertainty. The information produced must be useful to the business in achieving its overall goals. Control, compatibility, flexibility, and relevance can be expensive. A business needs a system that gives the most benefit for the least cost. The business must consider the cost of training employees to use the system and time spent on entering data into the system. The business must invest only in an accounting system in which the benefits received outweigh the cost of the system. © 2018 Pearson Education, Inc.

Components of an Accounting Information System
An accounting information system has three basic components: Source documents and input devices Purchase invoices, bank checks, sales invoices Processing and storage A server is a computer where data are stored, which can be accessed from many different computers. Outputs Reports, such as the financial statements Accounting information systems have three basic components: (1) source documents and input devices, (2) processing and storage for information, and (3) outputs. All data must come from source documents, which provide the evidence and data for accounting transactions. Examples of source documents include purchase invoices, bank checks, and sales invoices. Once data have been input into the system, they must be processed. In a manual accounting information system, processing includes journalizing transactions and posting to the accounts. A computerized system, on the other hand, uses software to process transactions. A business’s data must also be stored. In a manual system, data are contained in paper documents that are often stored in filing cabinets and off-site document warehouses. Computerized systems now allow businesses to keep data on a main computer called a server, which often allows employees to access information from anywhere in the world. A server is the main computer where data are stored, which can be accessed from many different computers. Outputs are the reports used for decision making, including the financial statements. © 2018 Pearson Education, Inc.

HOW ARE SALES AND CASH RECEIPTS RECORDED IN A MANUAL ACCOUNTING INFORMATION SYSTEM? Manual accounting information systems are covered in this course because: The accounting is the same regardless of the system. Few small businesses have computerized all of their accounting. Learning a manual system helps you master accounting. We begin by reviewing how transactions are recorded in a manual accounting information system. You may be wondering why we cover manual accounting information systems when many businesses have computerized systems. There are three main reasons: Learning a manual systems equips you to work with both manual and computerized systems. The accounting is the same regardless of the system. Few small businesses have computerized all of their accounting. Even companies that use QuickBooks or Sage 50 Accounting, two popular entry-level accounting information systems, keep some manual accounting records. Learning a manual system helps you master accounting. © 2018 Pearson Education, Inc.

Special Journals A special journal is an accounting journal designed to record one specific type of transaction. The four special journals are: Sales journal Cash receipts journal Purchases journal Cash payments journal Transactions that do not fit in any of the special journals, such as adjusting entries, are recorded in the general journal. In a manual system, transactions are classified by type. It is inefficient to records all transactions in the general journal, so businesses use special journals. A special journal is an accounting journal designed to record one specific type of transaction. Sales on account, cash receipts, purchases on account, and cash payments are treated as four separate categories and, therefore, create the four special journals: Sales journal for sales on account Cash receipts journal for cash receipts Purchases journal for purchases on account Cash payments journal for cash payments A general journal is used to record all other transactions, including adjusting entries. © 2018 Pearson Education, Inc.

Special Journals The five types of transactions, the related journal related to each, and the posting abbreviations used in a manual system are summarized in Exhibit B-2. © 2018 Pearson Education, Inc.

Subsidiary Ledgers Accounting information systems use subsidiary ledgers to hold individual accounts to support a general ledger. There are two common subsidiary ledgers: Accounts receivable subsidiary ledger Accounts payable subsidiary ledger The sum of the balances in a group of related accounts in a subsidiary ledger is called a control account. In addition to special journals, an accounting information system uses subsidiary ledgers. A subsidiary ledger is a record of accounts that provides supporting details on individual balances, the total of which appears in a general ledger account. The accounts receivable subsidiary ledger is a subsidiary ledger that includes an accounts receivable account for each customer that contains detailed information such as the amount sold, received, and owed. The accounts payable subsidiary ledger is a subsidiary ledger that includes an account payable account for each vendor that contains detailed information such as the amount purchased, paid, and owed. A control account is an account whose balance equals the sum of the balances in a group of related accounts in a subsidiary ledger. © 2018 Pearson Education, Inc.

Accounts Receivable Subsidiary Ledger
The accounts receivable subsidiary ledger includes a receivable account for each customer. The total of the accounts in the accounts receivable subsidiary ledger must equal the Accounts Receivable balance in the general ledger. This is demonstrated in Exhibit B-3. The Accounts Receivable balance of $4,319 in the general ledger equals the sum of the accounts in the accounts receivable subsidiary ledger ($935 + $907 + $694 + $1,783). © 2018 Pearson Education, Inc.

Accounts Payable Subsidiary Ledger
The accounts payable subsidiary ledger lists: Vendors in alphabetical order Amounts paid Amounts owed The total of the individual balances in the subsidiary ledger equal the Accounts Payable (control account) balance in the general ledger. To pay debts on time, a company must know how much it owes each supplier. Accounts Payable in the general ledger shows only a single total for the amount owed on account. It does not indicate the amount owed to each vendor. Companies keep an accounts payable subsidiary ledger that is similar to the accounts receivable subsidiary ledger. The accounts payable subsidiary ledger lists vendors in alphabetical order, along with amounts paid to the vendors and the remaining amounts owed to them. The total of the individual balances in the subsidiary ledger equals the Accounts Payable (control account) balance in the general ledger. Don’t confuse the terms customer and vendor. Remember that a company sells to customers and purchases from vendors. © 2018 Pearson Education, Inc.

The Sales Journal Most merchandisers sell inventory on account. The credit sales are entered in a sales journal. The sale of merchandise inventory for cash is not recorded in the sales journal. Most merchandisers sell inventory on account. These credit sales are entered in a sales journal. The sales journal is used when recording the sale of merchandise inventory on account. A sales journal is a special journal used to record credit sales. The sale of merchandise inventory for cash is not recorded in the sales journal; instead, it is recorded in the cash receipts journal. In addition, credit sales of assets other than merchandise inventory occur infrequently and are not recorded in the sales journal. They are recorded in the general journal. © 2018 Pearson Education, Inc.

The Sales Journal Exhibit B-4 illustrates a sales journal (Panel A) and the related posting to the ledgers (Panel B). When a business completes a sale, the accountant enters the date, invoice number, customer name, and transaction amount. © 2018 Pearson Education, Inc.

The Sales Journal Instead of the sale transaction being recorded in the general journal (illustrated below), it is recorded in the sales journal. Consider the first transaction in Panel A of Exhibit B-4. On November 2, the business sold merchandise inventory on account to Maria Galvez for $935, with a cost of $505. The invoice number is 422. In Chapter 5, this transaction was recorded in the general journal. © 2018 Pearson Education, Inc.

The Sales Journal Note that all items appear on a single line in the sales journal. When a business uses special journals, instead of recording this transaction in the general journal, the business records the transaction in the sales journal. All of the information related to the sale appears on a single line in the sales journal. The entry records the sales revenue and associated accounts receivable by entering the amount of the sale, $935, in the Accounts Receivable DR, Sales Revenue CR column. The entry also records the expense of the sale and the reduction of merchandise inventory by recording the cost of the sale, $505, in the Cost of Goods Sold DR, Merchandise Inventory CR column. By using a sales journal, the recording of the sale is streamlined, thus saving a significant amount of time. Notice that the journal has a single column to debit Accounts Receivable and credit Sales; therefore, by the very nature of this special journal, the amount for each transaction is listed only once. The same is true for the Cost of Goods Sold and Merchandise Inventory accounts. © 2018 Pearson Education, Inc.

The Cash Receipts Journal
The cash receipts journal records the collection of cash receipts. Every transaction in the cash receipts journal is a cash receipt; no payments are recorded. All businesses have lots of cash transactions, and therefore a cash receipts journal comes in handy. The cash receipts journal is a special journal used to record cash receipts. Every transaction in this journal is a cash receipt. © 2018 Pearson Education, Inc.

Exhibit B-5 illustrates the cash receipts journal. The cash receipts journal includes a column for debits to Cash. The next column is for debits to Sales Discounts. The main sources of cash are collections on account and cash sales. Collections on account are recorded in the Accounts Receivable CR column and the Cash DR column. Cash sales are recorded in the Sales Revenue CR column, the Cash DR column, and Cost of Goods Sold DR, Merchandise Inventory CR column. The cash receipts journal also has an Other Accounts CR column that is used to record miscellaneous cash receipt transactions. © 2018 Pearson Education, Inc.

After posting, the sum of the individual ending balances in the accounts receivable subsidiary ledger equals the ending balance of Accounts Receivable in the general ledger, as follows: As with the sales journal, entries in the cash receipts journal are posted daily to the accounts receivable subsidiary ledger and monthly to the general ledger. After posting, the sum of the individual ending balances in the accounts receivable subsidiary ledger equals the ending balance of Accounts Receivable in the general ledger. © 2018 Pearson Education, Inc.

Learning Objective 3 Journalize and post purchases, cash payments, and other transactions in a manual accounting information system using special journals and subsidiary ledgers © 2018 Pearson Education, Inc.

HOW ARE PURCHASES, CASH PAYMENTS, AND OTHER TRANSACTIONS RECORDED IN A MANUAL ACCOUNTING INFORMATION SYSTEM? A merchandising business purchases merchandise inventory and other items on account. The purchases journal handles these transactions. Cash purchases are not recorded in the purchases journal; they are recorded in the cash payments journal. A merchandising business purchases merchandise inventory and other items, such as office supplies, equipment, and furniture, on account. The purchases journal handles these transactions plus other purchases incurred on account. Cash purchases are not recorded in the purchases journal; they are recorded in the cash payments journal. © 2018 Pearson Education, Inc.

The Purchases Journal Exhibit B-6 illustrates a purchases journal (Panel A) and posting to the ledgers (Panel B). The purchases journal has special columns for credits to Accounts Payable and debits to Merchandise Inventory, Office Supplies, and Other Accounts. The Other Accounts DR columns are used for purchases on account of items other than merchandise inventory and office supplies. This business uses a perpetual inventory system. In a periodic system, the Merchandise Inventory DR column would be replaced with a column titled Purchases DR. © 2018 Pearson Education, Inc.

The Purchases Journal Exhibit B-6 continued, Panel B. This exhibit shows the posting to ledger accounts from the purchases journal. Entries from the purchases journal are posted daily to the accounts payable subsidiary ledger and monthly to the general ledger. © 2018 Pearson Education, Inc.

The Cash Payments Journal
Businesses make most payments by check. All cash and check payments are recorded in the cash payments journal. This special journal is also called the check register and the cash disbursements journal. Businesses make most payments by check, and all checks (and payments of currency) are recorded in the cash payments journal. The cash payments journal is a special journal used to record cash payments by check and currency. This special journal is also called the check register and the cash disbursements journal. © 2018 Pearson Education, Inc.

Exhibit B-7 shows the cash payments journal (Panel A) and posting to the ledgers (Panel B). The cash payments journal has two debit columns: one for Other Accounts and one for Accounts Payable. It has two credit columns: one for Merchandise Inventory (for purchase discounts) and one for Cash. This special journal also has columns for the date and check number of each cash payment and the account debited. © 2018 Pearson Education, Inc.

To review accounts payable, companies list individual vendor ending balances in the accounts payable subsidiary ledger. Entries in the cash payments journal are posted daily to the accounts payable subsidiary ledger and monthly to the general ledger. To review accounts payable, companies list individual vendor ending balances in the accounts payable subsidiary ledger. The general ledger and subsidiary ledger totals should agree. © 2018 Pearson Education, Inc.

The General Journal Not all transactions can be recorded in a special journal. The general journal is used to record all other transactions, such as: Adjusting entries for depreciation Expiration of prepaid insurance Accrual of salaries payable Adjustments for sales returns and allowances and purchase returns and allowances Special journals save time recording repetitive transactions. But some transactions don’t fit a special journal. Examples include the adjusting entries for depreciation, the expiration of prepaid insurance, and the accrual of salaries payable at the end of the period. Companies also use the general journal for sales returns and allowances and purchase returns and allowances. All accounting information systems need a general journal. The adjusting entries and the closing entries are recorded in the general journal, along with other nonroutine transactions. © 2018 Pearson Education, Inc.

As we have seen, a manual accounting information system involves five journals: sales journal, cash receipts journal, purchases journal, cash payments journal, and general journal. It’s important to remember that transactions are recorded in either one of the special journals or in the general journal, but not both. Exhibit B-8 provides a summary of all five journals that will help you decide which journal to use when recording transactions in a manual system. © 2018 Pearson Education, Inc.

HOW ARE TRANSACTIONS RECORDED IN A COMPUTERIZED ACCOUNTING SYSTEM?
A computerized accounting information system has two basic components: Hardware is the electronic equipment, such as computers, monitors, printers, and the network that connects them. Software is the set of programs that drives the computer. A computerized accounting information system has two basic components: hardware and software. Hardware is the electronic equipment that includes computers, monitors, printers, and the network that connects them. Most systems require a network to link computers. In a networked system, the server stores the program and the data. The network is a system of electronic linkages that allows different computers to share the same information. Software is the set of programs that drives the computer. Accounting software reads, edits, and stores transaction data. It also generates the reports that businesses can use to make decisions. Software is a set of programs or instructions that drives the computer to perform the work desired. © 2018 Pearson Education, Inc.

Entry-Level Software Two popular computerized accounting information systems for small businesses are: QuickBooks Sage 50 Accounting These programs allow businesses to: With increased availability of affordable computerized accounting information systems, more and more businesses are completing all of their accounting on the computer. Two popular entry-level software packages are QuickBooks and Sage 50 Accounting. Both of these programs allow businesses to enter sales of services and merchandise inventory. In addition, these programs can record expenses and produce reports such as financial statements. These computerized accounting information systems are relatively easy to use, often requiring little knowledge of accounting or GAAP. Computerized accounting software allows businesses to organize finances, track sales and expenses, and complete all recordkeeping. Enter sales transactions Record expenses Produce reports Organize finances © 2018 Pearson Education, Inc.

Enterprise Resource Planning (ERP) Systems
Larger companies often use enterprise resource planning (ERP) systems to manage their data. ERP systems are compatible with cloud computing. Advantages Reduce operating costs. Help companies adjust to change. Integrate separate software systems. Disadvantages Major installations are expensive. Implementation requires large commitment of time and people. Larger companies often use enterprise resource planning (ERP) systems to manage their data. ERP systems such as SAP and Oracle can integrate all company data into a single database. The ERP system feeds the data into software for all company activities, from purchasing to production and customer service. Advantages of ERP systems include: Reduce operating costs. Help companies adjust to change. Replace separate software systems, such as sales and payroll. Disadvantages of ERP systems include: ERP is expensive. Major installations can cost millions of dollars. Implementation requires a large commitment of time and people. Many ERP systems and entry-level systems can be offered in the cloud. With cloud computing, software and data are stored on a third-party server instead of by the business and can be accessed by employees via the Internet. Cloud computing can significantly reduce costs for many businesses. © 2018 Pearson Education, Inc.

QuickBooks On June 23, Smart Touch Learning performs $3,000 of services for Richard Michura on account. Smart Touch Learning needs to create an invoice for Richard. In a computerized accounting system, the business does not have to record the transaction in debit and credit format. The software automatically posts to the appropriate general ledger accounts. Suppose that on June 23, Smart Touch Learning performs $3,000 of services for Richard Michura on account. To record this transaction in QuickBooks, Smart Touch Learning needs to create an invoice for Richard. Notice there are no debits or credits on the invoice. In a computerized accounting system, the business does not have to record the transaction in debit and credit format. Instead, by creating the invoice, the software knows automatically to record a debit to Accounts Receivable—Michura and a credit to Sales Revenue. After creating the invoice, the software automatically posts the transactions to the appropriate general ledger accounts. There is no need for the business to manually post the transaction; the software takes care of the posting process. © 2018 Pearson Education, Inc.

QuickBooks Exhibit B-9 shows the invoice Smart Touch Learning creates for Richard Michura. An invoice includes various items, such as the customer’s name, the customer’s address, the invoice number, the date, the payment terms, the quantity ordered, and the balance due. © 2018 Pearson Education, Inc.

QuickBooks The Vendors tab of QuickBooks is used to record bills received. On June 25, Smart Touch Learning receives a $580 bill for utilities. The company records the bill in QuickBooks, and all items post automatically to the appropriate general ledger accounts. When a business needs to record a bill received, it uses the Vendors tab of QuickBooks. Suppose that on June 25, Smart Touch Learning receives a $580 bill for utilities. © 2018 Pearson Education, Inc.

QuickBooks Exhibit B-10 shows the bill that the company records in QuickBooks. When Smart Touch Learning saves the bill, the software automatically records a debit to Utilities Expense and a credit to Accounts Payable—Smart Energy. A bill includes the vendor’s name, the vendor’s address, the payment due date, and the total amount due. © 2018 Pearson Education, Inc.

QuickBooks has the ability to produce numerous reports, such as the income statement (called profit and loss in QuickBooks), balance sheet, and statement of cash flows. The software can also be used to create accounts receivable and accounts payable aging schedules. Exhibit B-11 shows an example of an income statement for Smart Touch Learning. © 2018 Pearson Education, Inc.

Appendix B Accounting Information Systems

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