1. 7 The System Learning Objectives Unit 7
Explain the accounting process as an information system
Explain the use of Special Journals and Subsidiary Ledgers in the accounting process
Identify the components of an Income Statement, Balance Sheet and Statement of Changes in Owner’s Equity
Analysis: Calculate and explain the current ratio and working capital from a Classified Balance Sheet
Unit 7

2. Objective 7.1: Accounting as an Information System
The accounting process is an excellent example of a modern information system.
The system process is characterized by:
O7.1

3. Inputs – Processing - Outputs
INPUTS -The controlled collection of information (example is journalizing);
PROCESSING -The reorganization and storage of this information (example is posting and updating account balances) and;
OUTPUTS -The production of new information (examples are the financial statements output from the process).
O7.1

4. Feedback from the Outputs is used to improve the system
TRANSACTIONS
ADJUSMENTS
CLOSING ENTRIES
Feedback from the Outputs is used to improve the system
INPUTS
JOURNAL
Controls must be
adequate to insure the quality of the outputs.
OUTPUTS
Financial Statements
Balance Sheet
Income Statement
Statement of Changes in Owner’s Equity
Cash Flow
PROCESSING
ACCOUNT LEDGERS
O-7.1

5. System Controls -Goals
Protect assets against loss due to waste or theft
Provide reliable financial reports from accurate data
Encourage efficient operations
Comply with management’s goals
Achieve compliance with laws and regulations.
O-7.1

6. System Controls –Issues
Segregation of duties
Clear definitions of authority and responsibility
Safeguards to protect the firm’s assets
Written policies
Periodic quality reviews
Maintenance of a review (audit) trail
Access limitations
Management philosophy consistent with good control

7. System Controls -Issues
AUTHORIZATION
RECORDING
CUSTODY OF
ASSETS
Keep in mind the goal of always separating these duties:

8. Objective 7.2: Special Journals & Subsidiary Ledgers
Special Journals bring efficiencies to the accounting process by providing books of original entry designed to handle large numbers of similar transactions.
O7.2

9. Special Journals
Sales Journal –All sales from regular operations on credit
Purchases Journal –All inventory* purchases on credit
Cash Receipts Journal –All cash received
Cash Payments Journal –All cash paid
* Often expanded to include other purchases on credit such as supplies and equipment

10. different paths can lead to the GL
Special Journals
TRANSACTIONS
JOURNALIZING
SALES
JOURNAL
PURCHASES
JOURNAL
CASH
RECEIPTS
JOURNAL
CASH
PAYMENTS
JOURNAL
GENERAL
JOURNAL
Many
different paths can lead to the GL
POSTING
ACCOUNT LEDGERS
(General Ledger)
Some accounts will be
Control Ledgers

11. Objective 7.2: Special Journals & Subsidiary Ledgers
Subsidiary ledgers are used to maintain sub accounts within a main or control account.
O7.2

12. Example- Subsidiary Ledger
An example is customer accounts receivable.
Each customer’s balances must be maintained and all customers must reconcile with the total accounts receivable reported.
O7.2

13. The Subsidiary Ledgers must add up to the Control Ledger
Accounts Receivable
Balance
Subsidiary Ledgers AR
Customer A
O7.2

14. Which Journal? Does the transaction. . .
1. Involve Cash?
CASH
RECEIPTS
JOURNAL
CASH
PAYMENTS
JOURNAL
2. Involve sales & purchases “On Account”?
SALES
JOURNAL
PURCHASES
JOURNAL
3. Remaining transactions go to the General Journal
GENERAL
JOURNAL
O7.2

15. Sales Journal For Sales on Credit Only
(P)
Indicates subsidiary account posting
Indicates that the total $3,750 has been posted to both the Accounts Receivable and to the Sales Ledgers.
Notice the totals under each column are posted to the
account ledgers, rather than posting each individual transaction.
O7.2

16. Posting
O7.2

17. Dual Posting
From
Sales Journal
O5.2

18. Notice the Other Debit all purpose column
Purchases Journal
Notice the Other Debit all purpose column
O7.2

19. Dual Posting
From
Purchases Journal
O5.2
O-5.2

20. Dedicated columns are totaled and posted
Cash Receipts Journal
Dedicated columns are totaled and posted
O7.2

21. The Other account column is used for the Owner Investment transaction
Cash Receipts Journal
The Other account column is used for the Owner Investment transaction
O7.2

22. Cash Receipts Journal
Remember to
maintain
Subsidiary Ledgers
O7.2

23. Cash Payments Journal O7.2
Cash is reduced with each transaction in this journal
The Other account column is used for the Salaries Expense
O7.2

24. Cash Payments Journal
Remember to
maintain
Subsidiary Ledgers
O7.2

25. General Journal
These transactions don’t fit in the other journals –they must go in the general journal.
O7.2

26. Remember that we are using a Perpetual Inventory System
General Journal
Remember that we are using a Perpetual Inventory System
O7.2

27. Objective 7.3:
Identify the components of an Income Statement, Balance Sheet and Statement of Changes in Owner’s Equity
O7.3

28. Service Firm Income Statement Multi-step
No cost of goods sold and gross profit section.
Separate sections for operating expenses and nonoperating expenses.
Further separation of operating expenses into selling and administrative expenses.
The other income and expense area segregates nonoperating revenue and expenses
O7.3

29. Merchandising Income Statement
The cost of goods sold and gross profit
section is a
distinguishing feature
A single step statement would simply summarize the operating expenses to a single amount..
O7.3

30. Current Asset & Liabilities
Current assets - assets that are expected to be converted to cash or provide a benefit (consumed) within one year or the firm’s fiscal period whichever is longer. Examples are Cash, Accounts Receivable, Inventory, Supplies, Prepaid Insurance. 
Current liabilities- liabilities that are due and payable within the longer of one year or the firm’s fiscal period. Examples are trade accounts payable, taxes and wages payable, credit lines and notes due within the firm’s fiscal period

31. Classified Balance Sheet
Separate
both assets and liabilities into
current and
noncurrent.
O7.3

32. Classified Balance Sheet
More
liquid
Earlier
Payment
Dates
Current assets are listed in order of their liquidity or convertibility to cash.
Liabilities are listed in order of their scheduled due dates.
O7.3

33. Statement of Changes in Owner’s Equity
Notice the beginning of the fiscal period Owner’s Capital, less the Owner draws during the fiscal period and finally the period’s income or loss. The total ending equity is the same number that appears on the Balance Sheet of the same date.
O7.3

34. Objective 7.4:
Analysis: Calculate and explain the current ratio and working capital from a Classified Balance Sheet
Current Assets
Current
Ratio
Current Liabilities
Working Capital
Current Assets
Current Liabilities
O7.4

35. Liquidity
Liquidity –The current ratio and working capital are often called liquidity measures. The term “liquidity” refers the relative cash nature of a particular balance sheet.
O7.4

36. Liquidity
For example, a highly liquid balance sheet would have a large amount of cash and other current assets, with limited current liabilities that would require the use of that cash (liquidity).
O7.4

37. Liquidity More Liquid Less Liquid Balance Sheet Balance Sheet
Current
Liabilities
Current
Liabilities
Current
Assets
Current
Assets
More Liquid
Less Liquid
Equity
Assets
Equity
More current asset dollars to pay each current liability dollar
Fewer current asset dollars to pay each current liability dollar
O4.3

38. Current ratio The current ratio answers the following question:
How many dollars of current assets are available to pay each dollar of current liabilities scheduled?
The higher the number, the more dollars of current assets are available and therefore the more liquid is the particular balance sheet being studied.
Current Assets
Current
Ratio
Current Liabilities
O7.4

39. Working capital Working capital answers the following question:
How many dollars of current assets would remain if all current liabilities were paid using current assets?
The resulting answer is expressed in dollars. The higher the number, the more liquidity is displayed by the balance sheet.
Working Capital
Current Assets
Current Liabilities
O7.4

40. Current Ratio Example 1.10 ? O7.4
$1.10 of current assets are available to pay each dollar of current liabilities
1.10 ?
O7.4

41. Working Capital Example
$16,900 of current assets would remain if current assets were used to pay all current liabilities
$16,900 ?
O7.4

42. End Unit 7