1. Lecture 16 Chapter 5 Accounting Systems and Internal Controls

2. 1.Define an accounting system and describe its implementation. 2.List the three objectives of internal control, and define and give examples of the five elements of internal control. 3.Journalize and post transactions in a manual accounting system that uses subsidiary ledgers and special journals.

5. Implementation Design Analysis FEEDBACKFEEDBACKFEEDBACKFEEDBACK

6. Objectives of Internal Control 1.assets are safeguarded and used for business purposes. 2.business information is accurate. 3.employees comply with laws and regulations. To provide reasonable assurance that: 1.assets are safeguarded and used for business purposes. 2.business information is accurate. 3.employees comply with laws and regulations.

7. Elements of Internal Control 1.Control environment 2.Risk assessment 3.Control procedures 4.Monitoring 5.Information and communication

8. 1.Control environment 2.Risk assessment 3.Control procedures 4.Monitoring 5.Information and communication Elements of Internal Control

9. Management philosophy and operating style influences the control environment.

10. 1.Control environment 2.Risk assessment 3.Control procedures 4.Monitoring 5.Information and communication

11. Once risks are identified, they can be analyzed to estimate their significance, to assess their likelihood of occurring, and to determine actions that will minimize them.

12. 1.Control environment 2.Risk assessment 3.Control procedures 4.Monitoring 5.Information and communication

13. Control Procedures  Competent Personnel  Rotating Duties  Mandatory Vacations  Separating Responsibilities for Related Operations  Separating Operations, Custody of Assets, and Accounting  Proofs and Security Measures

14. Control Procedures  Competent Personnel  Rotating Duties  Mandatory Vacations  Separating Responsibilities for Related Operations  Separating Operations, Custody of Assets, and Accounting  Proofs and Security Measures

15. 1.Orders may be placed on the basis of friendship with a supplier, rather than on price, quality, and other objective factors. 2.The quantity and quality of supplies received may not be verified, thus causing payment for supplies not received or poor-quality supplies. 3.Supplies may be stolen by the employee. 4.The validity and accuracy of invoices may be verified carelessly.

16. Control Procedures  Competent Personnel  Rotating Duties  Mandatory Vacations  Separating Responsibilities for Related Operations  Separating Operations, Custody of Assets, and Accounting  Proofs and Security Measures

17. Independent check Custody of Assets AccountingOperationsOperations

18. 1.Control environment 2.Risk assessment 3.Control procedures 4.Monitoring 5.Information and communication

19. Clues to Potential Problems 1.Abrupt changes in lifestyle. 2.Close social relationships with suppliers. 3.Refusing to take a vacation. 4.Frequent borrowing from other employees. 5.Excessive use of alcohol or drugs. Warning signs with regard to people:

20. 1.Missing documents or gaps in transaction numbers. 2.An unusual increase in customer refunds. 3.Differences between daily cash receipts and bank deposits. 4.Sudden increase in slow payments. 5.Backlog in recording transactions. Warning signs from the accounting system:

21. Review of Lecture

22. End of Lecture 16

23. Lecture 17 Chapter 5 Accounting Systems

24. Review of Lecture

25. Manual Accounting Systems

26. Running Balance Method of Ledgers

27. Cash11 Accts. Pay.21 General Ledger Accts. Rec.12 Supplies14 Accounts Receivable Subsidiary Ledger A BCD Customer Accounts Accounts Payable Subsidiary Ledger A BCD Creditor Accounts

28. BUYING SELLING Special Journals Providing services on account Revenue journal Revenue journal recorded in Receipt of cash from any source Cash receipts journal Cash receipts journal recorded in Purchase of items on account Purchases journal recorded in Payment of cash for any purpose Cash payments journal recorded in

30. Revenue Journal Invoice Post Accts. Rec. – Debit Date No. Account Debited Ref. Fees Earned – Credit Page 35 123456123456 123456123456

31. Revenue Journal Invoice Post Accts. Rec. – Debit Date No. Account Debited Ref. Fees Earned – Credit Page 35 123456123456 123456123456 2010 Mar. 2615MyMusicClub.com 2 2 0 0

32. Revenue Journal Invoice Post Accts. Rec. – Debit Date No. Account Debited Ref. Fees Earned – Credit Page 35 123456123456 123456123456 Mar. 2615MyMusicClub.com 2 2 0 0 2010

33. Revenue Journal Invoice Post Accts. Rec. – Debit Date No. Account Debited Ref. Fees Earned – Credit Page 35 123456123456 123456123456 Mar. 2615MyMusicClub.com 2 2 0 0 2010

34. Revenue Journal Invoice Post Accts. Rec. – Debit Date No. Account Debited Ref. Fees Earned – Credit Page 35 123456123456 123456123456 Mar. 2615MyMusicClub.com 2 2 0 0 Accounts Receivable Subsidiary Ledger Date Item P.R. Debit CreditBalance MyMusicClub.com Mar. 2R352,2002,200 2010

35. Revenue Journal Invoice Post Accts. Rec. – Debit Date No. Account Debited Ref. Fees Earned – Credit Page 35 123456123456 123456123456 Mar. 2615MyMusicClub.com 2 2 0 0 Accounts Receivable Subsidiary Ledger Date Item P.R. Debit CreditBalance MyMusicClub.com Mar. 2R352,2002,200 2010 This procedure is repeated for each posting to the accounts receivable subsidiary ledger. 2010

36. Revenue Journal Invoice Post Accts. Rec. – Debit Date No. Account Debited Ref. Fees Earned – Credit Page 35 123456123456 123456123456 Mar. 2615MyMusicClub.com 2 2 0 0 6616Zone.com1 7 5 0 18617Web Cantina2 6 5 0 27618MyMusicClub.com3 0 0 0 2010

37. Revenue Journal Invoice Post Accts. Rec. – Debit Date No. Account Debited Ref. Fees Earned – Credit Page 35 123456123456 123456123456 Mar. 2615MyMusicClub.com 2 2 0 0 6616Zone.com1 7 5 0 18617Web Cantina2 6 5 0 27618MyMusicClub.com3 0 0 0 319 6 0 0 2010

38. Revenue Journal Invoice Post Accts. Rec. – Debit Date No. Account Debited Ref. Fees Earned – Credit Page 35 123456123456 123456123456 Mar. 2615MyMusicClub.com 2 2 0 0 6616Zone.com1 7 5 0 18617Web Cantina2 6 5 0 27618MyMusicClub.com3 0 0 0 319 6 0 0 2010

39. ACCOUNT Accounts Receivable Account No. 12 Balance Dr. Cr. Date Dr.Cr. Item Post. Ref. 2010 Mar.1Balance3 400 GENERAL LEDGER 319 60013 000 R35 Revenue Journal, page 35

40. By placing the account number here, we indicate that Rs. 9,600 has been debited to Accounts Receivable in the general ledger. Revenue Journal Invoice Post Accts. Rec. – Debit Date No. Account Debited Ref. Fees Earned – Credit Page 35 123456123456 123456123456 Mar. 2615MyMusicClub.com 2 2 0 0 6616Zone.com1 7 5 0 18617Web Cantina2 6 5 0 27618MyMusicClub.com3 0 0 0 319 6 0 0 (12)(41) 2010

41. ACCOUNT Fees Earned Account No. 41 Balance Dr. Cr. Date Dr.Cr. Item Post. Ref. GENERAL LEDGER 2010 Mar. 31R359 6 0 09 6 0 0

42. Revenue Journal Invoice Post Accts. Rec. – Debit Date No. Account Debited Ref. Fees Earned – Credit Page 35 123456123456 123456123456 Mar. 2615MyMusicClub.com 2 2 0 0 6616Zone.com1 7 5 0 18617Web Cantina2 6 5 0 27618MyMusicClub.com3 0 0 0 319 6 0 0 (12)(41) Placing “41” here indicates that Rs.9,600 has been posted to the credit side of Fees Earned in the general ledger. 2010

43. End of Lecture 17

45. Lecture 18 Chapter 5 Accounting Systems

46. The Cash Receipts Journal

47. All transactions that involve the receipt of cash are recorded in the cash receipts journal.

48. Mar. 1 Rent Revenue400 400 CASH RECEIPTS JOURNAL OtherAccounts PostAccounts ReceivableCash DateAccount CreditedRef.Cr.Cr.Dr. Page 14 2010

49. Mar. 1 Rent Revenue400 400 CASH RECEIPTS JOURNAL OtherAccounts PostAccounts ReceivableCash DateAccount CreditedRef.Cr.Cr.Dr. 19 Web Cantina3,4003,400 28MyMusicClub.com2,2002,200 30 RapZone.com 1,7501,750 Page 14 2010

50. Mar. 1 Rent Revenue400 400 CASH RECEIPTS JOURNAL OtherAccounts PostAccounts ReceivableCash DateAccount CreditedRef.Cr.Cr.Dr. 19 Web Cantina3,4003,400 28MyMusicClub.com2,2002,200 30 RapZone.com 1,7501,750 Page 14 2010

51. Mar. 1 Rent Revenue400 400 CASH RECEIPTS JOURNAL OtherAccounts PostAccounts ReceivableCash DateAccount CreditedRef.Cr.Cr.Dr. Page 14 19 Web Cantina3,4003,400 28MyMusicClub.com2,2002,200 30 RapZone.com 1,7501,750 Accounts Receivable Subsidiary Ledger Date Item P.R. Debit CreditBalance Web Cantina Mar. 1 Bal.3,400 18R352,6506,050 2006 3,400 2,650 2006 19

52. Mar. 1 Rent Revenue400 400 CASH RECEIPTS JOURNAL OtherAccounts PostAccounts ReceivableCash DateAccount CreditedRef.Cr.Cr.Dr. Page 14 19 Web Cantina3,4003,400 28MyMusicClub.com2,2002,200 30 RapZone.com 1,7501,750 Accounts Receivable Subsidiary Ledger Date Item P.R. Debit CreditBalance Web Cantina Mar. 1 Bal.3,400 18R352,6506,050 2006 3,40019CR14 2,650 2006 

53. After all journalizing and posting to the accounts receivable subsidiary ledger for the month is complete, the columns are totaled.

54. Mar. 1 Rent Revenue400 400 19 Web Cantina  3,4003,400 28MyMusicClub.com  2,2002,200 30 RapZone.com  1,7501,750 314007,3507,750 CASH RECEIPTS JOURNAL OtherAccounts PostAccounts ReceivableCash DateAccount CreditedRef.Cr.Cr.Dr. Page 14 2010

55. Mar. 1 Rent Revenue400 400 19 Web Cantina  3,4003,400 28MyMusicClub.com  2,2002,200 30 RapZone.com  1,7501,750 314007,3507,750 CASH RECEIPTS JOURNAL OtherAccounts PostAccounts ReceivableCash DateAccount CreditedRef.Cr.Cr.Dr. Page 14 The three circled items are posted to the general ledger. Let’s post Accounts Receivable. 2006 Account: Accounts Receivable No. 12 GENERAL LEDGER DateItemP.R. DebitCreditBalance Mar. 1Bal  3,400 31R359,60013,000 2006

56. Mar. 1 Rent Revenue400 400 19 Web Cantina  3,4003,400 28MyMusicClub.com  2,2002,200 30 RapZone.com  1,7501,750 314007,3507,750 CASH RECEIPTS JOURNAL OtherAccounts PostAccounts ReceivableCash DateAccount CreditedRef.Cr.Cr.Dr. Page 14 2010 Account: Accounts Receivable No. 12 GENERAL LEDGER DateItemP.R. DebitCreditBalance Mar. 1Bal  3,400 31R359,60013,000 2010 7,350 5,650 31 CR14

57. Mar. 1 Rent Revenue400 400 19 Web Cantina  3,4003,400 28MyMusicClub.com  2,2002,200 30 RapZone.com  1,7501,750 314007,3507,750 CASH RECEIPTS JOURNAL OtherAccounts PostAccounts ReceivableCash DateAccount CreditedRef.Cr.Cr.Dr. Page 14 2010 ( ) (12) 

58. The Rs.7,750 total in the Cash Debit column is posted to Cash in a similar manner.

59. The Rs.400 credit to Rent Revenue could have been posted earlier, but posting it at the same time as other general ledger accounts is proper.

60. A completely posted cash receipts journal is shown in the next slide.

61. Mar. 1 Rent Revenue400 400 19 Web Cantina  3,4003,400 28MyMusicClub.com  2,2002,200 30 RapZone.com  1,7501,750 314007,3507,750 CASH RECEIPTS JOURNAL OtherAccounts PostAccounts ReceivableCash DateAccount CreditedRef.Cr.Cr.Dr. Page 14 42 ( ) (12) (11) 2010 

62. Accounts Receivable Control Account If the accounts receivable account in the general ledger only shows summary totals, where are the individual customer balances? ACCOUNT Accounts Receivable No. 12 GENERAL LEDGER DateItemP.R. DebitCreditBalance Mar. 1Bal3,400 31R359,60013,000 7,3505,650 31CR14 

63. DateItemP.R. DebitCreditBalance RapZone.com 3/6 R35 1,7501,750 -- 3/30CR141,750-- DateItemP.R. DebitCreditBalance Web Cantina DateItemP.R. DebitCreditBalance 3/2R352,200 2,200 3/27R353,000 5,200 3,000 3/28CR142,2003,000 3/1Bal. 3,400 3/18R352,6506,050 2,650 3/19CR143,4002,650  Accounts Receivable Subsidiary Ledger Accounts Receivable Control Account MyMusicClub.com ACCOUNT Accounts Receivable No. 12 GENERAL LEDGER DateItemP.R. DebitCreditBalance Mar. 1Bal3,400 31R359,60013,000 7,3505,650 31CR14 

64. End of Lecture 18

66. Lecture 19 Chapter 5 Accounting Systems

68. The purchases journal is designed for recording all purchases on account.

69. On March 3, 2003, NetSolutions purchased supplies from Howard Supplies, $600. PURCHASES JOURNAL Accts.Other PostPayableSuppliesAccountsPost DateAccount CreditedRef.Cr.Dr.Dr.Ref.Amount Page 11 Mar. 3Howard Supplies600600 2006

70. PURCHASES JOURNAL Accts.Other PostPayableSuppliesAccountsPost DateAccount CreditedRef.Cr.Dr.Dr.Ref.Amount Page 11 To keep the accounts payable subsidiary ledger current, this entry is posted on March 3. Mar. 3Howard Supplies600600 2006 Accounts Payable Subsidiary Ledger DateItemP.R. Dr.Cr.Balance Howard Supplies Mar 3600600 2006

71. PURCHASES JOURNAL Accts.Other PostPayableSuppliesAccountsPost DateAccount CreditedRef.Cr.Dr.Dr.Ref.Amount Page 11 Mar. 3Howard Supplies600600 2006

72. PURCHASES JOURNAL Accts.Other PostPayableSuppliesAccountsPost DateAccount CreditedRef.Cr.Dr.Dr.Ref.Amount Page 11 On March 7, NetSolutions purchased supplies from Donnelly Supplies, $420. Mar. 3Howard Supplies600600 2006 7Donnelly Supplies420420

73. PURCHASES JOURNAL Accts.Other PostPayableSuppliesAccountsPost DateAccount CreditedRef.Cr.Dr.Dr.Ref.Amount Page 11 Mar. 3Howard Supplies600600 2006 7Donnelly Supplies420420

74. PURCHASES JOURNAL Accts.Other PostPayableSuppliesAccountsPost DateAccount CreditedRef.Cr.Dr.Dr.Ref.Amount Page 11 Mar. 3Howard Supplies600600 2006 On March 12, NetSolutions purchased office equipment from Jewett Business Systems, $2,800. 7Donnelly Supplies420420 12Jewett Bus. Sys.2,800Off. Equip.2,800 Because there isn’t a special column for Office Equipment, this purchase was recorded under “Other Accounts Dr.”

75. PURCHASES JOURNAL Accts.Other PostPayableSuppliesAccountsPost DateAccount CreditedRef.Cr.Dr.Dr.Ref.Amount Page 11 Mar. 3Howard Supplies600600 2006 7Donnelly Supplies420420 12Jewett Bus. Sys.2,800Off. Equip.2,800 Now, let’s look at the rest of March’s entries (assume that all postings to the accounts payable subsidiary ledger have been made). 19Donnelly Supplies1,4501,450 27Howard Supplies960960

76. PURCHASES JOURNAL Accts.Other PostPayableSuppliesAccountsPost DateAccount CreditedRef.Cr.Dr.Dr.Ref.Amount Page 11 Mar. 3Howard Supplies600600 2006 7Donnelly Supplies420420 12Jewett Bus. Sys.2,800Off. Equip.2,800 At the end of March, all columns are totaled and equality of debits and credits is verified. 19Donnelly Supplies1,4501,450 27Howard Supplies960960 316,2303,4302,800

77. The next step is to post to the general journal. The next step is to post to the general journal. PURCHASES JOURNAL Accts.Other PostPayableSuppliesAccountsPost DateAccount CreditedRef.Cr.Dr.Dr.Ref.Amount Page 11 Mar. 3Howard Supplies600600 2006 7Donnelly Supplies420420 12Jewett Bus. Sys.2,800Off. Equip.2,800 19Donnelly Supplies1,4501,450 27Howard Supplies960960 316,2303,4302,800

78. PURCHASES JOURNAL Accts.Other PostPayableSuppliesAccountsPost DateAccount CreditedRef.Cr.Dr.Dr.Ref.Amount Page 11 Mar. 3Howard Supplies600600 2006 7Donnelly Supplies420420 12Jewett Bus. Sys.2,800Off. Equip.2,800 19Donnelly Supplies1,4501,450 27Howard Supplies960960 316,2303,4302,800 ACCOUNT Accounts Payable No. 21 GENERAL LEDGER DateItemP.R. DebitCreditBalance Mar. 1Bal1,230 6,2307,46031P11

79. PURCHASES JOURNAL Accts.Other PostPayableSuppliesAccountsPost DateAccount CreditedRef.Cr.Dr.Dr.Ref.Amount Page 11 Mar. 3Howard Supplies600600 2003 7Donnelly Supplies420420 12Jewett Bus. Sys.2,800Off. Equip.2,800 19Donnelly Supplies1,4501,450 27Howard Supplies960960 316,2303,4302,800 ACCOUNT Accounts Payable No. 21 GENERAL LEDGER DateItemP.R. DebitCreditBalance Mar. 1Bal1,230 6,2307,46031P11 (21)

80. PURCHASES JOURNAL Accts.Other PostPayableSuppliesAccountsPost DateAccount CreditedRef.Cr.Dr.Dr.Ref.Amount Page 11 Mar. 3Howard Supplies600600 2003 7Donnelly Supplies420420 12Jewett Bus. Sys.2,800Off. Equip.2,800 19Donnelly Supplies1,4501,450 27Howard Supplies960960 316,2303,4302,800 (21)(14) 18

81. PURCHASES JOURNAL Accts.Other PostPayableSuppliesAccountsPost DateAccount CreditedRef.Cr.Dr.Dr.Ref.Amount Page 11 Mar. 3Howard Supplies600600 2006 7Donnelly Supplies420420 12Jewett Bus. Sys.2,800Off. Equip.2,800 19Donnelly Supplies1,4501,450 27Howard Supplies960960 316,2303,4302,800 (21)(14) 18 ( )

82. The Cash Payments Journal

83. All payments are recorded in the cash payments journal. NetSolutions makes all payments by check.

84. Let’s make all of the cash payment journal entries for March.

85. CASH PAYMENTS JOURNAL OtherAccounts Ck.PostAccounts PayableCash DateNo.Account DebitedRef.Dr.Dr.Cr PAGE 7 2006 Mar. 2150Rent Expense1,6001,600

86. CASH PAYMENTS JOURNAL OtherAccounts Ck.PostAccounts PayableCash DateNo.Account DebitedRef.Dr.Dr.Cr PAGE 7 2006 Mar. 2150Rent Expense1,6001,600 15151Grayco Supplies1,2301,230

87. CASH PAYMENTS JOURNAL OtherAccounts Ck.PostAccounts PayableCash DateNo.Account DebitedRef.Dr.Dr.Cr PAGE 7 2006 Mar. 2150Rent Expense1,6001,600 15151Grayco Supplies1,2301,230 Accounts Payable Subsidiary Ledger Grayco Supplies Mar. 3Bal. 1,230 DateItemP.R. Dr.Cr.Balance 1,230 --- 15CP7 

88. CASH PAYMENTS JOURNAL OtherAccounts Ck.PostAccounts PayableCash DateNo.Account DebitedRef.Dr.Dr.Cr PAGE 7 2006 Mar. 2150Rent Expense1,6001,600 15151Grayco Supplies1,2301,230 21152Jewett Business Sys.2,8002,800  

89. CASH PAYMENTS JOURNAL OtherAccounts Ck.PostAccounts PayableCash DateNo.Account DebitedRef.Dr.Dr.Cr PAGE 7 2006 Mar. 2150Rent Expense1,6001,600 15151Grayco Supplies1,2301,230 21152Jewett Business Sys.2,8002,800 22153Donnelly Supplies.420420  

90. CASH PAYMENTS JOURNAL OtherAccounts Ck.PostAccounts PayableCash DateNo.Account DebitedRef.Dr.Dr.Cr PAGE 7 2006 Mar. 2150Rent Expense1,6001,600 15151Grayco Supplies1,2301,230 21152Jewett Business Sys.2,8002,800 22153Donnelly Supplies.420420 30154Utilities Expense1,0501,050   

91. CASH PAYMENTS JOURNAL OtherAccounts Ck.PostAccounts PayableCash DateNo.Account DebitedRef.Dr.Dr.Cr PAGE 7 2006 Mar. 2150Rent Expense1,6001,600 15151Grayco Supplies1,2301,230 21152Jewett Business Sys.2,8002,800 22153Donnelly Supplies.420420 30154Utilities Expense1,0501,050 31155Howard Supplies600600   

92. CASH PAYMENTS JOURNAL OtherAccounts Ck.PostAccounts PayableCash DateNo.Account DebitedRef.Dr.Dr.Cr PAGE 7 2006 Mar. 2150Rent Expense1,6001,600 15151Grayco Supplies1,2301,230 21152Jewett Business Sys.2,8002,800 22153Donnelly Supplies.420420 30154Utilities Expense1,0501,050 31155Howard Supplies600600 312,6505,0507,700    

93. CASH PAYMENTS JOURNAL OtherAccounts Ck.PostAccounts PayableCash DateNo.Account DebitedRef.Dr.Dr.Cr PAGE 7 2006 Mar. 2150Rent Expense1,6001,600 15151Grayco Supplies1,2301,230 21152Jewett Business Sys.2,8002,800 22153Donnelly Supplies.420420 30154Utilities Expense1,0501,050 31155Howard Supplies600600 312,6505,0507,700 (21)(11) 52 54     ( )  

94. Accounts Payable

95. Donnelly Supplies DateItemP.R. DebitCreditBalance Grayco Supplies DateItemP.R. DebitCreditBalance Howard Supplies DateItemP.R. DebitCreditBalance Mar 2P11420420 19P111,4501,870 22CP74201,450 Accounts Payable Subsidiary Ledger ACCOUNT Accounts Payable No. 12 GENERAL LEDGER DateItemP.R. DebitCreditBalance Mar. 1Bal1,230 31P116,2307,460 31CP75,0502,410 Mar 1Bal.1,230 15CP71,2300- -  Mar 3 P11600600 27P119601,560 31CP7600960

96. Advantages of a Computerized Accounting System Over a Manual Accounting System 1.Computerized systems simplify the record- keeping process. 2.Computerized systems are generally more accurate. 3.Computerized systems provide management current account balance information to support decision making.

97. The Revenue and Collection Cycle in QuickBooks From Exhibit 10, page 203 of textbook Mail invoice to customer

98. The Revenue and Collection Cycle in QuickBooks Continued From Exhibit 10, page 203 of textbook

99. The Revenue and Collection Cycle in QuickBooks Continued From Exhibit 10, page 203 of textbook

100. Supply chain management (SCM) Customer relationship management (CRM) Product life-cycle management (PLM)

102. End of Lecture 19