Accounting- Chapter 7: Accounting Information Systems

1. Control Principle

-Accounting systems MUST have INTERNAL CONTROLS

4. Flexibility Principle

-Accounting systems should be able to adjust to change in the company, business environment (competitive pressures, technological advances), and decision makers' needs.

3. Compatibility Principle

-Accounting systems should conform with a company's activities, personal, and structure (The more complex a company's business, the more complex its accounting system is likely to be.)

2. Relevance Principle

-Accounting systems should report useful, understandable, timely, and pertinent information. (When designing a system, think of decisions users will make using data the system generates)

Computerized Systems are usually more accurate, efficient, and convenient.

-But remember "garbage in, garbage out" --A system is only as good as the data entered into it and its design --Just because data is computerized does not mean it is 100% accurate

2. Input Devices

-Capture information from source documents and transfer it to the system's information processing component -Examples: Journal entry, keyboard, scanner, Modems, bar code reader -System should include controls to ensure that only authorized individuals input data

Accounting Information Systems' Tasks::

-Collect and process transaction data -Organize the date into useful reports -Communicate results to decision makers

*Characteristic: Amounts owed to creditors

-Controlling Account in General Ledger: Accounts Payable -Subsidiary Ledger: Accounts Payable Ledger

*Characteristic: Amounts due from customers

-Controlling Account in General Ledger: Accounts Receivable -Subsidiary Ledger: Accounts Receivable Ledger

^Cash Receipts Journal Columns

-Date -Account Credited -Explanation (included in Cash Receipts Journal to identify the source -PR -Cash Dr. -Sales Discount Dr. -Accounts Receivable Cr. -Sales Cr. -Other Accounts Cr. -Cost of Goods Sold Dr. Inventory Cr.

3. Information Processor

-Interpret, transform, and summarize information so it can be analyzed and reported. -Examples: hardware, software, professional judgement, web-based application service provider -The accountant still needs to exercise professional judgement in reviewing the system's output

4. Information Storage

-Keeps data accessible for: --preparing accounting reports --preparing reports to facilitate business decisions --outside auditors -Examples: CD/DVD, hard drive, tape, paper document, offline ("cloud') storage

(review) Components of Accounting System: 2. General Journal

-Like a "diary" -Records journal entries in chronological order -Each journal entry's total debits must = total credits

(review) Components of Accounting System: 1. Chart of Accounts

-List all accounts in the accounting system with its unique account number -Listed in the order in which they appear in the financial statements -Journal entries may be made only to accounts in the chart of accounts -A company may add accounts to its char of accounts as needed

Computer Technology in Acocunting

-Off-the-Shelf Software -Integrated Software

Data Processing in Accounting

-Online processing -Batch processing

^Proving the Ledgers

-Prepare a trial balance of the general ledger to confirm that debits equal credits -Test a subsidiary ledger by preparing a schedule of individual accounts and amounts

1. Source Documents

-Provide the basic information processed by an accounting system. -Example: Invoice, Cash Register File, Employee earnins (payroll) record -System should include controls to reduce possibility of entering incorrect data (Ex: require that each journal entry's total debits = its total credits)

Factors to Consider When Evaluating a Cloud Computing Provider:

-Provider's knowledge of the user's business -Security of the provider's cloud, including firewalls -Provider's history, reputation, and references -Service level agreement for hardware and software -Provider's cloud compatibility with user's system

*4. Cash Disbursements Journal

-Records all cash payments -Each transaction involves CREDIT to cash

*2. Cash Receipts Journal

-Records receipts of cash for ANY reason, such as --Cash from cash sales --Cash from credit customers paying their accounts --Cash from interest --Cash from selling non-inventory assets -Each transaction involves a DEBIT to Cash

*1. Sales Journal

-Records sales of inventory on credit ("on account") -By using a sales journal, avoid having to make the following journal entry over and over -DEBIT Accounts Receivable; CREDIT Sales -DEBIT Cost of Goods Sold; CREDIT Merchandise Inventory

*Benefits of using Subsidiary Ledgers

-Reduce number of accounts in/remove excess detail from the General Ledger -Provide up-to-date information on specific customers and suppliers -Help identify errors in specific customers' or suppliers' accounts -More efficiently divide accounting tasks

^*Posting for a Sales Journal to the General Ledger

-Sales Journal's account columns are totaled at the end of each period. -When totals are posted to accounts in the general ledger, the account numbers are entered below the column total in the Sales Journal for tracking -Accounts Receivable Dr. Sales Cr. total = x -Cost of Goods Sold Dr. Inventory Cr. total = y THEREFORE (in the general ledger) -Accounts Receivable = DEBIT x -Sales = CREDIT x -Cost of Goods Sold = DEBIT y -Inventory = CREDIT y

Components of Accounting Systems

-Source Documents -Input Devices -Information Processor -Information Storage -Output Devices

Benefits of Enterprise Resource Planning Software

-Speeds decision making -Identify costs that can be reduced -Improve managers' control over operations Examples: -Identify inventory that has piled up (or needs replenishing) -Monitor the status of orders

5. Output Devices

-Take information from system and make it available to others -Examples: printer, monitor, projector, web communications -Output: sales invoice, check, paycheck, financial statements, internal report

5. Cost-Benefit Principle

-The benefits of an accounting system's reports/activities should exceed the system's costs (The principle affects the other 4 accounting information system principles)

(review) Components of Accounting System: 3. General Ledger

-The primary ledger -Contains all balance sheet and income statement accounts along with balances -Listed in the order in which they appear in the financial statements

*Special Journal

-Used to record and post similar transactions -Improves efficiency because TOTALS are posted to the General Ledger --(instead of repetitively posting the same entry to the General Ledger)

Benefits of Cloud Computing

-User does not need to update applications (cloud provider handles that) --New software release --change in payroll tax withholding tables -Improve controls due to data centralization -Enhanced security (Concerns: Will sensitive data be hacked?)

*Posting Cash Disbursement Journal Transactions in Ledgers

-When a cash disbursement is recorded in the Cash Disbursements Journal for a payment to a creditor, it should be posted immediately to the individual creditor's account in the Accounts Payable Subsidiary Ledger. -At the end of the period, the column totals are posted to the General Ledger

*Posting Cash Receipts Journal Transactions in Ledgers

-When a cash receipt is recorded in the cash Receipts Journal for a customer paying his/her account, it should be posted immediatly to the individual customer's account in the ACCOUNTS RECEIVABLE SUBSIDIARY LEGDER -At the end of the periond, the column totals are posted to the General Ledger

*Posting Purchases Journal Transactions in Ledgers

-When a purchase is recorded in the Purchases Journal, it should be posted immediately to the individual creditor's account in the Accounts Payable Subsidiary Ledger -At the end of the period, the column totals are posted to the General Ledger

*Posting Sales Journal Transactions in Ledgers

-When a sale is recorded in the Sales Journal, it should be posted immediately to the individual customer's account in the Accounts Receivable Subsidiary Ledger -At the end of the period, the column totals are posted to the General Ledger

^Sales taxes

-When using a columnar sales journal, we can keep a record of taxes collected by adding a Sales Taxes Payable column (Sales Taxes Payable Cr.) (Accounts Receivable and Sales account separate) (continue as usual)

^Sales Returns and Allowances

-a company with only a few sales returns and allowances can record them in a general journal --Debit Sales Returns and Allowances --Credit Accounts Receivable- merch name

^*Journalizing in Sales Journal

-has columns for recording the date, customer's name, invoice number, posting reference, and the sales and cost amount of each credit sale Columns: -Date -Account Debited -Invoice Number -PR -Account Receivable Dr. Sales Cr. -Cost of Goods Sold Dr. Inventory Cr. -Each transaction recorded in the sales journal yields an entry for the: --Account Receivable Dr. Sales Cr. column --Cost of Goods Sold Dr. Inventory Cr.

*3. Purchases Journal

-records all credit purchase ("purchases on account") including Inventory -Each transaction involves a CREDIT to Accounts Payable

^*2 (most important) Subsidiary Ledgers:

1. Accounts Receivable Ledger 2. Accounts Payable Ledger

^Cash receipts can be separated into one of 3 types:

1. Cash from credit customers in payment of their accounts 2. Cash from cash sales 3. cash from other sources (each with individual column)

Fundamental System Principles:

1. Control Principles 2. Relevance Principles 3. Compatibility Principles 4. Flexibility Principles 5. Cost-Benefit Principles

^3 additional issue with the Sales Journal

1. Recording Sales Taxes 2. Recording Sales Returns and allowances 3,. Using actual sales invoices as a journal

^Subsidiary ledgers can be used for accounts that need separate detailed accounts. 4 Benefits:

1. Removal of excessive details, and detailed accounts, from the general ledger. 2. Up-to-date information readily available on specific customers and suppliers 3. Aid in error identification for specific accounts 4. Potential efficiencies in record keeping through division of labor in posting.

*Special Journals::

1. Sales Journal 2. Cash Receipts Journal 3. Purchases Journal 4. Cash Disbursements Journal 5. General Journal

^*5 Special Journals:

1. Sales Journal 2. Cash Receipts Journal 3. Purchases Journal 4. Cash Disbursements Journal 5. General Journal

Government agencies usually require sellers to collect SALES TAX from customers and to periodically send these taxes to the appropriate agency

A column for SALES TAXES PAYABLE may be included in the SALES JOURNAL

A company with FEW sales returns may choose to record them directly in the General Journal (debit sales returns and allowances; credit accounts receivable)

A company with MANY sales returns may choose to use a Sales Returns and Allowances Journal

Integrated Software

Actions taken in one part of the system automatically affect related parts. For instance, when a credit sale is entered, several parts of the system are automatically updated

*5. General Journal Transactions (if special journals are used, General Journal would be used for)

Adjusting Entries -Sales of Non-Inventory Assets -Purchase Plant Asset with Note Payable Closing Entries -Purchase Returns and Allowances -Sales Returns and Allowances

^*Note: PR column

Check marks are entered in the sales journal's PR column when sales recorded in the sales journal are individually posted to customer accounts in the accounts receviable ledger. -Check marks are used rather than account numbers because customers accounts usually are arranged alphabetically in the accounts receivable lerger

*After all transactions are posted, the subsidiary ledger's total should agree to the balance of its Controlling Account in the General Ledger

Customers' accounts are often SORTED alphabetically

off-the-Shelf-Software

Familiar accounting programs such as Peachtree and QuickBooks are designed to be used friendly and menu driven

^*Posting for a Sales Journal to the Subsidiary Ledger

Individual transactions in the sales journal are posted regularly to customer accounts in the Accounts Receivable Ledger (a debit)

*Situation: Accountant can easily find the total accounts receivable balance in the General Ledger but also wants to know how much each customer owers

Solution: Create an Accounts Receivable Subsidy Ledger

^5 basic Components of Accounting Systems

Source Documents Input Devices Information Processors Information storage Output devices

^* Subsidiary Ledger

a list of individual accounts with a common characteristic -contains detailed information on specific accounts in the general ledger -Individual accounts in subsidiary ledgers are often arranged alphabetically

*Subsidiary Ledger

a listing of individual accounts with a common characterisic

Batch Processing

accumulates information for a period of time and the processes all the data at one time (daily, weekly, or monthly)

^to FOOT a column of numbers is to

add it

^to CROSSFOOT is to

add the DEBIT column totals, then add the CREDIT column totals, and compare the 2 sums equality

^*Columnar Journal

any journal with more than one column

Computer Networks

are links amount computers giving different users access to common databases and programs

^Output Devices

are the means to take information out of an accounting system and make it available to users

^Input Devices

capture information from source documents and enable its transfer to the system's information processing component

^Accounting Information Systems

collect and process data from transactions and events, organize them in useful reports, and communicate results to decision makers

^The account numbers for the column totals that are posted are

entered in parenthesis below each column

Online Processing

enters and processes data immediately

^We place an x below the Other Accounts Cr. column to

indicate that this column total is not posted

^*General Journal

is an all-purpose journal in which we can record any transaction (usually more costly, and less effective control process; thus, to enhance internal control and reduce costs, transactions are organized into common groups)

^Information Storage

is the accounting system component that keeps data in a form accessible to information processors

Cloud Computing

is the delivery of computing as a service rather than a product (uses applications via the Web instead of installing them on one's own computer)

*Schedule of Accounts Receivable

lists each customer and the balance owed

^Schedule of Accounts Recceivable

lists each customer and the balance owed. (if this total = the balance of Accounts Receivable Controlling Account, the accounts in the accounts receivable ledger are assumed correct

*Schedule of Accounts Payable

lists each supplier and the balance owed to it

These 5 components described here apply whether a system is _______ or __________

manual or compuerized

^Internal Controls

methods and procedures allowing managers to control and monitor business activities.

^Accounting Information systems consist of

people, record,s methods, and equipment

^Compatibility Principle

prescribes that an accounting information system conform with a company's activities, personnel, and structure (must adapt to a company's unique characteristics)

^Control Principle

prescribes that an accounting information system have internal controls

^Relevance Principle

prescribes that an accounting information system report useful, understandable, timely, and pertinent information for effective decision making.

^Flexibility Principle

prescribes that an accounting information systems be able to adapt to changes in the company, business environment, and needs of decision makers.

^Cost-Benefit Principle

prescribes that the benefits from an activity in an accounting information system outweigh the costs of that activity. (affects the other 4 principles)

Enterprise Resource Planning Software (ERP)

programs that manage and integrate a company's vital operations -Links EVERY aspect of a company's operations --one transaction triggers an immediate chain reaction of events through the business

^Source Documents

provide the basic information processed by an accounting system Examples: bank statements, checks, incoices from suppliers,

^*Accounts Receivable Ledger ("Accounts Receivable Subsidiary Ledger" "Customers Ledger")

stores transaction data of individual CUSTOMERS -shows records for each credit customer, paid and yet to pay, and is collectively part of the regular Accounts Receivable (controlling) Account

^*Accounts Payable Ledger ("Accounts Payable Subsidiary Ledger" "Creditors Ledger"

stores transaction data of individual SUPPLIERS -used by companies that must keep a separate account for each supplier. Collectively the Accounts Payable (controlling) account

^Information Processors

systems that interpret, transform, and summarize information for use in analysis and reporting.

^*Control Account

the Accounts Receivable account which is said to control the sum of ALL balances Controlling Account balance = Sum of subsidiary account balance (refers to any general ledger account that summarizes subsidiary ledger data)

*After all items are posted, the balance in the Accounts Receivable Controlling Account is EQUAL TO

the sum of the balance in the Accounts Receivable Subsidiary Ledger

^After crossfooting the journal to confirm that debits equal credits,

the total amounts from the columns of the cash receipts journal are posted to their general ledger accounts (the Other Accounts Cr. column total is not posted because the individual amounts are directly posted to their general ledger accounts)

^Sales Invoices as a Sales Journal

to save costs, some small companies avoid using a sales journal for credit sales and instead post each sales invoice amount directly to the customer's account in the accounts receivable ledger. -at end of period; total all invoices and make a general journal entry to Debit Accounts Receivables and Credit Sales (invoice copies act as a sales journal) ("Direct posting of Sales Invoices)

^*3. Purchases Journal

used to record all credit purchases (including those for inventory) (Purchases for cash are recorded in the cash disbursements journal)

^*2. Cash Receipts Journal

used to record all receipts of cash (all that include a debit of cash)

^*Special Journal

used to record and post transactions of similar type -efficient tools in helping journalize and post transactions -allows posting of amounts as column totals rather than individual amounts -efficient division of labor -are designed in a manner that is best suited for each business

^*1. Sales Journal

used to record sales of inventory ON CREDIT -sales of inventory for cash not recorded; instead in cash receipts journal -Sales of noninventory assets on credit recorded in general journal

^To be sure that total debits and credits in a columnar journal are equal

we often Crossfoot column totals before posting them