ACCOUNTING INFORMATION SYSTEMS

1. ACCOUNTING INFORMATION SYSTEMS Chapter 7 Chapter 7: Accounting Information SystemChapter 7: Accounting Information System

2. Fundamental System Principles Accounting information systems collect and process data from transactions and events, organize them in useful reports, and communicate results to decisions makers. In an accounting system, the fundamental principles that must be included in any system are: control, relevance, compatibility, flexibility, and cost-benefit. Internal controls are an integral part of an accounting system to help management monitor the business. We also hope that an accounting system provides information that is relevant, timely and pertinent. The accounting system should also be compatible with the aims of the company. Flexibility in an accounting system is important to be able to meet the changing needs of the company. But as with most things, the benefits of the accounting system should outweigh the costs incurred. Accounting information systems collect and process data from transactions and events, organize them in useful reports, and communicate results to decisions makers. In an accounting system, the fundamental principles that must be included in any system are: control, relevance, compatibility, flexibility, and cost-benefit. Internal controls are an integral part of an accounting system to help management monitor the business. We also hope that an accounting system provides information that is relevant, timely and pertinent. The accounting system should also be compatible with the aims of the company. Flexibility in an accounting system is important to be able to meet the changing needs of the company. But as with most things, the benefits of the accounting system should outweigh the costs incurred.

3. Components of Accounting Systems In an accounting system, the source documents provide the support for recording and processing transactions in the system. Source documents can be on paper or in electronic form. In an accounting system, the source documents provide the support for recording and processing transactions in the system. Source documents can be on paper or in electronic form.

4. Components of Accounting Systems Output devices are the means to take information out of an accounting system and make it available to users. Common output devices are printers, monitors, LCD projectors, and Web communications. Output devices are the means to take information out of an accounting system and make it available to users. Common output devices are printers, monitors, LCD projectors, and Web communications.

5. Special Journals in Accounting Special journals provide a place to record transactions of a similar nature. The Sales Journal is used to record credit sales. The Cash Receipts Journal is used to record cash receipts. The Purchases Journal is used to record credit purchases. The Cash Disbursements Journal is used to record cash payments. The General Journal is used for transactions not included in any of the special journals. So far in this class, we have been using a General Journal for all entries. Special journals provide a place to record transactions of a similar nature. The Sales Journal is used to record credit sales. The Cash Receipts Journal is used to record cash receipts. The Purchases Journal is used to record credit purchases. The Cash Disbursements Journal is used to record cash payments. The General Journal is used for transactions not included in any of the special journals.

6. Subsidiary Ledgers A subsidiary ledger is a list of individual accounts with a common characteristic. A subsidiary ledger contains detailed information on specific accounts in the general ledger. Two of the most important subsidiary ledgers are the accounts receivable ledger, which stores transaction data of individual customers, and the accounts payable ledger, which stores transaction data of individual suppliers. To answer these specific questions, we must use the subsidiary ledgers. A subsidiary ledger keeps track of the transactions related to a specific vendor or customer. Let�s look at an example.A subsidiary ledger is a list of individual accounts with a common characteristic. A subsidiary ledger contains detailed information on specific accounts in the general ledger. Two of the most important subsidiary ledgers are the accounts receivable ledger, which stores transaction data of individual customers, and the accounts payable ledger, which stores transaction data of individual suppliers. To answer these specific questions, we must use the subsidiary ledgers. A subsidiary ledger keeps track of the transactions related to a specific vendor or customer. Let�s look at an example.

7. Accounts Receivable Ledger In the General Ledger, the control account for Accounts Receivable indicates that customers owe us $1,915. But, it does not tell us how much Cook Company owes us. To find that, we must look at the Accounts Receivable Subsidiary Ledger for Cook Company. Looking there, we see that Cook Company owes us $415. By looking in the subsidiary ledgers, we can find the detail for each specific customer. The total of the balances in all the subsidiary accounts should total to the balance in the control account.In the General Ledger, the control account for Accounts Receivable indicates that customers owe us $1,915. But, it does not tell us how much Cook Company owes us. To find that, we must look at the Accounts Receivable Subsidiary Ledger for Cook Company. Looking there, we see that Cook Company owes us $415. By looking in the subsidiary ledgers, we can find the detail for each specific customer. The total of the balances in all the subsidiary accounts should total to the balance in the control account.

8. Accounts Payable Ledger The accounts payable ledger works exactly like the accounts receivable ledger but deals with suppliers rather than customers.The accounts payable ledger works exactly like the accounts receivable ledger but deals with suppliers rather than customers.

9. Sales Journal We have the sale to Jason Henry recorded in the Sales Journal. Accounts receivable will be recorded for $450 in the Accounts Receivable subsidiary ledger. We use a check in the Sales Journal to indicate the posting to the Accounts Receivable subsidiary ledger. In the Account Receivable subsidiary ledger we enter the page number from the Sales Journal to indicate the proper posting.We have the sale to Jason Henry recorded in the Sales Journal. Accounts receivable will be recorded for $450 in the Accounts Receivable subsidiary ledger. We use a check in the Sales Journal to indicate the posting to the Accounts Receivable subsidiary ledger. In the Account Receivable subsidiary ledger we enter the page number from the Sales Journal to indicate the proper posting.

10. Sales Journal At the end of the month all the individual sales have been recorded in the Accounts Receivable subsidiary ledger and it is time to post the column totals. The total of credit sales of $1200 is posted to the Accounts Receivable control account, account number 106 and also to the Sales account number 413.At the end of the month all the individual sales have been recorded in the Accounts Receivable subsidiary ledger and it is time to post the column totals. The total of credit sales of $1200 is posted to the Accounts Receivable control account, account number 106 and also to the Sales account number 413.

11. Proving the Ledgers At the end of the accounting period, the total of the balances in the subsidiary ledgers should equal the balance in the control account. At the end of the accounting period, the total of the balances in the subsidiary ledgers should equal the balance in the control account.

12. Sales Returns and Allowances A company with few sales returns and allowances may choose to record them in the General Journal. As you can see, the return would need to be posted to the accounts receivable subsidiary ledger and to the Accounts Receivable control account. In addition the amounts would also need to be posted to the appropriate general ledger accounts. A company with few sales returns and allowances may choose to record them in the General Journal. As you can see, the return would need to be posted to the accounts receivable subsidiary ledger and to the Accounts Receivable control account. In addition the amounts would also need to be posted to the appropriate general ledger accounts.

13. Cash Receipts Journal The first transaction on February 7th records a cash sale. The amounts are entered in the Cash and the Sales columns. These columns will be posted in total at a later date. The double red check marks in the posting reference column indicate that the transaction is not posted to any individual accounts. The second transaction on February 16th records a customer payment on account within the discount period. Again, the amounts are entered in columns that will be posted at a later date. The blue check mark in the posting reference column indicates that, on February 16th, the customer�s payment is posted to Jason Henry�s subsidiary accounts receivable account. The third transaction on May 31st first records interest received from the bank. The amounts are entered in the Cash and the Other Accounts columns. The Cash column will be posted at a later date. The account number 409 in the posting reference column indicates that the transaction was posted to Interest Revenue. The column totals for Cash, Sales Discounts, Accounts Receivable, and Sales are posted at one time. After posting, the appropriate account number is placed under the column total. The first transaction on February 7th records a cash sale. The amounts are entered in the Cash and the Sales columns. These columns will be posted in total at a later date. The double red check marks in the posting reference column indicate that the transaction is not posted to any individual accounts. The second transaction on February 16th records a customer payment on account within the discount period. Again, the amounts are entered in columns that will be posted at a later date. The blue check mark in the posting reference column indicates that, on February 16th, the customer�s payment is posted to Jason Henry�s subsidiary accounts receivable account. The third transaction on May 31st first records interest received from the bank. The amounts are entered in the Cash and the Other Accounts columns. The Cash column will be posted at a later date. The account number 409 in the posting reference column indicates that the transaction was posted to Interest Revenue. The column totals for Cash, Sales Discounts, Accounts Receivable, and Sales are posted at one time. After posting, the appropriate account number is placed under the column total.

14. Footing, Crossfooting, and Posting To be sure that total debits and credits in the columnar journal are equal, we often crossfoot column totals before posting them. To foot a column of numbers is to add it. To crossfoot in this case is to add the Debit column totals, then add the Credit column totals, and compare the two sums for equality.To be sure that total debits and credits in the columnar journal are equal, we often crossfoot column totals before posting them. To foot a column of numbers is to add it. To crossfoot in this case is to add the Debit column totals, then add the Credit column totals, and compare the two sums for equality.

15. Purchases Journal The first transaction on February 3rd records a purchase of inventory on credit. The amounts are entered in the Accounts Payable and the Inventory columns. These columns will be posted in total at a later date. The blue check mark in the posting reference column indicates that, on February 3rd , the purchase is posted to Ace Manufacturing Company�s Accounts Payable subsidiary ledger. The second transaction on February 18th records the purchase of office supplies and inventory on account. The amounts entered in the Accounts Payable and the Office Supplies columns will be posted at a later date. The blue check mark in the posting reference column indicates that, on February 18th, the purchase is posted to Homing Supply�s subsidiary accounts payable account. The third transaction on February 28th records the purchase of inventory on credit. The amounts are entered in the Accounts Payable and Inventory columns. These columns will be posted in total at a later date. The blue check mark in the posting reference column indicates that, on February 28th, the purchase is posted to Smith Company�s subsidiary accounts payable account. The column totals for Accounts Payable, Inventory, and Office Supplies are posted at one time. After posting, the appropriate account number is placed under the column total. The first transaction on February 3rd records a purchase of inventory on credit. The amounts are entered in the Accounts Payable and the Inventory columns. These columns will be posted in total at a later date. The blue check mark in the posting reference column indicates that, on February 3rd , the purchase is posted to Ace Manufacturing Company�s Accounts Payable subsidiary ledger. The second transaction on February 18th records the purchase of office supplies and inventory on account. The amounts entered in the Accounts Payable and the Office Supplies columns will be posted at a later date. The blue check mark in the posting reference column indicates that, on February 18th, the purchase is posted to Homing Supply�s subsidiary accounts payable account. The third transaction on February 28th records the purchase of inventory on credit. The amounts are entered in the Accounts Payable and Inventory columns. These columns will be posted in total at a later date. The blue check mark in the posting reference column indicates that, on February 28th, the purchase is posted to Smith Company�s subsidiary accounts payable account. The column totals for Accounts Payable, Inventory, and Office Supplies are posted at one time. After posting, the appropriate account number is placed under the column total.

16. Cash Disbursements Journal The first transaction on February 2nd records a payment on account within the discount period. The amounts are entered in the Cash, Inventory, and Accounts Payable columns. These columns will be posted in total at a later date. The blue check mark in the posting reference column indicates that, on February 2nd, the payment is posted to Ace Mfg. Company�s subsidiary accounts payable account. The second transaction on February 15th records the payment of salary to Jerry Hale. The amount entered in the Cash column will be posted at a later date. The amount entered in the Other Accounts column is posted to account number 622. The 3rd transaction on February 28th records a payment on account within the discount period. The amounts are entered in the Cash, Inventory, and Accounts Payable columns. These columns will be posted in total at a later date. The blue check mark in the posting reference column indicates that, on February 28th, the payment is posted to Smith Company�s subsidiary accounts payable account. The column totals for Cash, Purchase Discounts, and Accounts Payable are posted at one time. After posting, the appropriate account number is placed under the column total. The first transaction on February 2nd records a payment on account within the discount period. The amounts are entered in the Cash, Inventory, and Accounts Payable columns. These columns will be posted in total at a later date. The blue check mark in the posting reference column indicates that, on February 2nd, the payment is posted to Ace Mfg. Company�s subsidiary accounts payable account. The second transaction on February 15th records the payment of salary to Jerry Hale. The amount entered in the Cash column will be posted at a later date. The amount entered in the Other Accounts column is posted to account number 622. The 3rd transaction on February 28th records a payment on account within the discount period. The amounts are entered in the Cash, Inventory, and Accounts Payable columns. These columns will be posted in total at a later date. The blue check mark in the posting reference column indicates that, on February 28th, the payment is posted to Smith Company�s subsidiary accounts payable account. The column totals for Cash, Purchase Discounts, and Accounts Payable are posted at one time. After posting, the appropriate account number is placed under the column total.

17. Segment Return on Assets The Segment Return on Assets ratio reflects the profitability of the segment. It is calculated as segment operating income divided by segment average assets. The Segment Return on Assets ratio reflects the profitability of the segment. It is calculated as segment operating income divided by segment average assets.

18. END OF CHAPTER 7 End of Chapter 7.End of Chapter 7.