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Chapter 5 Accounting Systems and Internal Controls

Chapter 5 Accounting Systems and Internal Controls. 1. Basic Accounting Systems 2. Internal Control Manual Accounting Systems The revenue and collection cycle The purchase and payment cycle Adapting Manual Accounting Systems. Learning Objectives. Basic accounting system.

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Chapter 5 Accounting Systems and Internal Controls

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  1. Chapter 5 Accounting Systems and Internal Controls 1. Basic Accounting Systems 2. Internal Control • Manual Accounting Systems • The revenue and collection cycle • The purchase and payment cycle • Adapting Manual Accounting Systems Learning Objectives

  2. Basic accounting system A accounting system covers three-step process: • Analysis • Design • Implement

  3. Basic accounting system A accounting system covers three-step process: • Analysis • To identify who use the accounting information • To determine how to provide the accounting information • Design • Implement

  4. Basic accounting system A accounting system covers three-step process: • Analysis • Design • A chart of accounts • Journal • Ledger • Financial statements • Implement

  5. Basic accounting system A accounting system covers three-step process: • Analysis • Design • Implement • Recording and reporting Feedback P.181 the accounting system

  6. The concept of internal control Internal controls are the policies and procedures that protect assets form misuse, ensure that business information is accurate, and ensure that laws and regulation are being followed

  7. The concept of internal control • Businesses use internal controls to guide their operations and prevent abuses of their systems. • What the manage should do in a business control? • “Control are a part of your everyday life” • To give an example in your life.

  8. The objectives of internal control • Asset are safeguarded and used for business purposes. • Business information is accurate. • Employees comply with laws and regulations

  9. The elements of internal control • The control environment • Risk assessment • Control procedures • Monitoring • Information and communication

  10. The elements of internal control • The control environment • Management philosophy • Operating style • Organizational structure • Personnel policies

  11. The elements of internal control 2. Risk assessment • Changes in customer requirements • Competitors • Regulatory changes • Interest changes

  12. The elements of internal control • Control procedures • Competent personnel, rotating duties, and mandatory vacations • A case on p. 183 • Separating responsibilities for related operations • Separating operations, custody of assets, and accounting • Proofs and security measures • Cash receipts • Case on page 185

  13. The elements of internal control • Monitoring • Internal control • External control • Exhibit 3 indicators of internal control problems

  14. The elements of internal control • Information and communication • Communicate with internals and externals • Case on page 186

  15. Business on stage Accounting systems and profit measurement Questions: What we have learned from the case study?

  16. Manual accounting systems • General ledgers (AT & T) • Accounts receivable • Accounts payable • Subsidiary ledgers • General journals • Two-column journal • Special journals • Two column or multicolumn journal • Revenue; cash receipts; purchase; cash payments

  17. Cash General Ledger and Subsidiary Ledgers General Ledger Accts. Receivable Supplies Accts. Payable

  18. Accounts Receivable Subsidiary Ledger Cash Customer Accounts Accts. Receivable A B C D General Ledger and Subsidiary Ledgers General Ledger Supplies Accts. Payable

  19. Accounts Receivable Subsidiary Ledger Cash Customer Accounts Accts. Receivable A B C D Accounts Payable Subsidiary Ledger Creditor Accounts A B C D General Ledger and Subsidiary Ledgers General Ledger Supplies Accts. Payable

  20. Special Journals SELLING BUYING

  21. recorded in Special Journals SELLING Rendering of services on account Revenue Journal BUYING

  22. recorded in recorded in Special Journals SELLING Rendering of services on account Revenue Journal Receipt of cash from any source Cash Receipts Journal BUYING

  23. recorded in recorded in recorded in Special Journals SELLING Rendering of services on account Revenue Journal Receipt of cash from any source Cash Receipts Journal BUYING Purchase of items on account Purchases Journal

  24. recorded in recorded in recorded in recorded in Special Journals SELLING Rendering of services on account Revenue Journal Receipt of cash from any source Cash Receipts Journal BUYING Purchase of items on account Purchases Journal Payment of cash for any purpose Cash Payments Journal

  25. p. 190 Review a general journal Two-column formats

  26. p. 190 The Revenue Journal Page 35 Revenue Journal Invoice Post Accts. Rec. – Debit Date No. Account Debited Ref. Fees Earned – Credit 3/2 615 MyMusicClub.com 2,200 3/6 616 RapZone.com 1,750 3/18 617 Web Cantina 2,650 3/27 618 MyMusicClub.com 3,000 Totals 9,600 All sales on account are recorded in this journal. Each sales invoice is listed in numerical order. This journal is often referred to as an invoice register.

  27. Posting to the Subsidiary Ledger Page 35 Revenue Journal Invoice Post Accts. Rec. – Debit Date No. Account Debited Ref. Fees Earned – Credit 3/2 615 MyMusicClub.com 2,200 3/6 616 RapZone.com 1,750 3/18 617 Web Cantina 2,650 3/27 618 MyMusicClub.com 3,000 Totals 9,600 Each debit is posted to the accounts receivable subsidiary ledger. Accounts Receivable Subsidiary Ledger MyMusicClub.com Date Item P.R. Debit Credit Balance

  28. Posting to the Subsidiary Ledger Page 35 Revenue Journal Invoice Post Accts. Rec. – Debit Date No. Account Debited Ref. Fees Earned – Credit 3/2 615 MyMusicClub.com 2,200 3/6 616 RapZone.com 1,750 3/18 617 Web Cantina 2,650 3/27 618 MyMusicClub.com 3,000 Totals 9,600 Each debit is posted to the accounts receivable subsidiary ledger. Accounts Receivable Subsidiary Ledger MyMusicClub.com Date Item P.R. Debit Credit Balance 3/2 R35 2,200 2,200

  29. Posting to the Subsidiary Ledger Page 35 Revenue Journal Invoice Post Accts. Rec. – Debit Date No. Account Debited Ref. Fees Earned – Credit 3/2 615 MyMusicClub.com 2,200 3/6 616 RapZone.com 1,750 3/18 617 Web Cantina 2,650 3/27 618 MyMusicClub.com 3,000 Totals 9,600     Each debit is posted to the accounts receivable subsidiary ledger. Accounts Receivable Subsidiary Ledger MyMusicClub.com Date Item P.R. Debit Credit Balance 3/1 R35 2,200 2,200 3/27 R35 3,000 5,200

  30. Posting to the General Ledger Page 35 Revenue Journal Invoice Post Accts. Rec. – Debit Date No. Account Debited Ref. Fees Earned – Credit 3/2 615 MyMusicClub.com 2,200 3/6 616 RapZone.com 1,750 3/18 617 Web Cantina 2,650 3/27 618 MyMusicClub.com 3,000 Totals 9,600     The total is posted to Accounts Receivable AND to Fees Earned. General Ledger Account: Accounts Receivable No. 12 Date Item P.R. Debit Credit Balance  3/1 Bal 3,400

  31. Posting to the General Ledger Page 35 Revenue Journal Invoice Post Accts. Rec. – Debit Date No. Account Debited Ref. Fees Earned – Credit 3/2 615 MyMusicClub.com 2,200 3/6 616 RapZone.com 1,750 3/18 617 Web Cantina 2,650 3/27 618 MyMusicClub.com 3,000 Totals 9,600 (12) (41)     The total is posted to Accounts Receivable AND to Fees Earned. General Ledger Account: Accounts Receivable No. 12 Date Item P.R. Debit Credit Balance  3/1 Bal 3,400 3/31 R35 9,600 13,000

  32. Cash Receipts Journal Page 14 Other Accounts Post Accounts Receivable Cash Date Account Credited Ref. Credit Credit Debit 3/1 Rent Revenue 400 400 3/19 Web Cantina 3,400 3,400 3/28 MyMusicClub.com 2,200 2,200 3/30 RapZone.com 1,750 1,750 Totals 400 7,350 7,750 p. 193 The Cash Receipts Journal All cash received from any source is recorded in this journal. The total Cash Debit column equals the total of the two credit columns.

  33. Posting to the Subsidiary Ledger Cash Receipts Journal Page 14 Other Accounts Post Accounts Receivable Cash Date Account Credited Ref. Credit Credit Debit 3/1 Rent Revenue 400 400 3/19 Web Cantina 3,400 3,400 3/28 MyMusicClub.com 2,200 2,200 3/30 RapZone.com 1,750 1,750 Totals 400 7,350 7,750 Each Accounts Receivable credit is posted to the accounts receivable subsidiary ledger. Accounts Receivable Subsidiary Ledger Web Cantina Date Item P.R. Debit Credit Balance  3/1 Bal 3,400 3/27 R35 2,650 6,050

  34. Posting to the Subsidiary Ledger Cash Receipts Journal Page 14 Other Accounts Post Accounts Receivable Cash Date Account Credited Ref. Credit Credit Debit 3/1 Rent Revenue 400 400 3/19 Web Cantina 3,400 3,400 3/28 MyMusicClub.com 2,200 2,200 3/30 RapZone.com 1,750 1,750 Totals 400 7,350 7,750  Each Accounts Receivable credit is posted to the accounts receivable subsidiary ledger. Accounts Receivable Subsidiary Ledger Web Cantina Date Item P.R. Debit Credit Balance  3/1 Bal 3,400 3/18 R35 2,650 6,050 3/19 CR14 3,400 2,650

  35. Posting to the General Ledger Cash Receipts Journal Page 14 Other Accounts Post Accounts Receivable Cash Date Account Credited Ref. Credit Credit Debit 3/1 Rent Revenue 400 400 3/19 Web Cantina 3,400 3,400 3/28 MyMusicClub.com 2,200 2,200 3/30 RapZone.com 1,750 1,750 Totals 400 7,3507,750 ( )     General Ledger The three highlighted items are posted to the general ledger. Account: Accounts Receivable No. 12 Date Item P.R. Debit Credit Balance  3/1 Bal 3,400 3/31 R35 9,600 13,000

  36. Posting to the General Ledger Cash Receipts Journal Page 14 Other Accounts Post Accounts Receivable Cash Date Account Credited Ref. Credit Credit Debit 3/1 Rent Revenue 42 400 400 3/19 Web Cantina 3,400 3,400 3/28 MyMusicClub.com 2,200 2,200 3/30 RapZone.com 1,750 1,750 Totals 400 7,3507,750 ( ) (12) (11)     General Ledger The three highlighted items are posted to the general ledger. Account: Accounts Receivable No. 12 Date Item P.R. Debit Credit Balance  3/1 Bal 3,400 3/31 R35 9,600 13,000 3/31 CR14 7,350 5,650

  37. p. 193 Account: Accounts Receivable No. 12 General Ledger Accounts Receivable Control Account Date Item P.R. Debit Credit Balance  3/1 Bal. 3,400 3/31 R35 9,600 13,000 3/31 CR14 7,350 5,650 If the accounts receivable account in the general ledger only shows summary totals, where are the individual customer balances?

  38. p. 193 Account: Accounts Receivable No. 12 General Ledger Accounts Receivable Control Account Date Item P.R. Debit Credit Balance  3/1 Bal. 3,400 3/31 R35 9,600 13,000 3/31 CR14 7,350 5,650 MyMusicClub.com Date Item P.R. Debit Credit Balance 3/2 R35 2,200 2,200 3/27 R35 3,000 5,200 3/28 CR14 2,200 3,000 Accounts Receivable Subsidiary Ledger RapZone.com Date Item P.R. Debit Credit Balance 3/6 R35 1,750 1,750 3/30 CR14 1,750 0 Web Cantina Date Item P.R. Debit Credit Balance 3/1 Bal. 3,400 3/18 R35 2,650 6,050 3/19 CR14 3,400 2,650 

  39. Account: Accounts Receivable No. 12 General Ledger Accounts Receivable Control Account Date Item P.R. Debit Credit Balance  3/1 Bal. 3,400 3/31 R35 9,600 13,000 3/31 CR14 7,350 5,650 MyMusicClub.com Date Item P.R. Debit Credit Balance 3/2 R35 2,200 2,200 3/27 R35 3,000 5,200 3/28 CR14 2,200 3,000 Accounts Receivable Subsidiary Ledger RapZone.com Date Item P.R. Debit Credit Balance 3/6 R35 1,750 1,750 3/30 CR14 1,750 0 Web Cantina Date Item P.R. Debit Credit Balance 3/1 Bal. 3,400 3/18 R35 2,650 6,050 3/19 CR14 3,400 2,650 

  40. p. 194 The Purchases Journal Purchases Journal Page 11 Accts. Other Post Payable Supplies Accounts Post Date Account Credited Ref. Credit Debit Debit Ref. Amount 3/3 Howard Supplies 600 600 3/7 Donnelly Supplies 420 420 3/12 Jewett Bus. Syst. 2,800 Office Equip. 2,800 3/19 Donnelly Supplies 1,450 1,450 3/27 Howard Supplies 960 960 Totals 6,230 3,430 2,800 All purchases on account are recorded in this journal. The total credits to Accounts Payable equals the total of the two debit columns.

  41. Posting to the Subsidiary Ledger Purchases Journal Page 11 Accts. Other Post Payable Supplies Accounts Post Date Account Credited Ref. Credit Debit Debit Ref. Amount 3/3 Howard Supplies 600 600 3/7 Donnelly Supplies 420 420 3/12 Jewett Bus. Syst. 2,800 Office Equip. 2,800 3/19 Donnelly Supplies 1,450 1,450 3/27 Howard Supplies 960 960 Totals 6,230 3,430 2,800 Accounts Payable Subsidiary Ledger Each credit is posted to the accounts payable subsidiary ledger. Howard Supplies Date Item P.R. Debit Credit Balance

  42. Posting to the Subsidiary Ledger Purchases Journal Page 11 Accts. Other Post Payable Supplies Accounts Post Date Account Credited Ref. Credit Debit Debit Ref. Amount 3/3 Howard Supplies 600 600 3/7 Donnelly Supplies 420 420 3/12 Jewett Bus. Syst. 2,800 Office Equip. 2,800 3/19 Donnelly Supplies 1,450 1,450 3/27 Howard Supplies 960 960 Totals 6,230 3,430 2,800 Accounts Payable Subsidiary Ledger Each credit is posted to the accounts payable subsidiary ledger. Howard Supplies Date Item P.R. Debit Credit Balance 3/3 P11 600 600

  43. Posting to the Subsidiary Ledger Purchases Journal Page 11 Accts. Other Post Payable Supplies Accounts Post Date Account Credited Ref. Credit Debit Debit Ref. Amount  3/3 Howard Supplies 600 600 3/7 Donnelly Supplies 420 420 3/12 Jewett Bus. Syst. 2,800 Office Equip. 2,800 3/19 Donnelly Supp. 1,450 1,450 3/27 Howard Supplies 960 960 Totals 6,230 3,430 2,800     Accounts Payable Subsidiary Ledger Each credit is posted to the accounts payable subsidiary ledger. Howard Supplies Date Item P.R. Debit Credit Balance 3/3 P11 600 600 3/27 P11 960 1,560

  44. Posting to the General Ledger Purchases Journal Page 11 Accts. Other Post Payable Supplies Accounts Post Date Account Credited Ref. Credit Debit Debit Ref. Amount 3/3 Howard Supplies 600 600 3/7 Donnelly Supplies 420 420 3/12 Jewett Bus. Syst. 2,800 Office Equip. 2,800 3/19 Donnelly Supp. 1,450 1,450 3/27 Howard Supplies 960 960 Totals 6,2303,430 2,800       General Ledger Date Item P.R. Debit Credit Balance The highlighted items are posted to the general ledger. Account: Accounts Payable No. 21 Date Item P.R. Debit Credit Balance  3/1 Bal. 1,230

  45. Posting to the General Ledger Purchases Journal Page 11 Accts. Other Post Payable Supplies Accounts Post Date Account Credited Ref. Credit Debit Debit Ref. Amount  3/3 Howard Supplies 600 600 3/7 Donnelly Supplies 420 420 3/12 Jewett Bus. Syst. 2,800 Office Equip. 18 2,800 3/19 Donnelly Supp. 1,450 1,450 3/27 Howard Supplies 960 960 Totals 6,2303,430 2,800 ( 21) (14) ( )      General Ledger Date Item P.R. Debit Credit Balance The highlighted items are posted to the general ledger. Account: Accounts Payable No. 21 Date Item P.R. Debit Credit Balance  3/1 Bal. 1,230 3/31 P11 6,230 7,460

  46. p.196 The Cash Payments Journal Cash Payments Journal Page 7 Other Accounts Ck. Post Accounts Payable Cash Date No. Account Debited Ref. Debit Debit Credit 3/2 150 Rent Expense 1,600 1,600 3/15 151 Grayco Supplies 1,230 1,230 3/21 152 Jewett Bus. Syst. 2,800 2,800 3/22 153 Donnelly Supp. 420 420 3/30 154 Utilities Expense 1,050 1,050 3/31 155 Howard Supplies 600 600 Totals 2,650 5,050 7,700 All cash payments are recorded in this journal. Every check is listed in numerical order. This journal is often referred to as a check register.

  47. Posting to the Subsidiary Ledger Cash Payments Journal Page 7 Other Accounts Ck. Post Accounts Payable Cash Date No. Account Debited Ref. Debit Debit Credit 3/2 150 Rent Expense 1,600 1,600 3/15 151 Grayco Supplies 1,230 1,230 3/21 152 Jewett Bus. Syst. 2,800 2,800 3/22 153 Donnelly Supp. 420 420 3/30 154 Utilities Expense 1,050 1,050 3/31 155 Howard Supplies 600 600 Totals 2,650 5,050 7,700 Accounts Payable Subsidiary Ledger Each Accounts Payable debit is posted to the accounts payable subsidiary ledger. Grayco Supplies Date Item P.R. Debit Credit Balance  3/1 Bal. 1,230

  48. Posting to the Subsidiary Ledger Cash Payments Journal Page 7 Other Accounts Ck. Post Accounts Payable Cash Date No. Account Debited Ref. Debit Debit Credit 3/2 150 Rent Expense 1,600 1,600 3/15 151 Grayco Supplies 1,230 1,230 3/21 152 Jewett Bus. Syst. 2,800 2,800 3/22 153 Donnelly Supp. 420 420 3/30 154 Utilities Expense 1,050 1,050 3/31 155 Howard Supplies 600 600 Totals 2,650 5,050 7,700  Accounts Payable Subsidiary Ledger Each Accounts Payable debit is posted to the accounts payable subsidiary ledger. Grayco Supplies Date Item P.R. Debit Credit Balance  3/1 Bal. 1,230 3/15 CP7 1,230 0

  49. Posting to the General Ledger Cash Payments Journal Page 7 Other Accounts Ck. Post Accounts Payable Cash Date No. Account Debited Ref. Debit Debit Credit 3/2 150 Rent Expense 1,600 1,600 3/15 151 Grayco Supplies 1,230 1,230 3/21 152 Jewett Bus. Syst. 2,800 2,800 3/22 153 Donnelly Supp. 420 420 3/30 154 Utilities Expense 1,050 1,050 3/31 155 Howard Supplies 600 600 Totals 2,650 5,0507,700 ( )      General Ledger Date Item P.R. Debit Credit Balance The highlighted items are posted to the general ledger. Account: Accounts Payable No. 21  3/1 Bal. 1,230 3/31 P11 6,230 7,460

  50. Posting to the General Ledger Cash Payments Journal Page 7 Other Accounts Ck. Post Accounts Payable Cash Date No. Account Debited Ref. Debit Debit Credit 3/2 150 Rent Expense 52 1,600 1,600 3/15 151 Grayco Supplies 1,230 1,230 3/21 152 Jewett Bus. Syst. 2,800 2,800 3/22 153 Donnelly Supp. 420 420 3/30 154 Utilities Expense 54 1,050 1,050 3/31 155 Howard Supplies 600 600 Totals 2,650 5,0507,700 ( ) (21) (11)      General Ledger Date Item P.R. Debit Credit Balance The highlighted items are posted to the general ledger. Account: Accounts Payable No. 21  3/1 Bal. 1,230 3/31 P11 6,230 7,460 3/31 CP7 5,050 2,410

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