CHAPTER 7 … Accounting Information Systems

Objective 1: Describe an effective accounting information system

A. An accounting information system is the combination of personnel, records, and procedures that provide financial data. The system may be computerized or manual.

1. While a manual system can easily handle a simple business with few transactions each period, a computerized system will handle a heavy transaction load with ease.

2. Businesses computerize and specialize in order to process large amounts of transactions with accuracy and speed. Specialization refers to the process of grouping similar transactions.

B. While the design of the system varies from business to business, depending on the type of business, various features are common to all systems.

C. The system should provide control, compatibility, flexibility and a good cost/benefit relationship.

1. An effective system utilizes internal controls to help safeguard assets and eliminate waste.

2. The system design must be compatible with operations, personnel, and the organizational structure.

3. The system should be flexible enough to accommodate changes in the organization without having to be completely redone. It should be structured so that all phases of the information system function together effectively.

4. The cost of the system should not outweigh its benefits; managers desire a system that gives maximum benefits at minimum cost.

D. A computerized accounting information system has two basic components:

1. Hardware—the electronic equipment such as computers, disk drives, monitors, and printers. In larger businesses, the hardware can be networked so that information can be shared; a server stores the programs and data.

2. Software—the set of programs that tells the computer what tasks to perform. Accounting software may be integrated within the company’s management information system or database, the storehouse of computerized information.

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Objective 2: Understand both computerized and manual accounting systems

A. In both a computerized and a manual accounting system there are three stages of data processing. Exhibit 7-1 illustrates these steps.

1. Inputs are data from source documents. Similar transactions are grouped together to make recording easier.

2. Processing in a manual system includes journalizing, posting, and preparing financial statements. A computerized system performs some of these tasks for the operator.

3. Outputs are reports, such as the financial statements that are used for decision making. Exhibit 7-2 provides an overview of a computerized accounting system.

B. The design for both types of accounting systems is similar:

1. Both begin with the chart of accounts.

a. Both systems assign account numbers to the various accounts. These account numbers identify which accounts are assets, liabilities, and so on.

b. In a computerized system, account number ranges are used to translate accounts and their balances into financial statements and other reports. (Refer to Exhibit 7-3 for an example of a chart of accounts for a computerized system.)

2. Each transaction must be classified before it can be processed or recorded.

a. In a manual system, similar transactions are grouped together and recorded in a special journal (i.e., credit sales are recorded in the sales journal and credit purchases are recorded in the purchases journal).

b. Computerized systems are organized by function or task. The appropriate journal is selected from a menu. See Exhibit 7-4 illustrating the main menu in a computerized accounting system.

(1) In a menu-driven system, the main menu is accessed first, then that menu directs the user to submenues until the desired function is reached.

(2) Posting in a computerized system is automatic and can be performed continuously, called on-line processing, or in groups, called batch processing.

3. Reports are the final stage of data processing.

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Objective 3: Understand how spreadsheets are used in accounting

A. Spreadsheets are computer programs that link data by means of formulas and functions. These electronic worksheets may be used to solve many different kinds of problems. A simple income statement prepared on a spreadsheet is illustrated in Exhibit 7-5.

B. Spreadsheets are organized into cells, each defined by a row number and a column number.

1. Cells can contain words or labels, numbers, or formulas.

2. The cursor, or electronic highlighter, indicates which cell is active, and it can be moved around the spreadsheet.

C. Basic arithmetic operations of spreadsheet programs such as Excel are listed in Exhibit 7-6.

Objective 4: Use the sales journal, the cash receipts journal, and the accounts receivable ledger

A. While all businesses must use a general journal (to record transactions that do not fit into one of the special journals), special journals are designed to record specific types of transactions.

1. See Exhibit 7-7 for an overview of an accounting system with special journals.

2. The four special journals that most businesses use are:

a. Sales journal (S)

b. Cash receipts journal (CR)

c. Purchases journal (P)

d. Cash payments journal (CP)

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B. The sales journal is used to record all sales on account. (Refer to Exhibit 7-8.)

1. Every transaction in the sales journal is a debit to Accounts Receivable and a credit to Sales Revenue.

2. The date, invoice number, and customer account name (or number) are entered along with the amount of the transaction.

3. This procedure saves time in a manual system. In a computerized system, the transaction may be entered at a cash register computer terminal that records both the sale and the related cost of goods sold as well as the decrease in the perpetual inventory.

4. Totals from the sales journal are posted monthly to the general ledger.

5. Individual amounts from the sales journal are posted daily to the subsidiary ledger.

a. A subsidiary ledger is a record of accounts that provides supporting details on individual customer balances.

b. The total of the subsidiary ledger should equal the total of Accounts Receivable in the general ledger. When a subsidiary ledger is used, the general ledger account is called the control account.

c. Since the subsidiary ledger is not part of the general ledger, posting to it is not indicated with an account number but with a check mark.

d. The journal reference for items posted from the sales journal will all begin with “S”, followed by the page number.

e. Small businesses may alternatively use actual documents (such as sales invoices) as the journal.

C. The cash receipts journal is used for all transactions that involve a receipt of cash. (See Exhibit 7-9.)

1. All transactions in the cash receipts journal involve a debit to Cash.

2. The main sources of cash are collections on account and cash sales, thus the cash receipts journal includes columns for Accounts Receivable (Cr.) and Sales (Cr.).

3. Other sources of cash are recorded in the Other Accounts column. Individual customer names are also listed in the “Account Title” column.

4. Column totals, except for Other Accounts, are posted monthly.

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a. The accounts that appear in the Other Accounts column are posted individually, either daily or at the end of the month.

b. The journal reference will begin with “CR”, followed by the page number.

5. Collections of accounts receivable must be posted to the subsidiary ledger daily.

Objective 5: Use the purchases journal, the cash payments journal, and the accounts payable ledger

A. The purchases journal is used to record all purchases on account. (Refer to Exhibit 7-10.)

1. Every transaction in the purchases journal includes a credit to Accounts Payable.

2. Purchases on account of inventory and supplies are recorded in this journal; a (Dr) column is provided for each.

3. Purchases of other assets are recorded in the Other Accounts column.

4. Posting procedures are similar to those of other special journals.

a. Column totals, except for Other Accounts, are posted monthly to the general ledger.

b. The journal reference will begin with “P”, followed by the page number.

5. Items in the Other Accounts column are posted individually, usually at the end of the month.

6. A subsidiary ledger is also used for accounts payable. All credits to Accounts Payable are posted daily to the subsidiary ledger.

B. The cash payments journal (also called the check register or cash disbursements journal) is used to record all payments of cash. (See Exhibit 7-11.)

1. All transactions in the cash payments journal involve a credit to Cash.

2. Many cash payments are for payments on account; therefore, an Accounts Payable (Dr) column appears in the cash payments journal.

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3. Other payments of cash are recorded in the Other Accounts column.

4. Column totals, except for Other Accounts, are posted monthly.

a. The amounts that appear in the Other Accounts column are posted individually, either daily or at the end of the month.

b. The journal reference will begin with “CP”, followed by the page number.

5. Payments on accounts payable must be posted to the subsidiary ledger daily.

C. At the end of each accounting period, a list of individual creditors’ account balances should be made and the total balanced with the related control account in the general ledger.

D. While special journals save time when recording repetitive transactions, a business still has need for a general journal. Examples of transactions recorded in the general journal include adjusting and closing entries, sales returns and allowances, purchase returns and allowances, and other non-routine entries.

1. Sales returns and allowances: The business will issue a credit memorandum or credit memo to notify the customer that he has received credit for returned merchandise. The related journal entry includes a credit to both the customer’s account receivable and the accounts receivable control account. Refer to Exhibit 7-12.

2. Purchase returns and allowances: The business may issue a debit memorandum or debit memo to notify a vendor that merchandise has been returned. The related journal entry includes a debit to both the vendor’s account payable and to the accounts payable control account.

E. At the end of each period, balancing the ledgers or proving the ledgers helps ensure that certain equalities exist:

1. In the general ledger: there should be equal debit account and credit account totals.

2. In the general ledger and the subsidiary ledger: the control account should be equal to the sum of the individual balances in the ledger (for both accounts receivable and accounts payable).

F. Generally, computerized special journals require no drastic changes in system design.

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