Accounting Accounting PrinciplesPrinciplesSecond Canadian EditionSecond Canadian Edition

Prepared by: Carole Bowman, Sheridan College

Weygandt · Kieso · Kimmel · Trenholm

ACCOUNTING ACCOUNTING INFORMATION SYSTEMSINFORMATION SYSTEMS

CHAPTERCHAPTER

77

An accounting information system (AIS) involves collecting and processing data and disseminating financial information to interested parties.

An AIS may either be manual or computerized.

Accounting Information SystemAccounting Information System

PRINCIPLES OF AN PRINCIPLES OF AN EFFICIENT AND EFFECTIVE EFFICIENT AND EFFECTIVE

ACCOUNTING INFORMATION SYSTEMACCOUNTING INFORMATION SYSTEM

Costs Benefits

The accounting system must be cost effective.Benefits of information must outweigh the cost of providing it.

PRINCIPLES OF AN PRINCIPLES OF AN EFFICIENT AND EFFECTIVE EFFICIENT AND EFFECTIVE

ACCOUNTING INFORMATION SYSTEMACCOUNTING INFORMATION SYSTEM

It must be relevant!

It must be

reliable! It must be accurate!

It must be

timely!Balance

SheetIncome

StatementOther

Financial Reports

PRINCIPLES OF AN PRINCIPLES OF AN EFFICIENT AND EFFECTIVE EFFICIENT AND EFFECTIVE

ACCOUNTING INFORMATION SYSTEMACCOUNTING INFORMATION SYSTEM

Government Regulation and Deregulation

Organizational Growth Increased

Competition

Changing Accounting Principles

Technological Advances

ILLUSTRATION ILLUSTRATION 7-27-2PHASES IN THE DEVELOPMENT PHASES IN THE DEVELOPMENT OF AN ACCOUNTING SYSTEMOF AN ACCOUNTING SYSTEM

Analysis

Follow up Design

Implementation

Planning and identifying

information needs and sources

Evaluating and monitoring effectiveness

and efficiency and correcting any

weaknesses

Creating forms, documents, procedures,

job descriptions, and reports

Installing the system, training personnel, and

making the system operational

A subsidiary ledger is a group of accounts with a common characteristic, such as customer accounts.

The subsidiary ledger is assembled to facilitate the recording process by freeing the general ledger from details concerning individual balances.

Two common subsidiary ledgers are the Accounts Receivable Ledger and the Accounts Payable Ledger.

SUBSIDIARY LEDGERSSUBSIDIARY LEDGERS

The general ledger account that summarizes subsidiary ledger data is called a control account.

Each general ledger control account balance must equal the composite balance of the individual accounts in the subsidiary ledger.

CONTROL ACCOUNTCONTROL ACCOUNT

ILLUSTRATION ILLUSTRATION 7-37-3 RELATIONSHIP OF GENERAL LEDGERS RELATIONSHIP OF GENERAL LEDGERS

AND SUBSIDIARY LEDGERSAND SUBSIDIARY LEDGERSAccounts receivable controls a subsidiary ledger of many

different customers.

GeneralLedger

SubsidiaryLedgers

Cash Owner’sCapital

AccountsReceivable

AccountsPayable

CustomerA

CustomerB

CustomerC

Accounts payable controls a subsidiary ledger of many

different creditors.

CreditorX

CreditorY

CreditorZ

Advantages of using subsidiary ledgers are that they:1. Show transactions affecting one customer or one creditor in a single account.2. Free the general ledger of excessive details.3. Help locate errors in individual accounts by reducing the number of accounts combined in one ledger and by using controlling accounts.4. Create a division of labour in posting by allowing one employee to post to the general ledger and a different employee to post to the subsidiary ledger.

SUBSIDIARY LEDGERSSUBSIDIARY LEDGERS

Special journals are used to group similar types of transactions.

If a transaction cannot be recorded in a special journal, it is recorded in the general journal.

Special journals permit greater division of labour and reduce time necessary to complete the posting process.

SPECIAL JOURNALS

ILLUSTRATION ILLUSTRATION 7-57-5 USE OF SPECIAL JOURNALS AND USE OF SPECIAL JOURNALS AND

THE GENERAL JOURNALTHE GENERAL JOURNALSales

JournalCash

ReceiptsJournal

Purchases Journal

Cash PaymentsJournal

GeneralJournal

Used for:

All sales of

merchan-dise on account

Used for:

All cash received

(including cash sales)

Used for:

All purchases

of merchan-dise on account

Used for:

All cash paid

(includingcash

purchases)

Used for:

Transactionsthat cannotbe enteredin a special

journal, including

correcting, adjusting, and closing entries

The types of special journals used depend largely on the types of transactions that occur frequently in a business enterprise.

Under a perpetual inventory system, one entry at selling price in the Sales Journal results in a debit to Accounts Receivable and a credit to Sales. Another entry at cost results in a debit to Cost of Goods Sold and a credit to Merchandise Inventory.

Postings are made monthly to the general ledger and daily to the accounts receivable subsidiary ledger.

JOURNALIZING THE SALES JOURNAL – JOURNALIZING THE SALES JOURNAL – PERPETUAL INVENTORY SYSTEMPERPETUAL INVENTORY SYSTEM

Date Account Debited

Invoice # Ref Accts Receivable Dr

Sales Cr Cost of Goods Sold Dr

Merchandise Inventory Cr May 3 Abbot Sisters 101 10,600 6,360

7 Babson Co. 102 11,350 7,370

14 Carson Bros. 103 7.800 5,070

19 Deli Co. 104 9,300 6,510

21 Abbot Sisters 105 15,400 10,780

24 Deli Co. 106 21,210 15,900

27 Babson Co. 107 14,570 10,200

90,230 62,190

Karns Wholesale SupplySales Journal S1

ILLUSTRATION ILLUSTRATION 7-87-8 PROVING THE ACCURACY OF THE PROVING THE ACCURACY OF THE

ACCOUNTS RECEIVABLE ACCOUNTS RECEIVABLE SUBSIDIARY LEDGERSUBSIDIARY LEDGER

To prove the accuracy of the ledgers it is necessary to determine whether the sum of the accounts receivable subsidiary ledger balances equals the balance in the general ledger’s Accounts Receivable control account.

General Ledger

Accounts Receivable $90,230

Accounts Receivable Subsidiary Ledger

Abbot Sisters $26,000Babson Co. 25,920Carson Bros. 7,800Deli Co. 30,510

$90,230

CASH RECEIPTS JOURNAL CASH RECEIPTS JOURNAL PERPETUAL SYSTEMPERPETUAL SYSTEM

The debit columns for cash and cost of goods sold must be equal to the total of the credit columns for accounts receivable, sales, inventory, and other accounts.

Date Accounts Credited Ref Cash Dr

Accounts Receivable

Cr

Sales Cr

CGS Dr/ Inventory

Cr

Other Accounts Cr

May 3 D. A. Karns, Capital 50 5,000 5,000 7 1,900 1,900 1,240 10 Abbot Sisters 10,600 10,600 12 2,600 2,600 1,690 17 Babson Co. 11,350 11,350 21 Notes Payable – 21 6,000 6,000 24 Carson Bros. 7,800 7,800 28 Deli Co. 9,300 9,300 54,550 39,050 4,500 2,930 11,000

Karns Wholesale SupplyCash Receipts Journal

54,550

Column totals are posted at the end of each month.

The total of the Other Accounts column is not posted. The individual amounts comprising the total are posted separately to the general ledger accounts specified in the Accounts Credited column.

The individual amounts in the Accounts Receivable column are posted daily to the subsidiary ledger account specified in the Accounts Credited column.

CASH RECEIPTS JOURNALCASH RECEIPTS JOURNAL

ILLUSTRATION ILLUSTRATION 7-117-11 PROVING THE LEDGERS AFTER POSTING THE PROVING THE LEDGERS AFTER POSTING THE SALES AND THE CASH RECEIPTS JOURNALSSALES AND THE CASH RECEIPTS JOURNALS

Accounts ReceivableSubsidiary Ledger

Abbot Sisters $15,400Babson Co. 14,570Deli Co. 21,210

$51,180

After the posting of the cash receipts journal is completed, it is necessary to prove the ledgers. The general ledger totals are in agreement and the sum of the subsidiary ledger balances equals the control account balance.

General LedgerDebits

Cash $54,550Accounts Receivable 51,180Cost of Goods Sold 65,120

$170,850

CreditsMerchandise Inventory $ 65,120Notes Payable 6,000D. A. Karns, Capital 5,000Sales 94,730

$170,850

PURCHASES JOURNAL PURCHASES JOURNAL PERPETUAL SYSTEMPERPETUAL SYSTEM

Merchandise Inventory Dr. Date Account Credited Terms Ref. Accounts Payable Cr. May 6 Jasper Manufacturing Inc. n/20 11,000 10 Eaton and Howe Inc. n/20 7,200 14 Fabor and Son n/20 6,900 19 Jasper Manufacturing Inc. n/20 17,500 26 Fabor and Son n/20 8,700 29 Eaton and Howe Inc. n/20 12,600 63,900

In a perpetual system, each entry results in a debit to Merchandise Inventory and a credit to Accounts Payable.

Postings are made daily to the accounts payable subsidiary journal and monthly to the general ledger.

Karns Wholesale SupplyPurchases Journal

ILLUSTRATION 7-13 PROVING THE ACCURACY OF THE

ACCOUNTS PAYABLE SUBSIDIARY LEDGER

To prove the ledgers it is necessary to determine that the sum of the subsidiary ledger balances equals the balance in the control account.

Accounts Payable Subsidiary Ledger

Eaton and Howe, Inc. $19,800Fabor and Son 15,600Jasper Manufacturing Inc. 28,500

$63,900

General LedgerMerchandise Inventory $63,900

Accounts Payable $63,900

CASH PAYMENTS JOURNAL CASH PAYMENTS JOURNAL PERPETUAL SYSTEMPERPETUAL SYSTEM

Journalizing procedures are similar to cash receipts journalPosting procedures are also like the cash receipts journal

Karns Wholesale SupplyCash Payments Journal

DateCheque

# PayeeCash

Cr

Merchandise Inventory

Dr.

Accounts Payable

Dr. Account Debited Ref

Other Accounts

Dr.May 3 101 Corporate General Ins. 1,200 Prepaid insurance 130 1,200

3 102 Canpar 100 100 7 103 Zwicker 4,400 4,400

10 104 Jasper Manufaturing Inc. 11,000 11,000 Jasper Manufaturing Inc.19 105 Eaton & Howe, Inc. 7,200 7,200 Eaton & Howe, Inc.24 106 Fabor and Son 6,900 6,900 Fabor and Son28 107 Jasper Manufaturing Inc. 17,500 17,500 Jasper Manufaturing Inc.31 108 D.A.Karns 500 D.A. Karns, Drawings 306 500

48,800 4,500 42,600 1,700

ILLUSTRATION ILLUSTRATION 7-167-16 PROVING THE ACCURACY OF THE PROVING THE ACCURACY OF THE ACCOUNTS PAYABLE SUBLEDGERACCOUNTS PAYABLE SUBLEDGER

To prove the ledgers it is necessary to determine that the sum of the subsidiary ledger balances equals the balance in the control account.

Accounts Payable Subsidiary Ledger

Eaton and Howe, Inc. $12,600Fabor and Son 8,700

$21,300

General LedgerDebitsCash $ 9,750Accounts Receivable 51,180Prepaid Insurance 1,200 D. A. Karns, Drawings 500Purchases 64,300Freight In 100

$127,030

CreditsAccounts Payable $ 21,300Notes Payable 6,000D. A. Karns, Capital 5,000Sales 94,730

$127,030

Only transactions that cannot be recorded in a special journal are recorded in the

general journal. When the entry involves both control and subsidiary accounts:

1. In journalizing, control and subsidiary accounts must be identified, and

2. In posting there must be a dual posting (to the control account and subsidiary ledger).

EFFECTS ON EFFECTS ON GENERAL JOURNALGENERAL JOURNAL

ILLUSTRATION ILLUSTRATION 7-177-17 JOURNALIZING AND POSTING THE JOURNALIZING AND POSTING THE

GENERAL JOURNALGENERAL JOURNALJ1

Date Account Title and Explanation Ref Debit Credit31-May Accounts Payable-Fabor and Sons 500

Merchandise Inventory 500 Record goods returned.

General Journal

120Date Ref Debit Credit Balance2002

May 31 S1 62,190 (62,190) 31 CR1 2,930 (65,120) 31 P1 63,900 (1,220) 31 CP1 4,500 3,280 31 G1 500 2,780

General LedgerMerchandise Inventory

201Date Ref Debit Credit Balance2002

May 31 P1 63,900 63,900 31 CP1 42,600 21,300 31 G1 500 20,800

Accounts Payable

Date Ref Debit Credit Balance2002

May 14 P1 6,900 6,900 24 CP1 6,900 - 26 P1 8,700 8,700 31 G1 500 8,200

Fabor and Son

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