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Accounting Principles

Second Canadian Edition


Weygandt Kieso Kimmel Trenholm

Carole Bowman, Sheridan College

Prepared by:

CHAPTER

7
ACCOUNTING INFORMATION SYSTEMS

Accounting Information System

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.

PRINCIPLES OF AN EFFICIENT AND EFFECTIVE ACCOUNTING INFORMATION SYSTEM


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

PRINCIPLES OF AN EFFICIENT AND EFFECTIVE ACCOUNTING INFORMATION SYSTEM


It must be relevant! It must be reliable!

Balance Sheet Income Statement Other Financial Reports

It must be timely!
It must be accurate!

PRINCIPLES OF AN EFFICIENT AND EFFECTIVE ACCOUNTING INFORMATION SYSTEM


Technological Advances

Government Regulation and Deregulation

Changing Accounting Principles

ILLUSTRATION 7-2

PHASES IN THE DEVELOPMENT OF AN ACCOUNTING SYSTEM


Analysis
Planning and identifying information needs and sources

Follow up

Design Creating forms, documents, procedures, job descriptions, and reports

Evaluating and monitoring effectiveness and efficiency and correcting any weaknesses

Implementation
Installing the system, training personnel, and making the system operational

SUBSIDIARY LEDGERS

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.

CONTROL ACCOUNT

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.

ILLUSTRATION 7-3

RELATIONSHIP OF GENERAL LEDGERS AND SUBSIDIARY LEDGERS


Accounts receivable controls a subsidiary ledger of many different customers. Accounts payable controls a subsidiary ledger of many different creditors.

General Ledger

Cash

Accounts Receivable

Accounts Payable

Owners Capital

Subsidiary Ledgers

Customer Customer Customer A B C Creditor X Creditor Y Creditor Z

SUBSIDIARY LEDGERS
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.

SPECIAL JOURNALS

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.

ILLUSTRATION 7-5

USE OF SPECIAL JOURNALS AND THE GENERAL JOURNAL


Sales Journal
Used for: All sales of merchandise on account

Cash Cash Purchases Payments Receipts Journal Journal Journal


Used for: All cash received (including cash sales) Used for: Used for: All All cash purchases paid of merchan- (including cash dise on account purchases)

General Journal
Used for: Transactions that cannot be entered in 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.

JOURNALIZING THE SALES JOURNAL PERPETUAL INVENTORY SYSTEM


Karns Wholesale Supply Sales Journal
Date May 3 7 14 19 21 24 27 Account Debited Abbot Sisters Babson Co. Carson Bros. Deli Co. Abbot Sisters Deli Co. Babson Co. Invoice # 101 102 103 104 105 106 107 Ref Accts Receivable Dr Sales Cr 10,600 11,350 7.800 9,300 15,400 21,210 14,570 90,230

S1
Cost of Goods Sold Dr Merchandise Inventory Cr 6,360 7,370 5,070 6,510 10,780 15,900 10,200 62,190

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.

ILLUSTRATION 7-8

PROVING THE ACCURACY OF THE ACCOUNTS RECEIVABLE SUBSIDIARY LEDGER


General Ledger Accounts Receivable $90,230

Accounts Receivable Subsidiary Ledger


Abbot Sisters Babson Co. Carson Bros. Deli Co. $26,000 25,920 7,800 30,510 $90,230

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 ledgers Accounts Receivable control account.

CASH RECEIPTS JOURNAL PERPETUAL SYSTEM


Karns Wholesale Supply Cash Receipts Journal
Date May 3 7 10 12 17 21 24 28 Accounts Credited D. A. Karns, Capital Abbot Sisters Babson Co. Notes Payable Carson Bros. Deli Co. Ref 50 21 Cash Dr 5,000 1,900 10,600 2,600 11,350 6,000 7,800 9,300 54,550 Accounts Receivable Cr Sales Cr 1,900 10,600 2,600 11,350 6,000 7,800 9,300 39,050 1,690 CGS Dr/ Inventory Cr 1,240 Other Accounts Cr 5,000

4,500

2,930

11,000

54,550

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.

CASH RECEIPTS JOURNAL


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.

ILLUSTRATION 7-11 PROVING THE LEDGERS AFTER POSTING THE SALES AND THE CASH RECEIPTS JOURNALS
Accounts Receivable Subsidiary Ledger Abbot Sisters Babson Co. Deli Co. $15,400 14,570 21,210 $51,180
General Ledger Debits Cash Accounts Receivable Cost of Goods Sold $54,550 51,180 65,120 $170,850

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.

Credits Merchandise Inventory Notes Payable D. A. Karns, Capital Sales

$ 65,120 6,000 5,000 94,730 $170,850

PURCHASES JOURNAL PERPETUAL SYSTEM


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

ILLUSTRATION 7-13

PROVING THE ACCURACY OF THE ACCOUNTS PAYABLE SUBSIDIARY LEDGER


General Ledger Merchandise Inventory $63,900 Accounts Payable $63,900
Accounts Payable Subsidiary Ledger

Eaton and Howe, Inc. $19,800 Fabor and Son 15,600 Jasper Manufacturing Inc. 28,500 $63,900

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

CASH PAYMENTS JOURNAL PERPETUAL SYSTEM


Karns Wholesale Supply Cash Payments Journal
Date May 3 3 7 10 19 24 28 31 Cheque # 101 102 103 104 105 106 107 108 Payee Corporate General Ins. Canpar Zwicker Jasper Manufaturing Inc. Eaton & Howe, Inc. Fabor and Son Jasper Manufaturing Inc. D.A.Karns Cash Cr 1,200 100 4,400 11,000 7,200 6,900 17,500 500 48,800 Merchandise Accounts Inventory Payable Dr. Dr. 100 4,400 11,000 7,200 6,900 17,500 4,500 42,600 Jasper Manufaturing Inc. Eaton & Howe, Inc. Fabor and Son Jasper Manufaturing Inc. D.A. Karns, Drawings Account Debited Prepaid insurance Other Accounts Ref Dr. 130 1,200

306

500 1,700

Journalizing

procedures are similar to cash receipts journal Posting procedures are also like the cash receipts journal

ILLUSTRATION 7-16

PROVING THE ACCURACY OF THE ACCOUNTS PAYABLE SUBLEDGER


General Ledger
Accounts Payable Subsidiary Ledger
Eaton and Howe, Inc. Fabor and Son $12,600 8,700 $21,300 Credits Accounts Payable Notes Payable D. A. Karns, Capital Sales Debits Cash Accounts Receivable Prepaid Insurance D. A. Karns, Drawings Purchases Freight In $ 9,750 51,180 1,200 500 64,300 100 $127,030

$ 21,300 6,000 5,000 94,730 $127,030

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

EFFECTS ON GENERAL JOURNAL


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).

ILLUSTRATION 7-17

JOURNALIZING AND POSTING THE GENERAL JOURNAL


General Journal Date Account Title and Explanation 31-May Accounts Payable-Fabor and Sons Merchandise Inventory Record goods returned. Ref Debit 500 J1 Credit 500

Date 2002 May 14 24 26 31

Fabor and Son Ref Debit Credit P1 CP1 P1 G1 6,900 6,900 8,700 500

Balance 6,900 8,700 8,200

General Ledger Merchandise Inventory Date Ref Debit Credit 2002 May 31 S1 62,190 31 CR1 2,930 31 P1 63,900 31 CP1 4,500 31 G1 500

120 Balance (62,190) (65,120) (1,220) 3,280 2,780

Accounts Payable 201 Date Ref Debit Credit Balance 2002 May 31 P1 63,900 63,900 31 CP1 42,600 21,300 31 G1 500 20,800

COPYRIGHT

Copyright 2002 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by CANCOPY (Canadian Reprography Collective) is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his / her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.

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