CHAPTER 7 Lecture Notes

ACCOUNTING INFORMATION SYSTEMS

Learning objectives

1. Identify the basic concepts of an accounting information system.

2. Describe the nature and purpose of a subsidiary ledger.
3. Explain how companies use special journals in journalizing.

Learning Objection 1: Accounting Information Systems

The accounting information system collects and processes transaction data and communicates financial
information to decision makers. It includes each step of the accounting cycle.

The basic principles of an accounting information system are:

 Cost-effectiveness - The system must be cost effective (The benefits of the information must
outweigh the cost of providing it)
 Usefulness - To be useful the information must be understandable, relevant, reliable, timely,
and accurate.
 Flexibility - The system should accommodate a variety of users and changing information needs.

Computerized Accounting Systems

General ledger accounting systems are software programs that integrate the various accounting
functions related to sales, purchases, receivables, payables, cash receipts and disbursements, and
payroll. They also generate financial statements.

Companies with revenues of less than $5 million and up to 20 employees generally use entry-level
programs. Quality entry-level packages include easy data access and report preparation, provide an
“audit trail,” have internal controls, enable customization, and provide network-compatibility.

Enterprise resource planning (ERP) systems are typically used by manufacturing companies with more
than 500 employees and $500 million in sales. ERP systems go far beyond the functions of an entry-level
general ledger package by integrating all aspects of the organization, including accounting, sales, human
resource management, and manufacturing.

Manual Systems

In a manual accounting system, each of the steps in the accounting cycle is performed by hand.

Learning Objective 2: Subsidiary Ledgers

A subsidiary ledger is a group of accounts with a common characteristic, assembled together to facilitate
the recording process by freeing the general ledger from details concerning individual balances.

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Two common subsidiary ledgers are:

1. The accounts receivable (or customers’) ledger, which collects transaction data of individual
customers.
2. The accounts payable (or creditors’) ledger, which collects transaction data of individual
creditors.

The summary account in the general ledger is called a control account and the balance in the control
account must equal the composite balance of the individual accounts in the subsidiary ledger at the end
of the period.

The advantages of using subsidiary ledgers are that they:

1. Show in a single account transactions affecting one customer or one creditor, thus providing up-
to-date information on specific account balances.
2. Free the general ledger of excessive details. As a result, a trial balance of the general ledger does
not contain vast numbers of individual account balances.
3. Help locate errors in individual accounts by reducing the number of accounts in one ledger and
by using control accounts.
4. Make possible a division of labor in posting by having one employee post to the general ledger
while a different employee posts to the subsidiary ledgers.

Learning Objective 3: Special Journals

To expedite journalizing and posting transactions, most companies use special journals in addition to the
general journal. A special journal is used to group similar types of transactions, such as all sales of
merchandise on account or all cash receipts.

The following are types of special journals:

 Sales journal—all sales of merchandise on account.

 Cash receipts journal—all cash received (including cash sales).
 Purchases journal—all purchases of merchandise on account.
 Cash payments journal—all cash paid (including cash purchases).

If a transaction cannot be recorded in a special journal, it is recorded in the general journal. Special
journals permit greater division of labor and reduce the time necessary to complete the posting process.

Sales Journal

For the sales journal,

 Each entry results in a debit to Accounts Receivable and a credit to Sales Revenue at selling
price; and a debit to Cost of Goods Sold and a credit to Inventory at cost.
 Only one line is needed to record each transaction.
 All entries are made from sales invoices.
 Postings are made daily to the individual accounts receivable in the subsidiary ledger and
monthly, in total, to Accounts Receivable, Sales Revenue, Cost of Goods Sold and Inventory in
the general ledger.

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Cash Receipts Journal

The cash receipts journal is a columnar journal with debit columns for cash and sales discounts,
and credit columns for accounts receivable, sales revenue, and “other” accounts. In addition
there is a separate column for a debit to Cost of Goods Sold and a credit to Inventory. In
journalizing cash receipts transactions:

 Only one line is needed for each entry.

 Each sale entry is accompanied by another entry that debits Cost of Goods Sold and
credits Inventory for cost.

The posting of a columnar journal such as the cash receipts journal involves the following
procedures:

 All column totals except the total for the Other Accounts column are posted once at the
end of the month to the account title or titles specified in the column heading.
 The total of the Other Accounts column is not posted. Instead, the individual amounts
comprising the total are posted separately to the general ledger accounts specified in
the Accounts Credited column.
 The individual amounts in a column, posted in total to a control account, are posted
daily to the subsidiary ledger account specified in the Accounts Credited column.

Purchases Journal

For the purchases journal,

 Each entry results in a debit to Inventory and a credit to Accounts Payable.

 Only one line is needed to record each transaction.
 All entries are made from purchase invoices.
 Postings are made daily to the individual creditor accounts in the accounts payable
subsidiary ledger and monthly, in total, to Inventory and Accounts Payable in the
general ledger.

The purchases journal can be expanded into a columnar journal by adding columns for supplies
and other accounts.

Cash Payments Journal

The cash payments journal has multiple columns because cash payments may be made for a
variety of purposes.

 The journalizing procedures are similar to those described earlier for the cash receipts
journal.
 All entries are made from prenumbered checks.
 The posting procedures are similar to those described earlier for the cash receipts
journal.

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Effects of Special Journals on the General Journal

Only transactions that cannot be entered in a special journal are recorded in the general journal.
When the entry involves both control and subsidiary accounts the following modifications are
required:

 In journalizing, both the control and subsidiary accounts must be identified.

 In posting, there must be a dual posting: once to the control account and once to the
subsidiary account.

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