Principles of Accounting

2002e

Belverd E. Needles, Jr.

Marian Powers
Susan Crosson
-----------
Multimedia Slides by:
Harry Hooper
Santa Fe Community College

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 Chapter 7
Accounting
Information
Systems
 LEARNING OBJECTIVES
1. Identify the principles of accounting
systems design.
2. Describe how general ledger software
and spreadsheet software are used in
accounting.
3. Describe the use of microcomputer
systems in small businesses .
4. Explain how accountants use the
Internet.

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 LEARNING OBJECTIVES
(continued)

5. Explain the objectives and uses of

special-purpose journals.
6. Explain the purposes and relationships
of controlling accounts and subsidiary
ledgers.
7. Construct and use a sales journal,
purchases journal, cash receipts journal,
cash payments journal, and other
special-purpose journals as needed.
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Accounting Systems Design

OBJECTIVE 1
Identify the principles of
accounting systems design.
 Principles of Accounting
Systems Design
Accounting systems summarize financial
data about a business and organize it into
useful forms.
Most businesses use computerized
accounting systems to provide timely and
useful information to decision makers.
Accountants must have an understanding
of accounting and computer systems.

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 Design Principles

Four general principles of

accounting systems design:
Cost-benefit principle.
Control principle.
Compatibility principle.
Flexibility principle.

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 Cost-Benefit Principle
The cost-benefit principle holds that the
benefits derived from an accounting system
and the information it generates must be
equal to or greater than the systems cost.
Costs may either be tangible or intangible.
Tangible costs include personnel, forms,
and equipment.
Intangible costs include the cost of wrong
decisions.
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 Control Principle

The control principle requires that an

accounting system provide internal
control features in order to protect a
firms assets and ensure that data are
reliable.

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 Compatibility Principle

The compatibility principle holds that

the design of an accounting system
must be in harmony with the
organizational and human factors of
the business.

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 Flexibility Principle

Theflexibility principle holds that an

accounting system must be flexible
enough to allow the volume of
transactions to grow and
organizational changes to be made.

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 Discussion
Q. What are the four general
principles of accounting systems
design?
A. The four general principles of
accounting systems design are: (1) cost-
benefit, (2) control, (3) compatibility,
and (4) flexibility.

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 Computer Software for
Accounting

OBJECTIVE 2
Describe how general ledger
software and spreadsheet
software are used in accounting.
 General Ledger Software
General ledger software is a group of integrated
programs that an accountant uses to perform
major functions such as accounting for sales and
accounts receivable, purchases and accounts
payable, and payroll.
Most systems are Windows based and operate
with a graphical user interface (GUI).

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 Accounting Software
Two general ledger software programs
available for this book include:
Peachtree Complete Accounting for
Windows.
General Ledger Software.

Spreadsheet software is often used in

addition to general ledger software. These
include such programs as:
Windows Excel.
Lotus 1-2-3.

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 Graphical User Interface

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 Discussion

Q. What are two types of software that

accountants typically use?
A. The two types of software often
used by accountants are general
ledger software and spreadsheet
software.

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 Computerized
Accounting Systems

OBJECTIVE 3
Describe the use of
microcomputer systems in small
business.
 Computerized Accounting
Systems
The computer system is the nerve center of the
company.
Enterprise Resource Management (ERM) systems use
powerful computers linked together to provide
communication and data transfer around the world.
ERMs integrate all functions of a business.
The Internet links microcomputers in small and large
companies, providing communications and
supporting business transactions.

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 Microcomputer Systems
Most businesses purchase commercial
accounting software.
Most software consists of modules.
Sales/accounts receivable.
Purchases/accounts payable.
Cash receipts.
Cash disbursements.
Payroll.
General journal.

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 Microcomputer Systems

Modules should work together to

form an integrated accounting
program.
Each transaction that enters the
system should be supported by a
source document.
Source documents verify the validity
of a transaction and provide
necessary details.
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 Microcomputer Systems

After transactions are processed, a

procedure is followed to post them to
and update the ledgers and to prepare
a trial balance.
The final step is the preparation of
financial statements and other
accounting reports.

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 Microcomputer Systems

Computerization typically results in:

Reduced processing time.
Improved arithmetic accuracy.
Increased data dependability.

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 Discussion

Q. Identify three source documents

that would support entries into an
accounting system.
A. Typical source documents would
include: customer invoices, vendor
invoices, deposit slips, checks, and
time cards.
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Microcomputer Accounting System Using General Ledger Software

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Accountants and the Internet

OBJECTIVE 4
Explain how accountants use
the Internet.
 Internet

Worlds largest computer network.

Access to the Internet requires a
communication device (modem)
with a connection to an Internet
service provider (ISP).

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 Internet Capabilities
Electronic mail (E-mail).
Sending and receiving of communications over the
network.
World Wide Web.
A vast repository of information accessible via a
browser.
Information retrieval.
Downloading of files from the network to individual
computers.

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 Internet Capabilities
Bulletin boards.
Allow people with common interests to share
information and ideas over the network.
E-business.
Any use of the Internet by business.

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 Internet Capabilities

Electronic commerce.
Businesses and customers are increasingly using
the Internet to sell/buy products.
Creates many new challenges for accountants
Search Engines.
Internet sites that enable the user to
research or search for information.

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 Discussion

Q. What are five capabilities that the

Internet offers?
A. There are numerous benefits of the
Internet, five of which are: (1) E-mail,
(2) World Wide Web, (3) information
retrieval, (4) bulletin boards, and (5)
electronic commerce.

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Manual Data Processing:
Journals and Procedures

OBJECTIVE 5
Explain the objectives and uses
of special-purpose journals.
Steps and Devices in a Manual
Accounting System

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 Special-Purpose Journals

Special-purpose journals offer a more

efficient and economical way to process
similar repetitive transactions.
A general journal is still required even if
special-purpose journals are used. It is
used to record transactions that do not fall
into any of the special categories.

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 Special-Purpose Journals
Most business transactions fit into one of
four categories and can be recorded in a
special-purpose journal.
1. Sale of merchandise on credit: recorded in sales
journal.
2. Purchase on credit: recorded in purchases journal.
3. Receipt of cash: recorded in cash receipts journal.
4. Disbursement of cash: recorded in cash payment

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 Special-Purpose Journals
Using a special-purpose journal greatly
reduces the work involved in entering and
posting transactions.
Instead of posting every debit and credit
for each transaction the use of special-
purpose journals allows the posting of
column totals (representing many
transactions).

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 Discussion

Q. True or False: If a firm uses special-

purpose journals it no longer
needs a general journal.
A. False. A general journal is still
required even if special-purpose
journals are used. It is used to
record transactions that do not fall
into any of the special categories.

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 Controlling Accounts and
Subsidiary Ledgers

OBJECTIVE 6
Explain the purposes and
relationships of controlling
accounts and subsidiary ledgers.
 Controlling Accounts and
Subsidiary Ledgers
A controlling account (control account) is an
account in the general ledger that maintains the
total balance of all related accounts in a
subsidiary ledger.
A subsidiary ledger is a ledger separate from the
general ledger that contains a group of related
accounts.
The total of the balances in the subsidiary ledger
accounts equals the balance in the corresponding
controlling account.
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 Controlling Accounts and
Subsidiary Ledgers
Example:
The balance in the Accounts Receivable controlling
account in the general ledger should equal the total
of the account maintained for each customer in the
subsidiary ledger.
Postings to the controlling account in the general
ledger are made at least once a month, whereas
postings to subsidiary ledgers should be made daily.

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Relationship of Subsidiary Accounts to the Controlling Account

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 Controlling Accounts and
Subsidiary Ledgers
Most companies have subsidiary
ledgers for:
Accounts Receivable.
Accounts Payable.
Notes Receivable.
Short-Term Investments.
Equipment.

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 Controlling Accounts and
Subsidiary Ledgers

Subsidiaryledgers should be used

when management needs
information on individual items
composing the balance in a general
ledger (controlling) account.

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 Discussion

Q. What is a controlling account?

A. A controlling account (control

account) is an account in the general
ledger that maintains the total balance
of all related accounts in a subsidiary
ledger.

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 Constructing and Using
Special-Purpose Journals

OBJECTIVE 7
Construct and use a sales journal,
purchases journal, cash receipts
journal, cash payments journal, and
other special-purpose journals as
needed.
 Sales Journal

The sales journal contains all credit

sales.
Cash sales would be recorded in the
cash receipts journal.

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 Sales Journal

Amount
Account Invoice Post. (Dr. / Cr.
Date Debited Number Terms Ref. A/R / Sales)
July
1 P. Clark 721 2/10,n/30 x 750
5 G. Jones 722 2/10,n/30 x 500
8 E. Cumberland 723 2/10,n/30 335
x
1,585

Posted to A/R Posted to Sales

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 Sales Journal
Procedural Steps.
1. Enter each sales invoice in the sales journal
on a single line. Record date, customer
name, invoice number, and amount.
2. At the end of each day, post each individual
sale to customers Accounts Receivable
account in the ledger. Mark the Post. Ref.
column to indicate it has been posted.

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 Sales Journal
Procedural Steps (continued)
3. At the end of the month, sum the Amount
column to determine the total credit sales and
post the total to the general ledger accounts
(debit Accounts Receivable and credit Sales).
4. Verify the posting accuracy by adding the
account balances of the accounts receivable
ledger and matching the total with the
Accounts Receivable controlling account.
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 Sales Journal

Because the individual accounts in

the subsidiary ledger are updated
daily, and the controlling account in
the general ledger is updated
monthly, they are only equal once a
month.

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 Sales Taxes

Taxes collected for city or state.

Requires an additional Sales Tax
Payable column in the sales journal.
Foot column once a month and post to
the Sales Tax Payable account in the
general ledger.

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 Purchases Journal
The purchases journal is used to record
purchases on credit.
Cash purchases are recorded in the cash
payments journal, not the purchases journal.
Single column purchases journal is used for
merchandise purchases only. Other purchases
are entered in the general journal.
Multi column purchases journal is used for
other purchase accounts (e.g. supplies).
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 Purchases Journal
Procedural Steps.
1. Enter each purchase invoice in the purchases
journal on a single line.
2. At the end of each day, post each individual
purchase to the suppliers account in the
accounts payable subsidiary ledger. Indicate
in the Post. Ref. column that a purchase has
been posted.

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 Purchases Journal
Procedural Steps (continued)
3. At the end of the month, sum the Amount
column to determine the total purchases and
post the total to the general ledger accounts
(debit Purchases and credit Accounts
Payable).
4. Verify the posting accuracy by adding the
account balances of the accounts payable
ledger and matching the total with the
Accounts Payable controlling account.

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 Cash Receipts Journal
All transactions involving the receipt of
cash are recorded in the cash receipts
journal.
Examples of transactions recorded in
cash receipts journal:
Cash sales.
Cash from credit customers.
Cash from other sources.

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 Cash Receipts Journal

Cash receipts journal has more than

one column since the receipt of cash
will always result in a debit to cash.
The credit may be to various accounts
(e.g., Accounts Receivable, Sales).

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Cash Receipts Journal
Debit columns may include:
Cash.

Sales Discounts.
Other Accounts.

Credit columns may include:

Accounts Receivable.
Sales.

Other Accounts.

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 Cash Receipts Journal

Procedural Steps.
1. At the end of each day, post each individual
cash sale to the accounts receivable account
in the accounts receivable subsidiary
ledger. Indicate in the Post. Ref. column
that a transaction has been posted.

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 Cash Receipts Journal
Procedural Steps (continued)
2. At the end of each day, post each
transaction in the Other Accounts column.
As each transaction is posted, write the
account number in the Post. Ref. column to
indicate that the posting has been done.

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 Cash Receipts Journal
Procedural Steps (continued)
3. At the end of the month, total the column in the cash
receipts journal. The sum of the Debits column totals
must equal the sum of the Credits column totals.
4. Post the Debits column totals by posting the total of
the Cash column as a debit to the Cash account and
the total of the Sales Discounts column as a debit to
the Sales Discounts account.

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 Cash Receipts Journal
Procedural Steps (continued)
5. Post the Credits column totals:

Total of the Accounts Receivable column as a credit to the
Accounts Receivable controlling account.

Total of the Sales column as a credit to the Sales account.
6. Write the account numbers below each column as
the totals are posted.
7. Other accounts are checked at the bottom

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 Cash Payments Journal

All transactions involving the

payments of cash are entered in the
cash payments journal (cash
disbursements journal).

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 Cash Payments Journal
Credit columns usually consist of:
Cash.

Purchases Discounts.
Other Accounts.

Debit columns usually consist of:

Accounts Payable.
Other Accounts.

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 Cash Payments Journal
Procedural Steps.
1. Post the Accounts Payable column daily to the
individual accounts in the accounts payable
subsidiary ledger. Indicate in the Post. Ref.
column that the transaction has been posted.
2. Post the debits/credits in the Other Accounts
columns to the general ledger daily. When
posted, write the account number in the Post.
Ref. column to indicate the posting has been
made.

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 Cash Payments Journal
Procedural Steps (continued)
3. At the end of the month, the sum of the
Credits column totals must equal the sum of
the Debits column totals.
4. Post the column totals for Cash, Purchases
Discounts, and Accounts Payable at the end
of the month to their respective accounts in
the general ledger. Indicate in the Post. Ref.
column that postings have been made.

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 General Journal
Transactions that do not involve sales,
purchases, cash receipts, or cash
payments should be recorded in the
general journal.
Typically there will be only a few
transactions that are entered directly in
the general journal.
Adjusting and closing entries are also
recorded in the general journal.
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 The Flexibility of
Special-Purpose Journals
Special-purpose journals reduce and
simplify the work of accounting and allow
for the division of labor.
Special-purpose journals should be
designed to fit the business in which they
are used.

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 Discussion

Q. What are the two primary benefits of

using special-purpose journals?
A. Special-purpose journals reduce
and simplify the work of
accounting and allow for the
division of labor.

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 OK, LETS REVIEW

1. Identify the principles of accounting

systems design.
2. Describe how general ledger software
and spreadsheet software are used in
accounting.
3. Describe the use of microcomputer
systems in small businesses.
4. Explain how accountants use the
Internet.

Copyright by Houghton Mifflin Company. All rights reserved. 69

 WE ALSO COVERED

5. Explain the objectives and uses of

special-purpose journals.
6. Explain the purposes and relationships
of controlling accounts and subsidiary
ledgers.
7. Construct and use a sales journal,
purchases journal, cash receipts
journal, cash payments journal, and
other special-purpose journals as
needed.
Copyright by Houghton Mifflin Company. All rights reserved. 70