Accounting principles chapter 07

Accounting
Principles

Second Canadian Edition
Weygandt · Kieso · Kimmel ·
Trenholm

Prepared by:
Carole Bowman, Sheridan College


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
Org
aniz
a
Gro tional
wth

Government
Regulation and
Deregulation

d
e
s
a
e
r

Inc
tion
i
t
e
p
Com

Changing
Accounting
Principles


ILLUSTRATION 7-2

PHASES IN THE DEVELOPMENT
OF AN ACCOUNTING SYSTEM
Analysis

Follow up
Evaluating and
monitoring effectiveness
and efficiency and
correcting any
weaknesses

Planning and
identifying
information needs
and sources

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

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


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.

General
Ledger

Subsidiary
Ledgers

Cash

Accounts
Receivable

Accounts payable controls a
subsidiary ledger of many
different creditors.

Accounts
Payable

Owner’s
Capital

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

General
Journal

Used for:

Used for:

Used for:
All cash
received
(including
cash

sales)

Used for:

All
All cash
purchases
paid
of
merchan- (including
cash
dise on
account purchases)

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

Account
Debited

Invoice
#

Ref

Accts Receivable Dr
Sales Cr

S1
Cost of Goods Sold Dr
Merchandise Inventory Cr

Abbot Sisters

101

√

10,600

6,360

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

May 3
7

Under
Under aa perpetual
perpetual inventory
inventory system,
system, one
one entry
entry at
at selling
selling price
price in
in the
the Sales
Sales

Journal
Journal results
results in
in aa debit
debit to Accounts Receivable and
and aa credit to Sales. Another
entry
entry at
at cost
cost results
results in
in aa debit
debit to
to Cost
Cost of
of Goods
Goods Sold
Sold and
and aa credit
credit to
to
Merchandise
Merchandise Inventory.
Inventory.

 Postings
Postings are
are made
made monthly
monthly to

to the
the general
general ledger
ledger and
and daily
daily to
to the
the accounts
accounts
receivable
receivable subsidiary ledger.
ledger.




ILLUSTRATION 7-8

PROVING THE ACCURACY OF THE
ACCOUNTS RECEIVABLE
SUBSIDIARY LEDGER
Accounts Receivable
Subsidiary Ledger

General Ledger
Accounts Receivable

$90,230

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 ledger’s Accounts
Receivable control account.


CASH RECEIPTS JOURNAL
PERPETUAL SYSTEM
Karns Wholesale Supply
Cash Receipts Journal
Date

Accounts Credited

Ref

May 3
7
10
12

17
21
24
28

D. A. Karns, Capital

50

Abbot Sisters

√

Babson Co.
Notes Payable –
Carson Bros.
Deli Co.

√
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

CGS Dr/
Inventory
Cr

Other
Accounts Cr
5,000

1,900

1,240

2,600

1,690

10,600
11,350

6,000
7,800
9,300
39,050

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

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 Ledger
Debits
Cash
Accounts Receivable
Cost of Goods Sold
Credits
Merchandise Inventory
Notes Payable
D. A. Karns, Capital
Sales

$54,550
51,180
65,120
$170,850
$ 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.

Account Debited
Prepaid insurance

Other
Accounts
Ref
Dr.
130
1,200

Jasper Manufaturing Inc.
Eaton & Howe, Inc.
Fabor and Son
Jasper Manufaturing Inc.
D.A. Karns, Drawings

306

100
4,400
11,000
7,200

6,900
17,500
4,500

42,600

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

500
1,700


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

Debits
Cash
Accounts Receivable
Prepaid Insurance
D. A. Karns, Drawings
Purchases
Freight In
Credits
Accounts Payable
Notes Payable
D. A. Karns, Capital
Sales

$ 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.

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

Ref

Debit
500

J1
Credit

500

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


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