Principles of Financial
Accounting 2002e
Belverd E. Needles, Jr.
Marian Powers
Susan Crosson
----------Multimedia Slides by:
Harry Hooper
Santa Fe Community College
Copyright © by Houghton Mifflin Company. All rights reserved.
1
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.
Copyright © by Houghton Mifflin Company. All rights reserved.
3
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.
Copyright © by Houghton Mifflin Company. All rights reserved.
4
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.
Copyright © by Houghton Mifflin Company. All rights reserved.
6
Design Principles

Four general principles of
accounting systems design:

Cost-benefit principle.

Control principle.

Compatibility principle.

Flexibility principle.
Copyright © by Houghton Mifflin Company. All rights reserved.
7
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 system’s cost.
 Costs
may either be tangible or intangible.
 Tangible
costs include personnel, forms, and
equipment.
 Intangible
costs include the cost of wrong
decisions.
Copyright © by Houghton Mifflin Company. All rights reserved.
8
Control Principle
 The
control principle requires that an
accounting system provide internal
control features in order to protect a
firm’s assets and ensure that data are
reliable.
Copyright © by Houghton Mifflin Company. All rights reserved.
9
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.
Copyright © by Houghton Mifflin Company. All rights reserved.
10
Flexibility Principle
The
flexibility principle holds that an
accounting system must be flexible
enough to allow the volume of
transactions to grow and
organizational changes to be made.
Copyright © by Houghton Mifflin Company. All rights reserved.
11
Discussion
Q.
What are the four general
principles of accounting systems
design?
A.
The four general principles of
accounting systems design are: (1) costbenefit, (2) control, (3) compatibility,
and (4) flexibility.
Copyright © by Houghton Mifflin Company. All rights reserved.
12
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).
Copyright © by Houghton Mifflin Company. All rights reserved.
14
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.
Copyright © by Houghton Mifflin Company. All rights reserved.
15
Graphical User Interface
Copyright © by Houghton Mifflin Company. All rights reserved.
16
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.
Copyright © by Houghton Mifflin Company. All rights reserved.
17
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.
Copyright © by Houghton Mifflin Company. All rights reserved.
19
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.
Copyright © by Houghton Mifflin Company. All rights reserved.
20
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.
Copyright © by Houghton Mifflin Company. All rights reserved.
21
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.
Copyright © by Houghton Mifflin Company. All rights reserved.
22
Microcomputer Systems

Computerization typically results in:

Reduced processing time.

Improved arithmetic accuracy.

Increased data dependability.
Copyright © by Houghton Mifflin Company. All rights reserved.
23
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.
Copyright © by Houghton Mifflin Company. All rights reserved.
24
Microcomputer Accounting System Using General Ledger Software
Copyright © by Houghton Mifflin Company. All rights reserved.
25
Accountants and the Internet
OBJECTIVE 4
Explain how accountants use
the Internet.
Internet
World’s
largest computer network.
Access
to the Internet requires a
communication device (modem)
with a connection to an Internet
service provider (ISP).
Copyright © by Houghton Mifflin Company. All rights reserved.
27
Internet Capabilities
 Electronic

Sending and receiving of communications over the
network.
 World

mail (E-mail).
Wide Web.
A vast repository of information accessible via a
browser.
 Information

retrieval.
Downloading of files from the network to individual
computers.
Copyright © by Houghton Mifflin Company. All rights reserved.
28
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.
Copyright © by Houghton Mifflin Company. All rights reserved.
29
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.
Copyright © by Houghton Mifflin Company. All rights reserved.
30
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.
Copyright © by Houghton Mifflin Company. All rights reserved.
31
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
Copyright © by Houghton Mifflin Company. All rights reserved.
33
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.
Copyright © by Houghton Mifflin Company. All rights reserved.
34
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
Copyright © by Houghton Mifflin Company. All rights reserved.
35
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 specialpurpose journals allows the posting of
column totals (representing many
transactions).
Copyright © by Houghton Mifflin Company. All rights reserved.
36
Discussion
Q.
A.
True or False: If a firm uses specialpurpose journals it no longer
needs a general journal.
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.
Copyright © by Houghton Mifflin Company. All rights reserved.
37
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.
Copyright © by Houghton Mifflin Company. All rights reserved.
39
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.
Copyright © by Houghton Mifflin Company. All rights reserved.
40
Relationship of Subsidiary Accounts to the Controlling Account
Copyright © by Houghton Mifflin Company. All rights reserved.
41
Controlling Accounts and
Subsidiary Ledgers
 Most
companies have subsidiary
ledgers for:
 Accounts
Receivable.
 Accounts
Payable.
 Notes
Receivable.
 Short-Term
Investments.
 Equipment.
Copyright © by Houghton Mifflin Company. All rights reserved.
42
Controlling Accounts and
Subsidiary Ledgers
Subsidiary
ledgers should be used
when management needs
information on individual items
composing the balance in a general
ledger (controlling) account.
Copyright © by Houghton Mifflin Company. All rights reserved.
43
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.
Copyright © by Houghton Mifflin Company. All rights reserved.
44
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.
Copyright © by Houghton Mifflin Company. All rights reserved.
46
Sales Journal
Date
July
Account
Debited
1 P. Clark
5 G. Jones
8 E. Cumberland
Posted to A/R
Invoice
Number
721
722
723
Terms
Post.
Ref.
2/10,n/30
2/10,n/30
2/10,n/30
Amount
(Dr. / Cr.
A/R / Sales)
x
x
x
750
500
335
1,585
Posted to Sales
Copyright © by Houghton Mifflin Company. All rights reserved.
47
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 customer’s Accounts Receivable
account in the ledger. Mark the Post. Ref.
column to indicate it has been posted.
Copyright © by Houghton Mifflin Company. All rights reserved.
48
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.
Copyright © by Houghton Mifflin Company. All rights reserved.
49
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.
Copyright © by Houghton Mifflin Company. All rights reserved.
50
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.
Copyright © by Houghton Mifflin Company. All rights reserved.
51
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).
Copyright © by Houghton Mifflin Company. All rights reserved.
52
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 supplier’s account in the
accounts payable subsidiary ledger. Indicate
in the Post. Ref. column that a purchase has
been posted.
Copyright © by Houghton Mifflin Company. All rights reserved.
53
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.
Copyright © by Houghton Mifflin Company. All rights reserved.
54
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.
Copyright © by Houghton Mifflin Company. All rights reserved.
55
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).
Copyright © by Houghton Mifflin Company. All rights reserved.
56
Cash Receipts Journal
 Debit
columns may include:
 Cash.
 Sales
Discounts.
 Other Accounts.
 Credit
columns may include:
 Accounts
Receivable.
 Sales.
 Other Accounts.
Copyright © by Houghton Mifflin Company. All rights reserved.
57
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.
Copyright © by Houghton Mifflin Company. All rights reserved.
58
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.
Copyright © by Houghton Mifflin Company. All rights reserved.
59
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.
Copyright © by Houghton Mifflin Company. All rights reserved.
60
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
Copyright © by Houghton Mifflin Company. All rights reserved.
61
Cash Payments Journal
 All
transactions involving the
payments of cash are entered in the
cash payments journal (cash
disbursements journal).
Copyright © by Houghton Mifflin Company. All rights reserved.
62
Cash Payments Journal
 Credit
columns usually consist of:
 Cash.
 Purchases
Discounts.
 Other Accounts.

Debit columns usually consist of:
 Accounts
Payable.
 Other Accounts.
Copyright © by Houghton Mifflin Company. All rights reserved.
63
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.
Copyright © by Houghton Mifflin Company. All rights reserved.
64
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.
Copyright © by Houghton Mifflin Company. All rights reserved.
65
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.
Copyright © by Houghton Mifflin Company. All rights reserved.
66
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.
Copyright © by Houghton Mifflin Company. All rights reserved.
67
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.
Copyright © by Houghton Mifflin Company. All rights reserved.
68
OK, LET’S 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