978-0077862275 Chapter 7 Lecture Note Part 1

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CHAPTER 7

ACCOUNTING INFORMATION SYSTEMS

Related Assignment Materials

Student Learning Objectives Questions

Quick

Studies* Exercises* Problems*

Beyond the

Numbers

Conceptual objectives:

C1. Identify the fundamental

principles and components of

accounting information

systems.

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5, 6

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C2. Explain the goals and uses of

special journals.

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C3. Describe the use of controlling

accounts and subsidiary ledgers.

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Analytical objectives:

A1 Compute segment return on

assets and use it to evaluate

segment performance.

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Procedural objectives:

P1. Journalize and post transactions

using special journals.

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7-1, 7-2, 7-3 7-6, 7-7

P2. Prepare and prove the accuracy

of subsidiary ledgers.

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*See additional information on next page that pertains to these quick studies, exercises and problems.

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Additional Information on Related Assignment Material

The Serial Problem for Success Systems continues in this chapter. Problems 7-1A, and the

Comprehensive Problem provided for this chapter can be completed using Excel. Problem 7-1A, 7-2A

and the Serial Problem and the Comprehensive Problem can be completed with Sage 50 Software.

Problem 7-1A, 7-2A and the Serial Problem can be completed with QuickBooks.

Connect (Available on the instructor’s course-specific website) repeats all numerical Quick Studies, all

Exercises and Problems Set A. Connect provides new numbers each time the Quick Study, Exercise or

Problem is worked. It allows instructors to monitor, promote, and assess student learning. It can be used

in practice, homework, or exam mode.

Synopsis of Chapter Revisions

Oimei Company: NEW opener with new entrepreneurial assignment

Streamlined several sections

Updated segment analysis using Callaway Golf

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Chapter Outline Notes

I. Fundamental System Principles—Accounting information systems

(AIS) collect and process data from transactions and events, organize

them in useful reports and communicate results to decision makers.

The five fundamental principles of accounting information systems

are:

A. Control Principle

Prescribes that AIS have internal controls—methods and

procedures allowing managers to control and monitor activities.

B. Relevance Principle

Prescribes that AIS report useful, understandable, timely and

pertinent information for effective decision making.

C. Compatibility Principle

Prescribes that AIS conform with a company’s activities, personnel

and structure. It also must adapt to the company’s unique

characteristics.

D. Flexibility Principle

Prescribes that AIS be able to adapt to changes in the company,

business environment, and needs of decisions makers.

E. Cost-Benefit Principle

Requires that the benefits from an activity in AIS outweigh the

costs of that activity. Decisions regarding the other system

principles are affected by this principle.

II. Components of Accounting Systems—AIS consist of people,

records, methods and equipment. Five basic components of AIS are:

A. Source Documents

Documents (paper and electronic) that provide the basic

information processed by an accounting system.

B. Input Devices

Capture information from source documents and enable its transfer

to the information system’s processing component.

C. Information Processors

Systems that interpret, transform, and summarize information for

use in analysis and reporting.

D. Information Storage

System component that keeps data in a form accessible to

information processors.

E. Output Devices

Means to take information out of an accounting system and make

available to users.

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Chapter Outline Notes

III. Special Journals in Accounting

A. Basics of Special Journals

1. Special journals are used to record and post transactions of

similar type.

2. Their use reduces recording and posting labor by grouping

similar transactions and periodically posting column totals.

3. Use allows an efficient division of labor—an effective control

procedure.

B. Subsidiary Ledgers

List of individual accounts with a common characteristic. Contains

detailed information on specific general ledger accounts which are

referred to as the control account.

1. Two of the most important subsidiary ledgers are:

a. Accounts receivable ledger—stores transaction data of

individual customers; controlled by Accounts Receivable

in General Ledger.

b. Accounts payable ledger—stores transaction data of

individual suppliers; controlled by Accounts Payable in

General Ledger.

2. Subsidiary ledgers are common for other general ledger

accounts such as equipment inventory, and investments.

C. Sales Journal

Used to record sales of inventory on credit.

1. Generally contains two columns. The first column is use to

record each sale and the total is posted to Accounts Receivable

(debit) and to Sales (credit) in the General Ledger at the end of

the month.

2. It has a second column to record the tracking of the perpetual

inventory cost. This column total is posted to Cost of Goods

Sold (debit) and Inventory (credit).

3. Debits to the accounts of particular customers are individually

posted to the customers account in a subsidiary accounts

receivable ledger a the same time the transaction is recorded in

the special journal.

4. A schedule (list) of accounts receivable is used to prove the

accuracy of the subsidiary ledger. The total of this schedule

must equal the balance of the Accounts Receivable controlling

account in the general ledger.

D. Cash Receipts Journal

Multicolumn journal used to record all receipts of cash.

1. Every transaction increases Cash and is recorded in special

Cash debit column. The total of this column is posted at

month end.

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Chapter Outline Notes

2. Special credit columns are usually established for Accounts

Receivable and Sales. A special debit column may be used for

Sales Discounts. A special column is established to record the

tracking of the perpetual inventory cost. Amounts in this

column are debits to Cost of Goods Sold and credits to

Inventory. Only the totals of special columns are posted to the

General Ledger.

3. A column titled “Other Accounts – Credit” is used to record all

types of receipts that are not frequent enough to justify having

special columns. Each credit in the Other Accounts column

must be posted individually.

4. Credits to the accounts of particular customers are

individually posted to the customer’s account in a subsidiary

Accounts Receivable Ledger.

E. Purchases Journal

Multicolumn journal used to record all purchases on credit.

1. In addition to a special column for Inventory debit and

Accounts Payable credit, separate columns may be established

for frequent credit purchases, such as Store Supplies debit and

Office Supplies debit.

2. Only the totals of special columns are posted to the General

Ledger. Amounts in “Other Accounts” columns are posted

individually.

3. Credits to the accounts of particular creditors are individually

posted to the subsidiary Accounts Payable Ledger.

4. A schedule (list) of accounts payable is used to prove the

accuracy of the subsidiary ledger. The total of this schedule

must equal the balance of the Accounts Payable controlling

account in the general ledger

F. Cash Disbursements (Payments) Journal

Used to record all payments of cash.

1. A Check Register is a cash disbursements journal that includes

a column for entering the number of each check.

2. A special Cash credit column is established. Only the total of

this column is posted.

3. Special columns are usually established for Accounts Payable

debit and Inventory credit (for purchase discounts received).

Only the totals of special columns are posted to the General

Ledger.

4. A column titled “Other Accounts –Debit” is used to record all

types of payments that are not frequent enough to justify

special columns. Each debit in the Other Accounts column

must be posted individually.

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Chapter Outline Notes

5. Debits to the accounts of particular creditors are individually

posted to the supplier’s account in a subsidiary Accounts

Payable Ledger.

G. General Journal Transactions

Used to record transactions that do not fit in any of the special

journals. Examples:

1. Adjusting entries.

2. Closing entries.

3. Correcting entries.

4. Other transactions may include sales returns, purchases

returns, and purchases of plant assets by issuing a note and

receipt of notes from customers.

IV. Technology-Based Accounting Systems—AIS are supported with

technology ranging from simple calculators to advanced computerized

systems

A. Computer Technology in Accounting—provides accuracy, speed,

efficiency, and convenience in performing accounting tasks.

1. Multipurpose off–the-shelf software programs are designed to

be user friendly and menu driven (Examples: Peachtree and

QuickBooks).

2. Some software can operate efficiently as an integrated system

—actions in one part of the system automatically affect related

parts (For example: recording automatically results in

posting).

3. Technology has reduced recordkeeping time and thereby

allows more time for analysis and managerial decision

making.

B. Data Processing in Accounting—systems differ with regard to how

input is entered and processed.

1. On-line processing—enters and processes data as soon as

source documents are available. Updates databases

immediately. Examples: airline reservations, credit card

records, and rapid mail-order processing.

2. Batch processing accumulates source documents for a period

of time and then processes them all at once such as daily,

weekly, or monthly.

C. Computer Networks in Accounting

Links among computers giving different users and different

computers access to a common database and programs.

1. Local area network (LAN)—links computers with hard-wire

hookups.

2. Large computer networks extending over long distances often

rely on modem or wireless communication.

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Chapter Outline Notes

D. Enterprise-Resource Planning (ERP) Software

Programs that manage a company’s vital operations. Largest

suppliers of these programs are SAP and Oracle.

E. Cloud Computing

1. Delivery of computing as a service rather than a product.

2. Uses applications via the web instead of installing them on

individual computers.

V. Global View—Compares U.S. GAAP to IFRS

A. System principles and components are similar worldwide.

B. Special journals—systems that employ special journal are applied

worldwide but the exact structure of the special journals is unique

to each company.

VI. Decision Analysis—Segment Return on Assets

A. A segment is a part of a company that is separately identified by its

products or services or by the geographic market it serves.

B. Segment return on assets ratio—one measure of success for a

business segment.

C. Segment return on assets ratio equals the segment operating

income divided by segment average assets.

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