CHAPTER 7
ACCOUNTING INFORMATION SYSTEMS
LEARNING OBJECTIVES
1. EXPLAIN THE BASIC CONCEPTS OF AN ACCOUNTING
INFORMATION SYSTEM.
2. DESCRIBE THE NATURE AND PURPOSE OF A SUBSID–
IARY LEDGER.
CHAPTER REVIEW
Accounting Information Systems
1. (L.O. 1) The accounting information system collects and processes transaction data and
communicates financial information to decision makers. It includes each step of the accounting
cycle.
2. The basic principles of an accounting information system are:
a. Cost-effectiveness. The system must be cost effective: the benefits of the information must
Computerized Accounting Systems
3. 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.
Manual Systems
6. In a manual accounting system, each of the steps in the accounting cycle is performed by hand.
Subsidiary Ledgers
7. (L.O. 2) 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.
9. 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.
10. The advantages of using subsidiary ledgers are that they:
a. Show in a single account transactions affecting one customer or one creditor, thus providing
up–to-date information on specific account balances.
Special Journals
11. (L.O. 3) 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.
12. The following are types of special journals:
a. Sales journal—all sales of merchandise on account.
Sales Journal
14. For the sales journal,
a. 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.
Cash Receipts Journal
15. 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:
a. Only one line is needed for each entry.
16. The posting of a columnar journal such as the cash receipts journal involves the following
procedures:
a. 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.
Purchases Journal
17. For the purchases journal,
a. Each entry results in a debit to Inventory and a credit to Accounts Payable.
b. Only one line is needed to record each transaction.
18. The purchases journal can be expanded into a columnar journal by adding columns for supplies
and other accounts.
Cash Payments Journal
19. The cash payments journal has multiple columns because cash payments may be made for a
variety of purposes.
a. The journalizing procedures are similar to those described earlier for the cash receipts journal.
Effects of Special Journals on the General Journal
20. 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:
LECTURE OUTLINE
A. Basic Concepts of Accounting Information Systems.
1. Cost-effectiveness—the benefits of the information must outweigh the cost
of providing it.
B. Computerized Accounting Systems.
1. General ledger accounting systems are software programs that integrate
the various accounting functions related to sales, purchases, receivables,
payables, cash receipts and cash disbursements, and payroll.
2. Choosing the right software package is critical because installation of even
a basic system is time-consuming, and learning a new system will require
many hours of employee time.
ETHICS INSIGHT
The Sarbanes-Oxley Act requirements have created a huge market for software
that can monitor and trace every recorded transaction and adjusting entry. This
enables companies to pinpoint who used the accounting system and when they
used it.
Why might this software help reduce fraudulent activity by employees?
Answer: By pinpointing who used the accounting system and when they used it,
the software can hold employees more accountable for their actions.
C. Subsidiary Ledgers.
1. A subsidiary ledger is a group of accounts with a common characteristic
(for example, all accounts receivable).
4. The advantages subsidiary ledgers are that they:
a. Show in a single account transactions affecting one customer or one
creditor, thus providing up-to-date information on specific account
balances.
d. Make possible a division of labor in posting to the general ledger
and subsidiary ledgers.
ACCOUNTING ACROSS THE ORGANIZATION
Rather than relying on customer or creditor names in a subsidiary ledger, a com–
puterized system expands the account number of the control account in a pre–
specified manner.
Why use numbers to identify names in a computerized system?
Answer: Computerized systems process numbers faster than letters. Also, letters
sometimes cause problems because you may have two people with the
D. Special Journals.
1. Companies use special journals to record similar types of transactions.
Special journals frequently used are:
a. Sales journal. Used for all sales of merchandise on account.
2. In the sales journal, companies record sales of merchandise on account.
Each entry in the sales journal results in a debit to Accounts Receivable
3. In the cash receipts journal, companies record all receipts of cash.
a. Companies use a multiple-column cash receipts journal because a two
column journal would not have enough space for all possible cash
receipts transactions.
4. In the purchases journal, companies record all purchases of merchandise
on account. Each entry in this journal results in a debit to Inventory and a
credit to Accounts Payable.
E. Posting of Multi-Column Journals.
1. Companies post all column totals except for the Other Accounts column
once at the end of the month to the account title specified in the column
heading.
A Look at IFRS
As discussed in Chapter 1, IFRS is growing in acceptance around the world. For
example, recent statistics indicate a substantial number of the Global Fortune
500 companies use IFRS. And the chairman of the IASB predicts that IFRS
adoption will grow from its current level of 115 countries to nearly 150 countries
RELEVANT FACTS
Following are the key similarities and differences between AAP and IFRS related
to accounting information systems.
• The basic concepts related to an accounting information system are the same
under GAAP and IFRS.
LOOKING TO THE FUTURE
The basic recording process shown in this textbook is followed by companies
around the globe. It is unlikely to change in the future. The definitional structure
20 MINUTE QUIZ
Circle the correct answer.
True/False
1. The basic principles in developing an accounting information system are cost–effectiveness,
useful output, and flexibility.
True False
2. Flexibility (the ability to accommodate a variety of users and changing information needs)
is not important in designing and developing an efficient and effective accounting information
system.
True False
3. The sales journal is used to record all sales of merchandise.
True False
4. An advantage of using subsidiary ledgers is that they show transactions affecting one
customer or one creditor in a single account, providing up–to-date information on specific
account balances.
True False
5. In posting a multi-column journal, the total of the Other Accounts column is not posted.
True False
6. Each entry in the single–column purchases journal results in a debit to Inventory and a credit
to Accounts Payable.
True False
7. Only transactions that cannot be entered in a special journal are recorded in the general
journal.
True False
8. Companies record all receipts of cash in the cash receipts journal.
True False
9. The purchases journal is used to record all purchases of merchandise.
True False
10. When control and subsidiary accounts are involved, there must be a dual posting: once
to the control account and once to the subsidiary account.
True False
Multiple Choice
1. To be useful, information must be all of the following except
a. accurate.
b. conservative.
c. relevant.
d. understandable.
2. The source for preparing the schedule of accounts receivable is the
a. accounts receivable controlling account.
b. sales journal.
c. accounts receivable subsidiary ledger.
d. trial balance.
3. A group of accounts with a common characteristic, such as all accounts receivable, is a
a. cash receipts journal.
b. subsidiary ledger.
c. special journal.
d. general ledger.
4. Sales of merchandise for cash would be recorded in the
a. sales journal.
b. general journal.
c. purchases journal.
d. cash receipts journal.
5. A purchase return for credit is recorded in the
a. cash receipts journal.
b. cash payments journal.
c. general journal.
d. sales journal.
ANSWERS TO QUIZ
True/False
1. True 6. True
2. False 7. True
Multiple Choice
1. b.