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.

3. RECORD TRANSACTIONS IN SPECIAL JOURNALS IN

JOURNALIZING.

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 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
outweigh the cost of providing it.
b. Usefulness. To be useful the information must be understandable, relevant, reliable, timely,
and accurate.
c. Flexibility. The system should accommodate a variety of users and changing information
needs.

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.

4. Companies with revenues of less than $5 million and up to 20 employees generally use entry-
level programs. Quality entry-level packages include easy data access and report preparation,
provide an “audit trail,” have internal controls, enable customization, and provide network-
compatibility.

5. Enterprise resource planning (ERP) systems are typically used by manufacturing companies
with more than 500 employees and $500 million in sales. ERP systems go far beyond the
functions of an entry-level general ledger package by integrating all aspects of the organization,
including accounting, sales, human resource management, and manufacturing.

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.

8. Two common subsidiary ledgers are:

a. The accounts receivable (or customers’) ledger, which collects transaction data of individual
customers.
b. The accounts payable (or creditors’) ledger, which collects transaction data of individual
creditors.

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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.
b. Free the general ledger of excessive details. As a result, a trial balance of the general ledger
does not contain vast numbers of individual account balances.
c. Help locate errors in individual accounts by reducing the number of accounts in one ledger
and by using control accounts.
d. Make possible a division of labor in posting by having one employee post to the general
ledger while a different employee posts to the subsidiary ledgers.

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.
b. Cash receipts journal—all cash received (including cash sales).
c. Purchases journal—all purchases of merchandise on account.
d. Cash payments journal—all cash paid (including cash purchases).

13. If a transaction cannot be recorded in a special journal, it is recorded in the general journal. Special
journals permit greater division of labor and reduce the time necessary to complete the posting
process.

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.
b. Only one line is needed to record each transaction.
c. All entries are made from sales invoices.
d. Postings are made daily to the individual accounts receivable in the subsidiary ledger and
monthly, in total, to Accounts Receivable, Sales Revenue, Cost of Goods Sold and Inventory
in the general ledger.

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.
b. Each sale entry is accompanied by another entry that debits Cost of Goods Sold and credits
Inventory for cost.

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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.
b. The total of the Other Accounts column is not posted. Instead, the individual amounts com-
prising the total are posted separately to the general ledger accounts specified in the Accounts
Credited column.
c. The individual amounts in a column, posted in total to a control account, are posted daily to
the subsidiary ledger account specified in the Accounts Credited column.

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.
c. All entries are made from purchase invoices.
d. Postings are made daily to the individual creditor accounts in the accounts payable subsidiary
ledger and monthly, in total, to Inventory and Accounts Payable in the general ledger.

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.
b. All entries are made from prenumbered checks.
c. The posting 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:
a. In journalizing, both the control and subsidiary accounts must be identified.
b. In posting, there must be a dual posting: once to the control account and once to the sub -
sidiary account.

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 LECTURE OUTLINE

A. Basic Concepts of Accounting Information Systems.

1. Cost-effectiveness—the benefits of the information must outweigh the cost

of providing it.

2. Usefulness—information must be understandable, relevant, reliable, timely,

and accurate.

3. Flexibility—an accounting system should accommodate a variety of users

and changing information needs.

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.

3. Quality entry-level software packages usually involve more than recording

transactions and preparing financial statements. Common features and
benefits include:

(a) Easy data access and report preparation, (b) Audit trail, (c) Internal
controls, (d) Customization, and (e) Network-compatibility.

4. Enterprise resource planning (ERP) systems go far beyond the functions

of an entry-level general ledger package. They integrate all aspects of the
organization, including accounting, sales, human resource management,
and manufacturing.

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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.
Companies hope that this will reduce efforts by employees to enter false
accounting entries, change the dates of transactions, or create unau-
thorized expenditures. If employees do engage in these activities, there
will be significant evidence of their activities.

C. Subsidiary Ledgers.

1. A subsidiary ledger is a group of accounts with a common characteristic

(for example, all accounts receivable).

2. The subsidiary ledger facilitates the recording process by freeing the

general ledger from the details of individual balances.

3. At the end of an accounting period, each general ledger control account

balance must equal the composite balance of the individual accounts in
the related subsidiary ledger.

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.

b. Free the general ledger of excessive details relating to individual

accounts receivable and accounts payable.

c. Help locate errors in individual accounts by reducing the number of

accounts in one ledger and by using control accounts.

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 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
same name. Computerized systems avoid this problem by giving different
customers, including those with the same names, different account
numbers.

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.
b. Cash receipts journal. Used for all cash received.
c. Purchases journal. Used for all purchases of merchandise on
account.
d. Cash payments journal. Used for all cash paid.

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
and a credit to Sales Revenue at selling price and another entry at cost
—a debit to Cost of Goods Sold and a credit to Inventory.

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 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.

b. Generally, a cash receipts journal includes debit columns for Cash

and Sales Discounts, and credit columns for Accounts Receivable,
Sales Revenue, and “Other” Accounts. A debit and credit column is also
included to record debits to Cost of Goods Sold and credits to
Inventory when a cash sale occurs.

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.

5. In a cash payments (cash disbursements) journal, companies record all

disbursements of cash.

6. Only transactions that cannot be entered in a special journal are recorded in

the general journal.

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.

2. Companies do not post the total of the Other Accounts column. Instead,
the individual amounts comprising the total are posted separately to the
general ledger accounts specified in the Account Credited (Debited)
column.

3. The individual amounts in a column posted in total to a control account are

posted daily to the subsidiary ledger accounts specified in the Account
Credited (Debited) column.

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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
in the near future. When countries accept IFRS for use as accepted accounting
policies, companies need guidance to ensure that their first IFRS financial
statements contain high-quality information. Specifically, IFRS 1 requires that
information in a company’s first IFRS statements (1) be transparent, (2) provide a
suitable starting point, and (3) have a cost that does not exceed the benefits.

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.

• The use of subsidiary ledgers and control accounts, as well as the system used
for recording transactions, are the same under GAAP and IFRS.

• Many companies will be going through a substantial conversion process to

switch from their current reporting standards to IFRS.

• Upon first-time adoption of IFRS, a company must present at least one year of
comparative information under 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
of assets, liabilities, equity, revenues, and expenses may change over time as
the IASB and FASB evaluate their overall conceptual framework for establishing
accounting standards. In addition, high-quality international accounting requires
both high-quality accounting standards and high-quality auditing. Similar to the
convergence of U.S. GAAP and IFRS, there is a movement to improve
international auditing standards.

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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

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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.

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 ANSWERS TO QUIZ

True/False

1. True 6. True
2. False 7. True
3. False 8. True
4. True 9. False
5. True 10. True

Multiple Choice

1. b.
2. c.
3. b.
4. d.
5. c.

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