The System

1
The System
7
Unit 7
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Objective 7.1 Accounting as an Information
System

• The accounting process is an excellent example of
  a modern information system.

The system process is characterized by
O7.1
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Inputs Processing - Outputs

• INPUTS -The controlled collection of information
  (example is journalizing)
• PROCESSING -The reorganization and storage of
  this information (example is posting and updating
  account balances) and
• OUTPUTS -The production of new information
  (examples are the financial statements output
  from the process).

O7.1
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Feedback from the Outputs is used to improve the
system
TRANSACTIONS ADJUSMENTS CLOSING ENTRIES
INPUTS
JOURNAL
Controls must be adequate to insure the quality
of the outputs.
OUTPUTS Financial Statements Balance
Sheet Income Statement Statement of Changes in
Owners Equity Cash Flow
PROCESSING
ACCOUNT LEDGERS
O-7.1
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System Controls -Goals

• Protect assets against loss due to waste or
  theft
• Provide reliable financial reports from accurate
  data
• Encourage efficient operations
• Comply with managements goals
• Achieve compliance with laws and regulations.

O-7.1
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System Controls Issues

• Segregation of duties
• Clear definitions of authority and responsibility
• Safeguards to protect the firms assets
• Written policies
• Periodic quality reviews
• Maintenance of a review (audit) trail
• Access limitations
• Management philosophy consistent with good control

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System Controls -Issues
AUTHORIZATION RECORDING CUSTODY OF ASSETS
Keep in mind the goal of always separating these
duties
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Objective 7.2 Special Journals Subsidiary
Ledgers

• Special Journals bring efficiencies to the
  accounting process by providing books of original
  entry designed to handle large numbers of similar
  transactions.

O7.2
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Special Journals

• Sales Journal All sales from regular operations
  on credit
• Purchases Journal All inventory purchases on
  credit
• Cash Receipts Journal All cash received
• Cash Payments Journal All cash paid
• Often expanded to include other purchases on
  credit such as supplies and equipment

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Special Journals
TRANSACTIONS
JOURNALIZING
SALES JOURNAL
PURCHASES JOURNAL
CASH PAYMENTS JOURNAL
CASH RECEIPTS JOURNAL
GENERAL JOURNAL
POSTING
Many different paths can lead to the GL
ACCOUNT LEDGERS (General Ledger) Some accounts
will be Control Ledgers
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Objective 7.2 Special Journals Subsidiary
Ledgers

• Subsidiary ledgers are used to maintain sub
  accounts within a main or control account.

O7.2
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Example- Subsidiary Ledger

• An example is customer accounts receivable.
• Each customers balances must be maintained and
  all customers must reconcile with the total
  accounts receivable reported.

O7.2
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Subsidiary Ledgers
O-7.2
The Subsidiary Ledgers must add up to the Control
Ledger
Control Ledger Accounts Receivable
Balance
Subsidiary Ledgers AR Customer A
O7.2
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Which Journal?Does the transaction. . .
1. Involve Cash?
CASH PAYMENTS JOURNAL
CASH RECEIPTS JOURNAL
2. Involve sales purchases On Account?
PURCHASES JOURNAL
SALES JOURNAL
3. Remaining transactions go to the General
Journal
GENERAL JOURNAL
O7.2
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Sales Journal
For Sales on Credit Only
(P) Indicates subsidiary account posting
Indicates that the total 3,750 has been posted
to both the Accounts Receivable and to the Sales
Ledgers.
Notice the totals under each column are posted to
the account ledgers, rather than posting each
individual transaction.
O7.2
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Posting
O7.2
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Dual Posting
From Sales Journal
O5.2
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Purchases Journal
Notice the Other Debit all purpose column
O7.2
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Dual Posting
From Purchases Journal
O5.2
O-5.2
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Cash Receipts Journal
Dedicated columns are totaled and posted
O7.2
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Cash Receipts Journal
The Other account column is used for the Owner
Investment transaction
O7.2
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Cash Receipts Journal
Remember to maintain Subsidiary Ledgers
O7.2
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Cash Payments Journal
Cash is reduced with each transaction in this
journal
The Other account column is used for the Salaries
Expense
O7.2
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Cash Payments Journal
Remember to maintain Subsidiary Ledgers
O7.2
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General Journal
These transactions dont fit in the other
journals they must go in the general journal.
O7.2
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General Journal
Remember that we are using a Perpetual Inventory
System
O7.2
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Objective 7.3

• Identify the components of an Income Statement,
  Balance Sheet and Statement of Changes in Owners
  Equity

O7.3
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Service Firm Income Statement Multi-step
No cost of goods sold and gross profit section.
Separate sections for operating expenses and
nonoperating expenses.
Further separation of operating expenses into
selling and administrative expenses.
The other income and expense area segregates
nonoperating revenue and expenses
O7.3
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Merchandising Income Statement
The cost of goods sold and gross profit section
is a distinguishing feature
A single step statement would simply summarize
the operating expenses to a single amount..
O7.3
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Current Asset Liabilities
Current assets - assets that are expected to be
converted to cash or provide a benefit (consumed)
within one year or the firms fiscal period
whichever is longer. Examples are Cash, Accounts
Receivable, Inventory, Supplies, Prepaid
Insurance.  Current liabilities- liabilities
that are due and payable within the longer of one
year or the firms fiscal period. Examples are
trade accounts payable, taxes and wages payable,
credit lines and notes due within the firms
fiscal period
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Classified Balance Sheet
Separate both assets and liabilities into
current and noncurrent.
O7.3
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Classified Balance Sheet
More liquid
Earlier Payment Dates
Current assets are listed in order of their
liquidity or convertibility to cash.
Liabilities are listed in order of their
scheduled due dates.
O7.3
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Statement of Changes in Owners Equity
Notice the beginning of the fiscal period Owners
Capital, less the Owner draws during the fiscal
period and finally the periods income or loss.
The total ending equity is the same number that
appears on the Balance Sheet of the same date.
O7.3
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Objective 7.4
Analysis Calculate and explain the current ratio
and working capital from a Classified Balance
Sheet
Current Assets
Current Ratio
Current Liabilities
Working Capital
Current Assets
Current Liabilities
O7.4
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Liquidity
Liquidity The current ratio and working capital
are often called liquidity measures. The term
liquidity refers the relative cash nature of a
particular balance sheet.
O7.4
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Liquidity
For example, a highly liquid balance sheet would
have a large amount of cash and other current
assets, with limited current liabilities that
would require the use of that cash (liquidity).
O7.4
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Liquidity
Balance Sheet
Balance Sheet
Current Liabilities
Current Liabilities


Current Assets
Current Assets
More Liquid
Less Liquid
Equity
Assets
Equity
More current asset dollars to pay each current
liability dollar
Fewer current asset dollars to pay each current
liability dollar
O4.3
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Current ratio
The current ratio answers the following
question How many dollars of current assets are
available to pay each dollar of current
liabilities scheduled? The higher the number,
the more dollars of current assets are available
and therefore the more liquid is the particular
balance sheet being studied.
Current Assets
Current Ratio
Current Liabilities
O7.4
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Working capital
Working capital answers the following question
How many dollars of current assets would remain
if all current liabilities were paid using
current assets? The resulting answer is
expressed in dollars. The higher the number, the
more liquidity is displayed by the balance sheet.
Working Capital
Current Assets
Current Liabilities
O7.4
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Current Ratio Example
1.10 of current assets are available to pay each
dollar of current liabilities
?
1.10
O7.4
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Working Capital Example
16,900 of current assets would remain if current
assets were used to pay all current liabilities
?
16,900
O7.4
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End Unit 7