principal accounting - ch05 accounting system and internal control

Chapter 5Accounting Systems and

Internal ControlsAccounting, 21st Edition

Warren Reeve Fess

PowerPoint Presentation by Douglas CloudProfessor Emeritus of AccountingPepperdine University

© Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved.

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1. Define an accounting system and describe its implementation.

2. List the three objectives of internal control, and define and give examples of the five elements of internal control.

3. Journalize and post transactions in a manual accounting system that uses subsidiary ledgers and special journals.

ObjectivesObjectives

After studying this chapter, you should

be able to:

After studying this chapter, you should

be able to:

4. Describe and give examples of additional subsidiary ledgers and modified special journals.

ObjectivesObjectives

5. Apply computerized accounting to the revenue and collection cycle.

6. Describe the basic features of e-commerce.

Basic Accounting

System

Basic Accounting

System

Implementation

Design

Analysis

FEEDBACK

Objectives of Internal Control

Objectives of Internal Control

1. assets are safeguarded and used for business purposes.

2. business information is accurate.3. employees comply with laws and

regulations.

To provide reasonable assurance that:

1. Control environment2. Risk assessment3. Control procedures4. Monitoring5. Information and communication

Elements of Internal Control

Management philosophy and operating style influences the

control environment.

Management philosophy and operating style influences the

control environment.


Elements of Internal ControlElements of Internal Control

Once risks are identified, they can be analyzed to estimate their significance, to assess their likelihood of occurring, and to determine actions that will minimize them.

Once risks are identified, they can be analyzed to estimate their significance, to assess their likelihood of occurring, and to determine actions that will minimize them.

Control ProceduresControl Procedures

Competent Personnel Rotating Duties Mandatory Vacations Separating Responsibilities for

Related Operations Separating Operations,

Custody of Assets, and Accounting

Proofs and Security Measures

Separating Responsibilities for Related Operations

Separating Responsibilities for Related Operations1. Orders may be placed on the basis of

friendship with a supplier, rather than on price, quality, and other objective factors.

2. The quantity and quality of supplies received may not be verified, thus causing payment for supplies not received or poor-quality supplies.

3. Supplies may be stolen by the employee.4. The validity and accuracy of invoices may be

verified carelessly.

Otherwise, the following abuses are possible:

Otherwise, the following abuses are possible:

Control ProceduresControl Procedures

Competent Personnel Rotating Duties Mandatory Vacations Separating Responsibilities for

Related Operations Separating Operations,

Custody of Assets, and Accounting

Proofs and Security Measures

Independent check

Independent check

Independent check

Custody of Assets

AccountingOperationsOperations

Clues to Potential ProblemsClues to Potential Problems

1. Abrupt changes in lifestyle.

2. Close social relationships with suppliers.

3. Refusing to take a vacation.

4. Frequent borrowing from other employees.

5. Excessive use of alcohol or drugs.

Warning signs with regard to people:

1. Missing documents or gaps in transaction numbers.

2. An unusual increase in customer refunds.

3. Differences between daily cash receipts and bank deposits.

4. Sudden increase in slow payments.5. Backlog in recording transactions.

Warning signs from the accounting system:

Clues to Potential ProblemsClues to Potential Problems

Manual Accounting Systems

Cash 11

Accts. Pay. 21

General Ledger

Accts. Rec. 12

Supplies 14

General Ledger and Subsidiary LedgersGeneral Ledger and Subsidiary Ledgers

Accounts ReceivableSubsidiary Ledger

A B C D

Customer Accounts

Accounts PayableSubsidiary Ledger

A B C D

Creditor Accounts

BUYING

SELLING

Special Journals

Providing services on account

Revenue journalrecorded inrecorded in

Receipt of cash from any source

Cash receipts journalrecorded inrecorded in

Purchase of items on account

Purchases journalrecorded inrecorded in

Payment of cash for any purpose

Cash payments journalrecorded inrecorded in

The Revenue JournalThe Revenue Journal

All sales on account are recorded in this journal. Each sales invoice is

listed in numerical order.

All sales on account are recorded in this journal. Each sales invoice is

listed in numerical order.

Revenue Journal Invoice Post Accts. Rec. – Debit Date No. Account Debited Ref. Fees Earned – Credit

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Performed services on credit to MyMusic.com, $2,200.

Performed services on credit to MyMusic.com, $2,200.

2006

Mar. 2 615 MyMusicClub.com 2 2 0 0 00



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Notice that only one line is required to make the entry.

Notice that only one line is required to make the entry.

2006



Posting from the Revenue JournalPosting from the Revenue Journal


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To update the MyMusicClub.com account, the $2,200 debit is posted to the accounts

receivable subsidiary ledger.

To update the MyMusicClub.com account, the $2,200 debit is posted to the accounts


2006



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Accounts Receivable Subsidiary Ledger

Date Item P.R. Debit Credit Balance

MyMusicClub.com

Mar. 2 R35 2,200 2,2002006



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2006




MyMusicClub.com

Mar. 2 R35 2,200 2,2002006

This procedure is repeated for each posting to the accounts receivable subsidiary ledger.



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20031

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Assume that similar entries were journalized and posted during the

month of March.

Assume that similar entries were journalized and posted during the

month of March.


6 616 RapZone.com 1 7 5 0 00

18 617 Web Cantina 2 6 5 0 00

27 618 MyMusicClub.com 3 0 0 0 00

2006




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6 616 RapZone.com 1 7 5 0 00

18 617 Web Cantina 2 6 5 0 00


On March 31, the revenue journal is totaled and ruled.

On March 31, the revenue journal is totaled and ruled.

31 9 6 0 0 00



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6 616 RapZone.com 1 7 5 0 00

18 617 Web Cantina 2 6 5 0 00


Next, the revenue journal’s total ($9,600) is posted to the general ledger.

Next, the revenue journal’s total ($9,600) is posted to the general ledger.

31 9 6 0 0 00

Posting the Revenue Journal TotalPosting the Revenue Journal Total

ACCOUNT Accounts Receivable Account No. 12

Balance

Dr. Cr.Date Dr. Cr.Item

Post. Ref.

2006Mar. 1 Balance 3 400 00

GENERAL LEDGER

31 9 600 00 13 000 00 R35

Revenue Journal, page 35


By placing the account number here, we indicate that $9,600 has been debited to

Accounts Receivable in the general ledger.



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6 616 RapZone.com 1 7 5 0 00

18 617 Web Cantina 2 6 5 0 00


31 9 6 0 0 00

(12)(41)

ACCOUNT Fees Earned Account No. 41

Balance

Dr. Cr.Date Dr. Cr.Item

Post. Ref.

GENERAL LEDGER

2006Mar. 31 R35 9 600 00 9 600 00



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6 616 RapZone.com 1 7 5 0 00

18 617 Web Cantina 2 6 5 0 00


31 9 6 0 0 00

(12)(41)

Placing “41” here indicates that $9,600 has been posted to the credit side of Fees

Earned in the general ledger.


The Cash Receipts JournalThe Cash Receipts Journal

All transactions that involve the receipt of cash are

recorded in the cash receipts journal.

All transactions that involve the receipt of cash are

recorded in the cash receipts journal.


Mar. 1 Rent Revenue 400 400

CASH RECEIPTS JOURNALOther Accounts

Post Accounts Receivable CashDate Account Credited Ref. Cr. Cr. Dr.

Page 14

NetSolutions received $400 cash on March 1 for the month’s rent.

NetSolutions received $400 cash on March 1 for the month’s rent.


2006




During March, NetSolutions collected cash from three customers.

During March, NetSolutions collected cash from three customers.

19 Web Cantina 3,400 3,400 28 MyMusicClub.com 2,200 2,200 30 RapZone.com 1,750 1,750


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2006

Each account under “Accounts Receivable Cr.” is posted to the accounts


Each account under “Accounts Receivable Cr.” is posted to the accounts


Posting the Cash Receipts JournalPosting the Cash Receipts Journal





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2006




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Web Cantina

Mar. 1 Bal. 3,40018 R35 2,650 6,050

2006

3,400 2,650


2006

19




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Web Cantina

Mar. 1 Bal. 3,40018 R35 2,650 6,050

2006

3,40019 CR14 2,650

2006


After all journalizing and posting to the accounts

receivable subsidiary ledger for the month is complete, the

columns are totaled.

After all journalizing and posting to the accounts

receivable subsidiary ledger for the month is complete, the

columns are totaled.


Mar. 1 Rent Revenue 400 400 19 Web Cantina 3,400 3,400 28 MyMusicClub.com 2,200 2,200 30 RapZone.com 1,750 1,750 31 400 7,350 7,750



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2006

The total “Cash Dr.” column equals the total of the two

credit columns.

The total “Cash Dr.” column equals the total of the two

credit columns.




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The three circled items are posted to the general ledger.

Let’s post Accounts Receivable.

The three circled items are posted to the general ledger.

Let’s post Accounts Receivable.

2006

Account: Accounts Receivable No. 12

GENERAL LEDGER


Mar. 1 Bal 3,40031 R35 9,600 13,000

2006




Page 14


2006

Account: Accounts Receivable No. 12

GENERAL LEDGER


Mar. 1 Bal 3,40031 R35 9,600 13,000

2006

7,350 5,65031 CR14




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2006

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The $7,750 total in the Cash Debit column is posted to Cash in a similar manner.

The $7,750 total in the Cash Debit column is posted to Cash in a similar manner.


The $400 credit to Rent Revenue could have been posted earlier, but posting it at the same time as other general ledger accounts is proper.

The $400 credit to Rent Revenue could have been posted earlier, but posting it at the same time as other general ledger accounts is proper.


A completely posted cash receipts journal is shown in

the next slide.

A completely posted cash receipts journal is shown in

the next slide.




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Posted Cash Receipts JournalPosted Cash Receipts Journal

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2006

Accounts Receivable

Control Account

If the accounts receivable account in the general ledger only shows summary totals,

where are the individual customer balances?

If the accounts receivable account in the general ledger only shows summary totals,

where are the individual customer balances?

ACCOUNT Accounts Receivable No. 12

GENERAL LEDGER

Date Item P.R. Debit Credit BalanceMar. 1 Bal 3,400

31 R35 9,600 13,0007,350 5,65031 CR14


RapZone.com

3/6 R35 1,750 1,7503/30 CR14 1,750 --


Web CantinaDate Item P.R. Debit Credit Balance

3/2 R35 2,200 2,2003/27 R35 3,000 5,2003/28 CR14 2,200 3,000

3/1 Bal. 3,4003/18 R35 2,650 6,0503/19 CR14 3,400 2,650

Accounts Receivable Subsidiary

Ledger

Accounts Receivable

Control Account

MyMusicClub.com

ACCOUNT Accounts Receivable No. 12

GENERAL LEDGER


31 R35 9,600 13,0007,350 5,65031 CR14

The purchases journal is designed for recording all

purchases on account.

The purchases journal is designed for recording all

purchases on account.

On March 3, 2003, NetSolutions purchased supplies from Howard

Supplies, $600.

Journalizing in the Purchases JournalJournalizing in the Purchases Journal

PURCHASES JOURNALAccts. Other

Post Payable Supplies Accounts PostDate Account Credited Ref. Cr. Dr. Dr. Ref. Amount

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Mar. 3 Howard Supplies 600 600 2006



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To keep the accounts payable subsidiary ledger current, this entry

is posted on March 3.


Accounts Payable Subsidiary Ledger

Date Item P.R. Dr. Cr. Balance

Howard Supplies

Mar 3 600 6002006

Posting the Purchases JournalPosting the Purchases Journal



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Accounts Payable and Supplies will be posted as totals.





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On March 7, NetSolutions purchased supplies from Donnelly

Supplies, $420.


7 Donnelly Supplies 420 420




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7 Donnelly Supplies 420 420




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On March 12, NetSolutions purchased office equipment from Jewett Business

Systems, $2,800.

7 Donnelly Supplies 420 42012 Jewett Bus. Sys. 2,800 Off. Equip. 2,800

Because there isn’t a special column for Office Equipment, this purchase was recorded under “Other Accounts Dr.”




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Now, let’s look at the rest of March’s entries (assume that all postings to the accounts payable

subsidiary ledger have been made).

19 Donnelly Supplies 1,450 1,45027 Howard Supplies 960 960




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At the end of March, all columns are totaled and equality of debits and credits is verified.

At the end of March, all columns are totaled and equality of debits and credits is verified.

Totaling the Purchases JournalTotaling the Purchases Journal

19 Donnelly Supplies 1,450 1,45027 Howard Supplies 960 96031 6,230 3,430 2,800

$6,230 = $3,430 + $ 2,800 $6,230 = $3,430 + $ 2,800

The next step is to post to the general journal.



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7 Donnelly Supplies 420 42012 Jewett Bus. Sys. 2,800 Off. Equip. 2,80019 Donnelly Supplies 1,450 1,45027 Howard Supplies 960 96031 6,230 3,430 2,800




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ACCOUNT Accounts Payable No. 21

GENERAL LEDGER


6,230 7,46031 P11



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GENERAL LEDGER


6,230 7,46031 P11

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Supplies is posted as a total of $3,430 to general ledger account 21. Office

Equipment is posted individually.

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NetSolutions had only one entry in the “Other Accounts Dr.” column. If there were others, they would be posted individually. Therefore, the total is not posted. A check

mark indicates that the total was not posted.

The Cash Payments Journal

All payments are recorded in the cash payments journal.

NetSolutions makes all payments by check.

All payments are recorded in the cash payments journal.

NetSolutions makes all payments by check.

Let’s make all of the cash payment journal

entries for March.

Let’s make all of the cash payment journal

entries for March.

CASH PAYMENTS JOURNAL

Other AccountsCk. Post Accounts Payable Cash

Date No. Account Debited Ref. Dr. Dr. Cr

PAGE 7

On March 2, NetSolutions paid the rent for March by issuing Check No. 150 for $1,600.

2006

Mar. 2 150 Rent Expense 1,600 1,600




PAGE 7

On March 15, issued Check No. 151 to Grayco Supplies on account, $1,230.

2006

Mar. 2 150 Rent Expense 1,600 1,60015 151 Grayco Supplies 1,230 1,230




PAGE 7

Let’s post to the accounts payable subsidiary ledger at this time to keep

the creditor’s account current.

2006

Mar. 2 150 Rent Expense 1,600 1,60015 151 Grayco Supplies 1,230 1,230

Accounts Payable Subsidiary LedgerGrayco Supplies

Mar. 3 Bal. 1,230

Date Item P.R. Dr. Cr. Balance

1,230 --- 15 CP7




PAGE 7

On March 21, issued Check No. 152 as payment on account to

Jewett Business Systems, $2,800.

2006

Mar. 2 150 Rent Expense 1,600 1,60015 151 Grayco Supplies 1,230 1,23021 152 Jewett Business Sys. 2,800 2,800




PAGE 7

On March 22, issued Check No. 153 as payment on account to

Donnelly Supplies, $420.

2006

Mar. 2 150 Rent Expense 1,600 1,60015 151 Grayco Supplies 1,230 1,23021 152 Jewett Business Sys. 2,800 2,80022 153 Donnelly Supplies. 420 420




PAGE 7

On March 30, issued Check No. 154 as payment for utility bill, $1,050.

2006

Mar. 2 150 Rent Expense 1,600 1,60015 151 Grayco Supplies 1,230 1,23021 152 Jewett Business Sys. 2,800 2,80022 153 Donnelly Supplies. 420 42030 154 Utilities Expense 1,050 1,050




PAGE 7

On March 31, issued Check No. 155 on account to Howard

Supplies, $600

2006

Mar. 2 150 Rent Expense 1,600 1,60015 151 Grayco Supplies 1,230 1,23021 152 Jewett Business Sys. 2,800 2,80022 153 Donnelly Supplies. 420 42030 154 Utilities Expense 1,050 1,05031 155 Howard Supplies 600 600




PAGE 7

The journal is ruled, summed, and verified for equality of debits and

the “Cash Cr.” column.

2006

Mar. 2 150 Rent Expense 1,600 1,60015 151 Grayco Supplies 1,230 1,23021 152 Jewett Business Sys. 2,800 2,80022 153 Donnelly Supplies. 420 42030 154 Utilities Expense 1,050 1,05031 155 Howard Supplies 600 60031 2,650 5,050 7,700

Individual items in the “Other Accounts Dr.” column are posted. Then the totals for “Accounts

Payable Dr.” and “Cash Cr.” are posted.




PAGE 7

2006

Mar. 2 150 Rent Expense 1,600 1,60015 151 Grayco Supplies 1,230 1,23021 152 Jewett Business Sys. 2,800 2,80022 153 Donnelly Supplies. 420 42030 154 Utilities Expense 1,050 1,05031 155 Howard Supplies 600 60031 2,650 5,050 7,700

(21) (11)

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Accounts PayableAccounts Payable

Accounts Payable Control

Accounts Payable Control

Donnelly SuppliesDate Item P.R. Debit Credit Balance

Grayco SuppliesDate Item P.R. Debit Credit Balance

Howard SuppliesDate Item P.R. Debit Credit Balance

Mar 2 P11 420 42019 P11 1,450 1,87022 CP7 420 1,450Accounts

Payable Subsidiary

Ledger

Accounts Payable (Controlling)


GENERAL LEDGER


31 P11 6,230 7,46031 CP7 5,050 2,410

Mar 1 Bal. 1,23015 CP7 1,230 0--

Mar 3 P11 600 60027 P11 960 1,56031 CP7 600 960

Jewett Business Systems also has a zero balance, so that account was omitted for space

reasons.

Advantages of a Computerized Accounting System Over a Manual Accounting System

Advantages of a Computerized Accounting System Over a Manual Accounting System

1. Computerized systems simplify the record-keeping process.

2. Computerized systems are generally more accurate.

3. Computerized systems provide management current account balance information to support decision making.

The Revenue and Collection Cycle in QuickBooks

The Revenue and Collection Cycle in QuickBooks

From Exhibit 10, page 203 of textbook

Mail invoice to customer

The Revenue and Collection Cycle in QuickBooks Continued

The Revenue and Collection Cycle in QuickBooks Continued

From Exhibit 10, page 203 of textbook

Advanced Areas Where the Internet is Being Used for

Business Purposes

Advanced Areas Where the Internet is Being Used for

Business PurposesSupply chain management (SCM)

Customer relationship management (CRM)

Product life-cycle management (PLM)

The EndThe End

Chapter 5

principal accounting - ch05 accounting system and internal control

Economy & Finance

control environment

objectives of internal

accounting proofs

internal controls accounting

computerized accounting

basic accounting system

separating responsibilities

manual accounting systems