1 7 Unit 7 The System Learning Objectives

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1 7 Unit 7 The System Learning Objectives 1. Explain the accounting process as

1 7 Unit 7 The System Learning Objectives 1. Explain the accounting process as an information system 2. Explain the use of Special Journals and Subsidiary Ledgers in the accounting process 3. Identify the components of an Income Statement, Balance Sheet and Statement of Changes in Owner’s Equity 4. Analysis: Calculate and explain the current ratio and working capital from a Classified Balance Sheet ©Course. College. com

2 Objective 7. 1: Accounting as an Information System The accounting process is an

2 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: O 7. 1 ©Course. College. com

3 Inputs – Processing - Outputs INPUTS -The controlled collection of information (example is

3 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). O 7. 1 ©Course. College. com

4 TRANSACTIONS ADJUSMENTS CLOSING ENTRIES INPUTS Feedback from the Outputs is used to improve

4 TRANSACTIONS ADJUSMENTS CLOSING ENTRIES INPUTS Feedback from the Outputs is used to improve the system JOURNAL Controls must be adequate to insure the quality of the outputs. O-7. 1 OUTPUTS PROCESSING ACCOUNT LEDGERS Financial Statements Balance Sheet Income Statement of Changes in Owner’s Equity Cash Flow ©Course. College. com

5 System Controls -Goals ü Protect assets against loss due to waste or theft

5 System Controls -Goals ü Protect assets against loss due to waste or theft ü Provide reliable financial reports from accurate data ü Encourage efficient operations ü Comply with management’s goals ü Achieve compliance with laws and regulations. O-7. 1 ©Course. College. com

6 System Controls –Issues • Segregation of duties • Clear definitions of authority and

6 System Controls –Issues • Segregation of duties • Clear definitions of authority and responsibility • Safeguards to protect the firm’s assets • Written policies • Periodic quality reviews • Maintenance of a review (audit) trail • Access limitations • Management philosophy consistent with good control ©Course. College. com

System Controls -Issues 7 AUTHORIZATION Keep in mind the goal of always separating these

System Controls -Issues 7 AUTHORIZATION Keep in mind the goal of always separating these duties: RECORDING CUSTODY OF ASSETS ©Course. College. com

8 Objective 7. 2: Special Journals & Subsidiary Ledgers Special Journals bring efficiencies to

8 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. O 7. 2 ©Course. College. com

9 Special Journals §Sales Journal –All sales from regular operations on credit §Purchases Journal

9 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 ©Course. College. com

10 Special Journals TRANSACTIONS JOURNALIZING SALES JOURNAL Many different paths can lead to the

10 Special Journals TRANSACTIONS JOURNALIZING SALES JOURNAL Many different paths can lead to the GL PURCHASES JOURNAL CASH RECEIPTS JOURNAL CASH PAYMENTS JOURNAL GENERAL JOURNAL POSTING ACCOUNT LEDGERS (General Ledger) Some accounts will be Control Ledgers ©Course. College. com

11 Objective 7. 2: Special Journals & Subsidiary Ledgers Subsidiary ledgers are used to

11 Objective 7. 2: Special Journals & Subsidiary Ledgers Subsidiary ledgers are used to maintain sub accounts within a main or control account. O 7. 2 ©Course. College. com

12 Example- Subsidiary Ledger An example is customer accounts receivable. Each customer’s balances must

12 Example- Subsidiary Ledger An example is customer accounts receivable. Each customer’s balances must be maintained and all customers must reconcile with the total accounts receivable reported. O 7. 2 ©Course. College. com

13 Subsidiary Ledgers Control Ledger Accounts Receivable Balance The Subsidiary Ledgers must add up

13 Subsidiary Ledgers Control Ledger Accounts Receivable Balance The Subsidiary Ledgers must add up to the Control Ledger Subsidiary Ledgers AR Customer A O 7. 2 ©Course. College. com

14 Which Journal? Does the transaction. . . 1. Involve Cash? CASH RECEIPTS JOURNAL

14 Which Journal? Does the transaction. . . 1. Involve Cash? CASH RECEIPTS JOURNAL CASH PAYMENTS JOURNAL 2. Involve sales & purchases “On Account”? SALES JOURNAL PURCHASES JOURNAL 3. Remaining transactions go to the General Journal GENERAL JOURNAL O 7. 2 ©Course. College. com

15 Sales Journal For Sales on Credit Only (P) Indicates subsidiary account posting Indicates

15 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. O 7. 2 ©Course. College. com

16 Posting O 7. 2 ©Course. College. com

16 Posting O 7. 2 ©Course. College. com

17 Dual Posting From Sales Journal O 5. 2 ©Course. College. com

17 Dual Posting From Sales Journal O 5. 2 ©Course. College. com

18 Purchases Journal Notice the Other Debit all purpose column O 7. 2 ©Course.

18 Purchases Journal Notice the Other Debit all purpose column O 7. 2 ©Course. College. com

19 Dual Posting From Purchases Journal O-5. 2 O 5. 2 ©Course. College. com

19 Dual Posting From Purchases Journal O-5. 2 O 5. 2 ©Course. College. com

Cash Receipts Journal 20 Dedicated columns are totaled and posted O 7. 2 ©Course.

Cash Receipts Journal 20 Dedicated columns are totaled and posted O 7. 2 ©Course. College. com

21 Cash Receipts Journal The Other account column is used for the Owner Investment

21 Cash Receipts Journal The Other account column is used for the Owner Investment transaction O 7. 2 ©Course. College. com

22 Cash Receipts Journal Remember to maintain Subsidiary Ledgers O 7. 2 ©Course. College.

22 Cash Receipts Journal Remember to maintain Subsidiary Ledgers O 7. 2 ©Course. College. com

23 Cash Payments Journal Cash is reduced with each transaction in this journal The

23 Cash Payments Journal Cash is reduced with each transaction in this journal The Other account column is used for the Salaries Expense O 7. 2 ©Course. College. com

24 Cash Payments Journal Remember to maintain Subsidiary Ledgers O 7. 2 ©Course. College.

24 Cash Payments Journal Remember to maintain Subsidiary Ledgers O 7. 2 ©Course. College. com

25 General Journal These transactions don’t fit in the other journals – they must

25 General Journal These transactions don’t fit in the other journals – they must go in the general journal. O 7. 2 ©Course. College. com

26 General Journal Remember that we are using a Perpetual Inventory System O 7.

26 General Journal Remember that we are using a Perpetual Inventory System O 7. 2 ©Course. College. com

27 Objective 7. 3: Identify the components of an Income Statement, Balance Sheet and

27 Objective 7. 3: Identify the components of an Income Statement, Balance Sheet and Statement of Changes in Owner’s Equity O 7. 3 ©Course. College. com

28 No cost of goods sold and gross profit section. Separate sections for operating

28 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. Service Firm Income Statement Multi-step The other income and expense area segregates nonoperating revenue and expenses O 7. 3 ©Course. College. com

29 The cost of goods sold and gross profit section is a distinguishing feature

29 The cost of goods sold and gross profit section is a distinguishing feature Merchandising Income Statement A single step statement would simply summarize the operating expenses to a single amount. . O 7. 3 ©Course. College. com

30 Current Asset & Liabilities Current assets - assets that are expected to be

30 Current Asset & Liabilities Current assets - assets that are expected to be converted to cash or provide a benefit (consumed) within one year or the firm’s 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 firm’s fiscal period. Examples are trade accounts payable, taxes and wages payable, credit lines and notes due within the firm’s fiscal period ©Course. College. com

Classified Balance Sheet 31 Separate both assets and liabilities into current and noncurrent. O

Classified Balance Sheet 31 Separate both assets and liabilities into current and noncurrent. O 7. 3 ©Course. College. com

Classified Balance Sheet More liquid Current assets are listed in order of their liquidity

Classified Balance Sheet More liquid Current assets are listed in order of their liquidity or convertibility to cash. O 7. 3 32 Earlier Payment Dates Liabilities are listed in order of their scheduled due dates. ©Course. College. com

33 Statement of Changes in Owner’s Equity O 7. 3 Notice the beginning of

33 Statement of Changes in Owner’s Equity O 7. 3 Notice the beginning of the fiscal period Owner’s Capital, less the Owner draws during the fiscal period and finally the period’s income or loss. The total ending equity is the same number that appears on the Balance Sheet of the same date. ©Course. College. com

34 Objective 7. 4: Analysis: Calculate and explain the current ratio and working capital

34 Objective 7. 4: Analysis: Calculate and explain the current ratio and working capital from a Classified Balance Sheet Current Assets O 7. 4 Current Liabilities Current Ratio Current Liabilities Working Capital ©Course. College. com

35 Liquidity –The current ratio and working capital are often called liquidity measures. The

35 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. O 7. 4 ©Course. College. com

36 Liquidity For example, a highly liquid balance sheet would have a large amount

36 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). O 7. 4 ©Course. College. com

Balance Sheet Current Liquidity 37 Balance Sheet Current Liabilities Assets Liabilities Equity Assets More

Balance Sheet Current Liquidity 37 Balance Sheet Current Liabilities Assets Liabilities Equity Assets More current asset dollars to pay each current liability dollar O 4. 3 Fewer current asset dollars to pay each current liability dollar ©Course. College. com

38 Current ratio The current ratio answers the following question: How many dollars of

38 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 O 7. 4 Current Liabilities Current Ratio ©Course. College. com

39 Working capital answers the following question: How many dollars of current assets would

39 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. Current Assets O 7. 4 Current Liabilities Working Capital ©Course. College. com

Current Ratio Example 40 $1. 10 of current assets are available to pay each

Current Ratio Example 40 $1. 10 of current assets are available to pay each dollar of current liabilities O 7. 4 1. 10 ? ©Course. College. com

Working Capital Example 41 $16, 900 of current assets would remain if current assets

Working Capital Example 41 $16, 900 of current assets would remain if current assets were used to pay all current liabilities O 7. 4 $16, 900 ? ©Course. College. com

42 End Unit 7 ©Course. College. com

42 End Unit 7 ©Course. College. com