Chapter 5 Accounting Systems and Internal Controls Learning

Chapter 5 Accounting Systems and Internal Controls Learning Objectives 1. 2. 3. Basic Accounting Systems Internal Control Manual Accounting Systems – – 4. The revenue and collection cycle The purchase and payment cycle Adapting Manual Accounting Systems C 5 - 1

Basic accounting system A accounting system covers three-step process: 1. Analysis 2. Design 3. Implement C 5 - 2

Basic accounting system A accounting system covers three-step process: 1. Analysis – To identify who use the accounting information – To determine how to provide the accounting information 2. Design 3. Implement C 5 - 3

Basic accounting system A accounting system covers three-step process: 1. Analysis 2. Design • • A chart of accounts Journal Ledger Financial statements 3. Implement C 5 - 4

Basic accounting system A accounting system covers three-step process: 1. Analysis 2. Design 3. Implement – Recording and reporting Feedback P. 181 the accounting system C 5 - 5

The concept of internal control Internal controls are the policies and procedures that protect assets form misuse, ensure that business information is accurate, and ensure that laws and regulation are being followed C 5 - 6

The concept of internal control • Businesses use internal controls to guide their operations and prevent abuses of their systems. • What the manage should do in a business control? • “Control are a part of your everyday life” – To give an example in your life. C 5 - 7

The objectives of internal control 1. Asset are safeguarded and used for business purposes. 2. Business information is accurate. 3. Employees comply with laws and regulations C 5 - 8

The elements of internal control 1. 2. 3. 4. 5. The control environment Risk assessment Control procedures Monitoring Information and communication C 5 - 9

The elements of internal control 1. The control environment 1. 2. 3. 4. Management philosophy Operating style Organizational structure Personnel policies C 5 - 10

The elements of internal control 2. Risk assessment 1. 2. 3. 4. Changes in customer requirements Competitors Regulatory changes Interest changes C 5 - 11

The elements of internal control 3. Control procedures 1. Competent personnel, rotating duties, and mandatory vacations • A case on p. 183 2. Separating responsibilities for related operations 3. Separating operations, custody of assets, and accounting 4. Proofs and security measures • • Cash receipts Case on page 185 C 5 - 12

The elements of internal control 4. Monitoring 1. Internal control 2. External control 3. Exhibit 3 indicators of internal control problems C 5 - 13

The elements of internal control 5. Information and communication 1. Communicate with internals and externals 2. Case on page 186 C 5 - 14

Business on stage Accounting systems and profit measurement Questions: What we have learned from the case study? C 5 - 15

Manual accounting systems 1. General ledgers (AT & T) 1. Accounts receivable 2. Accounts payable 2. Subsidiary ledgers 3. General journals 1. Two-column journal 4. Special journals 1. Two column or multicolumn journal 1. Revenue; cash receipts; purchase; cash payments C 5 - 16

General Ledger and Subsidiary Ledgers General Ledger Cash Accts. Receivable Supplies Accts. Payable C 5 - 17

General Ledger and Subsidiary Ledgers General Ledger Cash Accounts Receivable Subsidiary Ledger Accts. Receivable Customer Accounts A B C D Supplies Accts. Payable C 5 - 18

General Ledger and Subsidiary Ledgers General Ledger Cash Accounts Receivable Subsidiary Ledger Accts. Receivable Customer Accounts A B C Supplies Accounts Payable Subsidiary Ledger Accts. Payable Creditor Accounts A B C D D C 5 - 19

Special Journals SELLING BUYING C 5 - 20

Special Journals SELLING Rendering of services on account recorded in Revenue Journal BUYING C 5 - 21

Special Journals SELLING Rendering of services on account recorded in Revenue Journal Receipt of cash from any source recorded in Cash Receipts Journal BUYING C 5 - 22

Special Journals SELLING Rendering of services on account recorded in Revenue Journal Receipt of cash from any source recorded in Cash Receipts Journal BUYING Purchase of items on account recorded in Purchases Journal C 5 - 23

Special Journals SELLING Rendering of services on account recorded in Revenue Journal Receipt of cash from any source recorded in Cash Receipts Journal BUYING Purchase of items on account recorded in Purchases Journal Payment of cash for any purpose recorded in Cash Payments Journal C 5 - 24

p. 190 Review a general journal Two-column formats C 5 - 25

p. 190 The Revenue Journal Invoice Date No. Post Account Debited Ref. Page 35 Accts. Rec. – Debit Fees Earned – Credit 3/2 615 My. Music. Club. com 2, 200 3/6 616 Rap. Zone. com 1, 750 3/18 617 Web Cantina 2, 650 3/27 618 My. Music. Club. com 3, 000 All sales on account are recorded in this journal. Totals Each sales invoice is listed in numerical order. This 9, 600 journal is often referred to as an invoice register. C 5 - 26

Posting to the Subsidiary Ledger Revenue Journal Invoice Date No. Post Account Debited Ref. Page 35 Accts. Rec. – Debit Fees Earned – Credit 3/2 615 My. Music. Club. com 2, 200 3/6 616 Rap. Zone. com 1, 750 3/18 617 Web Cantina 2, 650 3/27 618 My. Music. Club. com 3, 000 Each debit is Totals Accounts Receivable Subsidiary Ledger posted to the 9, 600 My. Music. Club. com accounts Date Item P. R. Debit Credit Balance receivable subsidiary ledger. C 5 - 27

Posting to the Subsidiary Ledger Revenue Journal Invoice Date No. Page 35 Post Accts. Rec. – Debit Account Debited Ref. Fees Earned – Credit 3/2 615 My. Music. Club. com 2, 200 3/6 616 Rap. Zone. com 1, 750 3/18 617 Web Cantina 2, 650 3/27 618 My. Music. Club. com 3, 000 Each debit is Totals Accounts Receivable Subsidiary Ledger posted to the 9, 600 My. Music. Club. com accounts Date Item P. R. Debit Credit Balance receivable 3/2 R 35 2, 200 subsidiary 2, 200 ledger. C 5 - 28

Posting to the Subsidiary Ledger Revenue Journal Invoice Date No. Page 35 Post Accts. Rec. – Debit Account Debited Ref. Fees Earned – Credit 3/2 615 My. Music. Club. com 2, 200 3/6 616 Rap. Zone. com 1, 750 3/18 617 Web Cantina 2, 650 3/27 618 My. Music. Club. com 3, 000 Each debit is Totals Accounts Receivable Subsidiary Ledger posted to the 9, 600 My. Music. Club. com accounts Date Item P. R. Debit Credit Balance receivable 3/1 R 35 2, 200 subsidiary 2, 200 ledger. 3/27 R 35 3, 000 5, 200 C 5 - 29

Posting to the General Ledger Revenue Journal Invoice Date No. Page 35 Post Accts. Rec. – Debit Account Debited Ref. Fees Earned – Credit 3/2 615 My. Music. Club. com 2, 200 3/6 616 Rap. Zone. com 1, 750 3/18 617 Web Cantina 2, 650 3/27 618 My. Music. Club. com 3, 000 The total is Totals General Ledger posted to 9, 600 Account: Accounts Receivable No. 12 Accounts Date Item P. R. Debit Credit Balance Receivable 3/1 Bal AND to Fees 3, 400 Earned. C 5 - 30

Posting to the General Ledger Revenue Journal Invoice Date No. Post Account Debited Ref. Page 35 Accts. Rec. – Debit Fees Earned – Credit 3/2 615 My. Music. Club. com 2, 200 3/6 616 Rap. Zone. com 1, 750 3/18 617 Web Cantina 2, 650 3/27 618 My. Music. Club. com 3, 000 The total is Totals General Ledger posted to 9, 600 Account: Accounts Receivable No. 12 Accounts Date Item P. R. Debit Credit Balance Receivable (12) (41) 3/1 Bal AND to Fees 3, 400 Earned. 3/31 R 35 9, 600 13, 000 C 5 - 31

p. 193 The Cash Receipts Journal Date Account Credited Page 14 Other Accounts Post Accounts Receivable Ref. Credit 3/1 Rent Revenue 3/19 Web Cantina 3, 400 3/28 My. Music. Club. com 2, 200 3/30 Rap. Zone. com 1, 750 Totals 400 Cash Debit 400 7, 350 7, 750 All cash received from any source is recorded in this journal. The total Cash Debit column equals the total of the two credit columns. C 5 - 32

Posting to the Subsidiary Ledger Cash Receipts Journal Date Account Credited Other Accounts Post Accounts Receivable Ref. Credit Page 14 Cash Debit 3/1 Rent Revenue 400 3/19 Web Cantina 3, 400 3/28 My. Music. Club. com 2, 200 3/30 Rap. Zone. com 1, 750 Totals 400 7, 350 7, 750 Each Accounts Receivable Subsidiary Ledger Receivable credit is Web Cantina posted to the Date Item P. R. Debit Credit Balance accounts receivable 3/1 Bal subsidiary ledger. 3, 400 3/27 R 35 2, 650 6, 050 C 5 - 33

Posting to the Subsidiary Ledger Cash Receipts Journal Date Account Credited Page 14 Other Accounts Post Accounts Receivable Ref. Credit 3/1 Rent Revenue 3/19 Web Cantina 3, 400 3/28 My. Music. Club. com 2, 200 3/30 Rap. Zone. com 1, 750 Totals Each Accounts Receivable credit is posted to the accounts receivable subsidiary ledger. 400 Cash Debit 400 7, 350 7, 750 Accounts Receivable Subsidiary Ledger Web Cantina Date Item 3/1 Bal 3, 400 R 35 6, 050 CR 14 3/18 3/19 P. R. Debit Credit Balance 2, 650 C 5 - 34

Posting to the General Ledger Cash Receipts Journal Date Account Credited Other Accounts Post Accounts Receivable Ref. Credit Page 14 Cash Debit 3/1 Rent Revenue 400 3/19 Web Cantina 3, 400 3/28 My. Music. Club. com 2, 200 3/30 Rap. Zone. com 1, 750 Totals 400 7, 350 7, 750 The three General Ledger ( ) highlighted Account: Accounts Receivable No. 12 items are Date Item P. R. Debit Credit Balance posted to the 3/1 Bal general ledger. 3, 400 3/31 R 35 9, 600 13, 000 C 5 - 35

Posting to the General Ledger Cash Receipts Journal Date Account Credited Other Accounts Post Accounts Receivable Ref. Credit Page 14 Cash Debit 3/1 Rent Revenue 42 400 3/19 Web Cantina 3, 400 3/28 My. Music. Club. com 2, 200 3/30 Rap. Zone. com 1, 750 Totals 400 7, 350 7, 750 The three General Ledger ( ) highlighted Account: Accounts Receivable No. 12 (12) (11) items are Date Item P. R. Debit Credit Balance posted to the 3/1 Bal general ledger. 3, 400 3/31 R 35 9, 600 13, 000 C 5 - 36 3/31 CR 14

p. 193 General Ledger Accounts Receivable Control Account: Accounts Receivable No. 12 Date Balance Item P. R. Debit Credit Bal. 3, 400 3/31 R 35 9, 600 13, 000 3/31 CR 14 If the accounts receivable account in the 7, 350 5, 650 3/1 general ledger only shows summary totals, where are the individual customer balances? C 5 - 37

p. 193 General Ledger Accounts Receivable Control Account: Accounts Receivable No. 12 Date Balance Item P. R. Credit Bal. 3, 400 3/31 R 35 9, 600 13, 000 3/31 CR 14 My. Music. Club. com 7, 350 5, 650 Date Item P. R. Debit Credit Balance 3/1 3/2 Accounts Receivable Subsidiary Ledger Debit R 35 2, 200 R 35 3, 000 2, 200 3/27 5, 200 Rap. Zone. com 3/28 CR 14 Date Item P. R. Debit Credit Balance 2, 2003, 000 3/6 R 35 1, 750 3/30 CR 14 Web Cantina 1, 750 0 Date Item P. R. Bal. 3, 400 3/18 R 35 6, 050 3/19 CR 14 Debit Credit Balance 3/1 2, 650 C 5 - 38

General Ledger Accounts Receivable Control Account: Accounts Receivable No. 12 Date Balance Item P. R. Credit Bal. 3, 400 3/31 R 35 9, 600 13, 000 3/31 CR 14 My. Music. Club. com 7, 350 5, 650 Date Item P. R. Debit Credit Balance 3/1 3/2 Accounts Receivable Subsidiary Ledger Debit R 35 2, 200 R 35 3, 000 2, 200 3/27 5, 200 Rap. Zone. com 3/28 CR 14 Date Item P. R. Debit Credit Balance 2, 2003, 000 3/6 R 35 1, 750 3/30 CR 14 Web Cantina 1, 750 0 Date Item P. R. Bal. 3, 400 3/18 R 35 6, 050 3/19 CR 14 Debit Credit Balance 3/1 2, 650 C 5 - 39

p. 194 The Purchases Journal Date Account Credited 3/3 3/7 3/12 3/19 3/27 Howard Supplies Donnelly Supplies Jewett Bus. Syst. 2, 800 Donnelly Supplies Howard Supplies Totals Page 11 Accts. Post Payable Supplies Ref. Credit Debit Other Accounts Debit 600 420 2, 800 600 420 1, 450 960 6, 230 1, 450 960 3, 430 Post Ref. Amount Office Equip. 2, 800 All purchases on account are recorded in this journal. The total credits to Accounts Payable equals the total of the two debit columns. C 5 - 40

Posting to the Subsidiary Ledger Purchases Journal Date Account Credited 3/3 3/7 3/12 3/19 3/27 Page 11 Accts. Post Payable Supplies Ref. Credit Debit Howard Supplies Donnelly Supplies Jewett Bus. Syst. 2, 800 Donnelly Supplies Howard Supplies Totals Each credit is posted to the accounts payable subsidiary ledger. Other Accounts Debit 600 420 2, 800 600 420 1, 450 960 6, 230 1, 450 960 3, 430 Post Ref. Amount Office Equip. 2, 800 Accounts Payable Subsidiary Ledger Howard Supplies Date Item P. R. Debit Credit Balance C 5 - 41

Posting to the Subsidiary Ledger Purchases Journal Date Account Credited 3/3 3/7 3/12 3/19 3/27 Howard Supplies Donnelly Supplies Jewett Bus. Syst. 2, 800 Donnelly Supplies Howard Supplies Totals Each credit is posted to the accounts payable subsidiary ledger. Page 11 Accts. Post Payable Supplies Ref. Credit Debit Other Accounts Debit 600 420 2, 800 600 420 1, 450 960 6, 230 1, 450 960 3, 430 Post Ref. Amount Office Equip. 2, 800 Accounts Payable Subsidiary Ledger Howard Supplies Date Item P. R. 600 P 11 600 3/3 Debit Credit Balance C 5 - 42

Posting to the Subsidiary Ledger Purchases Journal Date Account Credited 3/3 3/7 3/12 3/19 3/27 Howard Supplies Donnelly Supplies Jewett Bus. Syst. 2, 800 Donnelly Supp. Howard Supplies Totals Each credit is posted to the accounts payable subsidiary ledger. Page 11 Accts. Post Payable Supplies Ref. Credit Debit Other Accounts Debit 600 420 2, 800 600 420 1, 450 960 6, 230 1, 450 960 3, 430 Post Ref. Amount Office Equip. 2, 800 Accounts Payable Subsidiary Ledger Howard Supplies Date Item 3/3 P 11 600 P 11 960 1, 560 3/27 P. R. Debit Credit Balance C 5 - 43

Posting to the General Ledger Purchases Journal Date Account Credited 3/3 3/7 3/12 3/19 3/27 Howard Supplies Donnelly Supplies Jewett Bus. Syst. 2, 800 Donnelly Supp. Howard Supplies Totals The highlighted items are posted to the general ledger. Page 11 Accts. Post Payable Supplies Ref. Credit Debit Date Other Accounts Debit 600 420 2, 800 600 420 1, 450 960 6, 230 1, 450 960 3, 430 Item Office Equip. 2, 800 General Ledger P. R. Debit Credit Account: Accounts Payable Date Item P. R. Debit Credit 3/1 Bal. 1, 230 Post Ref. Amount Balance No. 21 Balance C 5 - 44

Posting to the General Ledger Purchases Journal Date Account Credited 3/3 3/7 3/12 18 3/19 3/27 Howard Supplies Donnelly Supplies Jewett Bus. Syst. 2, 800 Donnelly Supp. Howard Supplies Totals The highlighted items are posted to the general ledger. Page 11 Accts. Post Payable Supplies Ref. Credit Debit Date 600 420 2, 800 1, 450 960 6, 230 ( 21) Item Other Accounts Debit 600 420 1, 450 960 3, 430 (14) Debit Credit Account: Accounts Payable Date Item P. R. Debit Credit 3/1 3/31 Bal. 1, 230 P 11 6, 2307, 460 6, 230 Office Equip. 2, 800 ( ) General Ledger P. R. Post Ref. Amount Balance No. 21 Balance C 5 - 45

p. 196 The Cash Payments Journal Date 3/2 Ck. No. Account Debited Page 7 Other Accounts Post Accounts Payable Ref. Debit 150 Rent Expense 1, 600 3/15 151 Grayco Supplies 1, 230 3/21 152 Jewett Bus. Syst. 2, 800 3/22 153 Donnelly Supp. 420 3/30 154 Utilities Expense 1, 050 All cash payments are recorded in this journal. 3/31 155 Howard Supplies Every check is listed in numerical order. This 600 journal is often referred to as a check register. Totals 2, 650 Cash Credit 5, 050 7, 700 C 5 - 46

Posting to the Subsidiary Ledger Cash Payments Journal Date Ck. No. Account Debited Page 7 Other Accounts Post Accounts Payable Ref. Debit Cash Credit 3/2 150 Rent Expense 1, 600 3/15 151 Grayco Supplies 1, 230 3/21 152 Jewett Bus. Syst. 2, 800 3/22 153 Donnelly Supp. 420 3/30 154 Utilities Expense 1, 050 Accounts Payable Subsidiary Ledger Each Accounts 3/31 155 Howard Supplies Grayco Supplies Payable debit is 600 posted to the Totals Date Item P. R. Debit 2, 650 Credit 5, 050 Balance 7, 700 accounts payable 3/1 Bal. subsidiary ledger. 1, 230 C 5 - 47

Posting to the Subsidiary Ledger Cash Payments Journal Date Ck. No. Account Debited Page 7 Other Accounts Post Accounts Payable Ref. Debit Cash Credit 3/2 150 Rent Expense 1, 600 3/15 151 Grayco Supplies 1, 230 3/21 152 Jewett Bus. Syst. 2, 800 3/22 153 Donnelly Supp. 420 3/30 154 Utilities Expense 1, 050 Accounts Payable Subsidiary Ledger Each Accounts 3/31 155 Howard Supplies Grayco Supplies Payable debit is 600 posted to the Totals Date Item P. R. Debit 2, 650 Credit 5, 050 Balance 7, 700 accounts payable 3/1 Bal. subsidiary ledger. 1, 230 3/15 CP 7 1, 230 0 C 5 - 48

Posting to the General Ledger Cash Payments Journal Date 3/2 Ck. No. Account Debited Page 7 Other Accounts Post Accounts Payable Ref. Debit Cash Credit 150 Rent Expense 1, 600 3/15 151 Grayco Supplies 1, 230 3/21 152 Jewett Bus. Syst. 2, 800 3/22 153 Donnelly Supp. 420 3/30 154 Utilities Expense 1, 050 General Ledger Date Item P. R. Debit Credit Balance 3/31 155 Howard Supplies The highlighted Account: Accounts Payable No. 21 600 items are posted Totals 2, 650 5, 050 7, 700 to the general 3/1 Bal. ledger. ( ) 1, 230 3/31 P 11 6, 2307, 460 C 5 - 49

Posting to the General Ledger Cash Payments Journal Date 3/2 Ck. No. Account Debited Page 7 Other Accounts Post Accounts Payable Ref. Debit Cash Credit 150 Rent Expense 52 1, 600 3/15 151 Grayco Supplies 1, 230 3/21 152 Jewett Bus. Syst. 2, 800 3/22 153 Donnelly Supp. 420 3/30 154 Utilities Expense 54 1, 050 General Ledger Date Item P. R. Debit Credit Balance 3/31 155 Howard Supplies The highlighted Account: Accounts Payable No. 21 600 items are posted Totals 2, 650 5, 050 7, 700 to the general 3/1 Bal. ledger. ( ) 1, 230 (21) (11) 3/31 P 11 6, 2307, 460 C 5 - 50

Adapting manual accounting systems 1. Additional subsidiary ledgers 1. Equipment 2. Supply 2. Modified special journal 1. Revenue journal with Sales Taxes Payable column. 2. Other business C 5 - 51

HOME WORK READING: 1. Illustrative problem 2. Self- examination questions 3. Multiple choice Writing: 1. Exercise: 2. Problem : 5 -5 A Discussion: Activity 5 -1 C 5 - 52

This is the end of Chapter 5. C 5 - 53