lecture 16 chapter 5 accounting systems and internal controls

Lecture 16 Lecture 16 Chapter Chapter 55

Accounting Systems and Accounting Systems and Internal ControlsInternal Controls

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.

AnalysisAnalysis

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Objectives of Internal Objectives of Internal ControlControl

Objectives of Internal Objectives of Internal ControlControl

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. assets are safeguarded and used for

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

regulations.

Elements of Internal ControlElements of Internal Control1. Control environment2. Risk assessment3. Control procedures4. Monitoring5. Information and communication

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

Elements of Internal ControlElements of Internal Control

Management philosophy and operating style influences the

control environment.

Management philosophy and operating style influences the

control environment.

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 ProceduresControl ProceduresControl Procedures

Competent Personnel Rotating Duties Mandatory Vacations Separating Responsibilities for

Related Operations Separating Operations, Custody

of Assets, and Accounting Proofs and Security Measures



Related Operations Separating Operations,

Custody of Assets, and Accounting

Proofs and Security Measures

1. 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.



Related Operations Separating Operations,

Custody of Assets, and Accounting

Proofs and Security Measures

Independent check

Independent check

Independent check

Custody of Custody of AssetsAssets

AccountingAccountingOperationsOperationsOperationsOperations

Clues to Potential ProblemsClues to Potential ProblemsClues 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:

Review of Lecture

End of Lecture 16


Accounting SystemsAccounting Systems

Review of Lecture

Manual Accounting Systems

Running Balance Method of Ledgers

Cash 11

Accts. Pay. 21

General Ledger

Accts. Rec. 12

Supplies 14

Accounts ReceivableSubsidiary Ledger

A B C D

Customer Accounts

Accounts PayableSubsidiary Ledger

A B C D

Creditor Accounts

BUYING BUYING

SELLING SELLING

Special Journals

Providing services on account

Revenue journalRevenue journalrecorded inrecorded in

Receipt of cash from any source

Cash receipts journalCash receipts journalrecorded inrecorded in

Purchase of items on account

Purchases journalPurchases journalrecorded inrecorded in

Payment of cash for any purpose

Cash payments journalCash payments journalrecorded inrecorded in

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

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2010

Mar. 2 615 MyMusicClub.com 2 2 0 0


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Accounts Receivable Subsidiary Ledger

Date Item P.R. Debit Credit Balance

MyMusicClub.com

Mar. 2 R35 2,200 2,2002010

2010


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MyMusicClub.com

Mar. 2 R35 2,200 2,2002010

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

2010


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6 616 Zone.com 1 7 5 0

18 617 Web Cantina 2 6 5 0

27 618 MyMusicClub.com 3 0 0 0

2010


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6 616 Zone.com 1 7 5 0

18 617 Web Cantina 2 6 5 0

27 618 MyMusicClub.com 3 0 0 0 31 9 6 0 0

2010


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6 616 Zone.com 1 7 5 0

18 617 Web Cantina 2 6 5 0

27 618 MyMusicClub.com 3 0 0 031 9 6 0 0

2010

ACCOUNT Accounts Receivable Account No. 12

Balance

Dr. Cr.Date Dr. Cr.Item

Post. Ref.

2010Mar. 1 Balance 3 400

GENERAL LEDGER

31 9 600 13 000 R35

Revenue Journal, page 35


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6 616 Zone.com 1 7 5 0

18 617 Web Cantina 2 6 5 0

27 618 MyMusicClub.com 3 0 0 031 9 6 0 0

(12)(41)

2010

ACCOUNT Fees Earned Account No. 41

Balance

Dr. Cr.Date Dr. Cr.Item

Post. Ref.

GENERAL LEDGER

2010Mar. 31 R35 9 6 0 0 9 6 0 0


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6 616 Zone.com 1 7 5 0

18 617 Web Cantina 2 6 5 0

27 618 MyMusicClub.com 3 0 0 031 9 6 0 0

(12)(41)

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

Earned in the general ledger.

2010

End of Lecture 17

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.

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2010




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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2010




Page 14

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



Web Cantina

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

2006

3,400 2,650

2006

19




Page 14

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



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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2010




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The three circled items are The three circled items are posted to the general ledger. posted to the general ledger.

Let’s post Let’s post Accounts ReceivableAccounts Receivable..

The three circled items are The three circled items are posted to the general ledger. posted to the general ledger.

Let’s post Let’s post Accounts ReceivableAccounts Receivable..

2006

Account: Accounts Receivable No. 12

GENERAL LEDGER


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

2006




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2010

Account: Accounts Receivable No. 12

GENERAL LEDGER


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

2010

7,350 5,65031 CR14




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2010

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The Rs.7,750 total in the Cash Debit column is

posted to Cash in a similar manner.

The Rs.7,750 total in the Cash Debit column is

posted to Cash in a similar manner.

The Rs.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 Rs.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.

Mar. 1 Rent Revenue 400 400 19 Web Cantina 3,4003,400 28 MyMusicClub.com 2,200 2,200 30 RapZone.com 1,750 1,750 31 400 7,350 7,750



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2010

Accounts Accounts Receivable Receivable

Control Control AccountAccount

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 3,0003,000

3/1 Bal. 3,4003/18 R35 2,650 6,0503/19 CR14 3,400 2,6502,650

Accounts Receivable Subsidiary

Ledger

Accounts Accounts Receivable Receivable

Control Control AccountAccount

MyMusicClub.com

ACCOUNT Accounts Receivable No. 12

GENERAL LEDGER


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

End of Lecture 18

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 On March 3, 2003, NetSolutions purchased supplies from Howard purchased supplies from Howard

Supplies, $600.Supplies, $600.

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 To keep the accounts payable subsidiary ledger current, this entry subsidiary ledger current, this entry

is posted on March 3.is posted on March 3.


Accounts Payable Subsidiary Ledger

Date Item P.R. Dr. Cr. Balance

Howard Supplies

Mar 3 600 6002006



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On March 7, NetSolutions On March 7, NetSolutions purchased supplies from Donnelly purchased supplies from Donnelly

Supplies, $420.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 On March 12, NetSolutions purchased office equipment from Jewett Business office equipment from Jewett Business

Systems, $2,800.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 Because there isn’t a special column for Office EquipmentOffice Equipment, this purchase was , this purchase was recorded under “Other Accounts Dr.”recorded under “Other Accounts Dr.”



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

subsidiary ledger have been made).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 At the end of March, all columns are totaled and equality of debits and credits is verified. and equality of debits and credits is verified. At the end of March, all columns are totaled At the end of March, all columns are totaled

and equality of debits and credits is verified. and equality of debits and credits is verified.

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

The next step is to post to the The next step is to post to the general journal.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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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

2006

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




PAGE 7

2006

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




PAGE 7

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

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

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

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

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




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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




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

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


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

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

Supply chain management (SCM)

Customer relationship management (CRM)

Product life-cycle management (PLM)

End of Lecture 19

lecture 16 chapter 5 accounting systems and internal controls

Documents

control procedures4

control environment2

business information

risk assessment3

internal controls1

elements of internal

business purposes

quality of supplies