“I still want to achieve something greater”—Devin Lazerine 7

Accounting Information Systems

A Look Back Chapters 5 and 6 focused on merchandis- ing activities and accounting for inventory. We explained both the perpetual and periodic inventory systems, accounting for inventory transactions, and methods for assigning costs to inventory.

Larson−Wild−Chiappetta: Fundamental Accounting Principles, Seventeenth Edition

7. Accounting Information Systems

A Look at This Chapter This chapter emphasizes accounting infor- mation systems.We describe fundamental system principles, the system’s components, use of special journals and subsidiary ledgers, and technology-based systems.We also briefly discuss segment reporting.

Text © The McGraw−Hill

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A Look Ahead Chapter 8 focuses on internal controls and accounting for cash and cash equivalents. We explain good internal control proce- dures and their importance for accounting.


7. Larson−Wild−Chiappetta:

Accounting Information Fundamental Accounting

Systems Principles, Seventeenth Edition

Text © The McGraw−Hill

Companies, 2004

Decision Feature

Learning Objectives

CAP

Conceptual

Identify fundamental principles of accounting information systems. (p. 262)

Identify components of accounting information systems. (p. 263)

Explain the goals and uses of special journals. (p. 265)

Describe the use of controlling accounts and subsidiary ledgers. (p. 266)

Explain how technology-based information systems impact accounting. (p. 276)

Analytical

Compute segment return on assets and use it to evaluate segment performance. (p. 278)

Procedural C1

Journalize and post transactions using special journals. (p. 267)

C2

Prepare and prove the accuracy of subsidiary ledgers. (p. 269)

C3 C4

C5

A1 P1 P2

Wrapping Up Rap Deals

CALABASAS, CA—Devin Lazerine’s not your typical rap mogul, but then again, he is only 20. Devin is the founder of Rap-Up (Rap-Up.com), a nationwide hip-hop and R&B magazine that he launched four years ago.

Lazerine admits he has had to overcome many hurdles, including those of publishers.“They [publishers] don’t know too much about hip-hop music.They think it’s vulgar and something they don’t want to touch at all.” But overcome he has—today, Rap-Up has a circula- tion of more than 200,000. Lazerine did not reveal revenues, but his per monthly issues costs are about $120,000.

Lazerine says his path to success was rocky and with constant challenges. One of those challenges was implementing an accounting system. Controls had to be implemented, technology had to be pur- chased, and information had to be collected.

Interestingly, Lazerine’s age was a barrier in the rap industry. He learned to avoid phone contact, afraid his youthful voice would hurt his credibility.“I was at school once when they [record publicists] called,” admits Lazerine.“My mom picked up and said where I was,

and they were like,‘What? I thought he was the editor-in-chief of a magazine?’ ”

Another hurdle for Lazerine was to address the need to track business transactions. He eventually set up several special journals for this purpose, including subsidiary ledgers to track subscribers and their balances owed.

What does the future hold for this rap mogul? When asked about his role models, Lazerine doesn’t rattle off Ludacris or Ja Rule; instead, he mentions J Records head Clive Davis and Def Jam founder Russell Simmons.Thus, his interest in the business side of rap is natural. Lazerine adds that understanding and using account- ing information systems help him direct and plan Rap-Up operations. “My ultimate goal,” reveals Lazerine,“is to become a music mogul/entrepreneur.” With his current record, he may well become hip-hop’s business star.

[Sources: Rap-Up Website, January 2004; Entrepreneur, November 2002; Folio Magazine, May 1, 2002; Entertainment, July 19, 2001; USA Weekend, March 9, 2003.]


7. Larson−Wild−Chiappetta:

Accounting Information Fundamental Accounting

Systems Principles, Seventeenth Edition

Text © The McGraw−Hill

Companies, 2004

Chapter Preview

With increases in the number and complexity of business

these systems.We also explain procedures that use special activities, the demands placed on accounting information

journals and subsidiary ledgers to make accounting informa- systems increase.Accounting information systems must

tion systems more efficient.An understanding of the details meet this challenge in an efficient and effective manner. In

of accounting reports makes us better decision makers this chapter, we learn about fundamental principles guiding

when using financial information, and it improves our ability information systems, and we study components making up

to analyze and interpret financial statements.

Accounting Information Systems

System

System

Special

System Principles

Components

Journals

Technology

• Control

• Relevance

• Source

• Compatibility

• Flexibility

• Cost-Benefit

• • • • documents

Input devices Processors Storage Output devices

• Subsidiary ledgers

• Computers

• Sales journal

• Data processing

• Cash receipts journal

• Networks

• Purchases journal

• Enterprise resource

• Cash disbursements

planning (ERP) journal

Fundamental System Principles C1

Accounting information systems collect and process data from transactions and events, or- ganize them in useful reports, and communicate results to decision makers. With the increasing complexity of business and the growing need for information, accounting information systems are more important than ever. All decision makers need to have a basic knowledge of how ac- counting information systems work. This knowledge gives decision makers a competitive edge as they gain a better understanding of information constraints, measurement limitations, and

Exhibit 7.1

System Principles

potential applications. It allows them to make more informed decisions and to better balance the risks and returns of different strategies. This section explains five basic principles of accounting infor- mation systems, shown in Exhibit 7.1.

Control Principle Managers need to control and monitor business activities. The control principle prescribes that an accounting information system have internal controls. Internal controls are methods and pro- cedures allowing managers to control and moni- tor business activities. They include policies to direct operations toward common goals, proce- dures to ensure reliable financial reports, safe- Point: A hacker stole 300,000 credit

guards to protect company assets, and methods to achieve compliance with laws and card numbers from online music retailer

regulations. Chapter 8 describes detailed control procedures. CDUniverse due to internal control failure.

Relevance Principle Decision makers need relevant information to make informed decisions. The relevance principle prescribes that an accounting information system report useful, understandable, timely, and pertinent information for effective decision making. The system must be designed Identify fundamental principles of accounting information systems.

Control

Cost-Benefit

Relevance Principle System Principles

Flexibility

Compatibility


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Chapter 7 Accounting Information Systems 263

to capture data that make a difference in decisions. To ensure this, we must consider all decision makers when identifying relevant information for disclosure.

Compatibility Principle Accounting information systems must be consistent with the aims of a company. The compatibility principle prescribes that an accounting information system conform with a com- pany’s activities, personnel, and structure. It also must adapt to a company’s unique charac- teristics. The system must not be intrusive but must work in harmony with and be driven by company goals. Most start-up entrepreneurs require only a simple information system. Harley-Davidson, on the other hand, demands both a merchandising and a manufacturing information system able to assemble data from its global operations.

Flexibility Principle Accounting information systems must be able to adjust to changes. The flexibility principle prescribes that an accounting information system be able to adapt to changes in the com- pany, business environment, and needs of decisions makers. Technological advances, com- petitive pressures, consumer tastes, regulations, and company activities constantly evolve. A system must be designed to adapt to these changes.

Cost-Benefit Principle The cost-benefit principle prescribes that the benefits from an activity in an accounting in- formation system outweigh the costs of that activity. The costs and benefits of an activity such as producing a specific report will impact the decisions of both external and internal users. Decisions regarding other systems principles (control, relevance, compatibility, and flexibility) are also affected by the cost-benefit principle.

Components of Accounting Systems

Accounting information systems consist of people, records, methods, and equipment. The systems are designed to capture information about a company’s transactions and to provide output including financial, managerial, and tax reports. All accounting information systems have these same goals, and thus share some basic components. These components apply whether or not a system is heavily computerized, yet the components of computerized sys- tems usually provide more accuracy, speed, efficiency, and convenience than those of man- ual systems.

The five basic components of accounting systems are source documents, input devices, information processors, information storage, and output devices. Exhibit 7.2 shows these components as a series of steps, yet we know that much two-way communication occurs between many of these components. We briefly describe each of these key components in this section.

C2

Identify components of accounting information systems.

KRISPY KREME

Exhibit 7.2

Accounting System Components

Source

Input Devices Information

Information

Output Document

Processor

Storage

Devices

Source Documents We introduced source documents in Chapters 1 and 2 and explained their importance for both business transactions and information collection. Source documents provide the basic information processed by an accounting system. Examples of source documents include bank statements and checks, invoices from suppliers, billings to customers, cash register


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264 Chapter 7 Accounting Information Systems

Point: Understanding a manual accounting system is useful in understanding an electronic system.

Point: A financial accounting database can be designed to support a wide range of internal reports for management.

files, and employee earnings records. Source documents can be paper, although they in- creasingly are taking the form of electronic files and Web communications. A growing num- ber of companies are sending documents directly from their systems to their customers’ and suppliers’ systems. The Web is playing a major Decision Insight

Remote Input Scanners are increasingly embedded in cell phones and other handheld devices to gain access to Websites equipped with bar code readers.The phones can scan the bar codes in and then the user gains access to sites that market products and services.

role in this transformation from paper-based to paperless systems.

Accurate source documents are crucial to ac- counting information systems. Input of faulty or incomplete information seriously impairs the reliability and relevance of the information sys- tem. We commonly refer to this as “garbage in, garbage out.” Information systems are set up with attention on control procedures to limit the possibility of entering faulty data in the system.

Input Devices Input devices capture information from source documents and enable its transfer to the sys- tem’s information processing component. These devices often involve converting data on source documents from written or electronic form to a form usable for the system. Journal entries, both electronic and paper based, are a type of input device. Keyboards, scanners, and modems are some of the most common input devices in practice today. For example, bar code readers capture code numbers and transfer them to the organization’s computer for processing. Moreover, a scanner can capture writing samples and other input directly from source documents.

Controls are used to ensure that only authorized individuals input data to the system. Controls increase the system’s reliability and allow information to be traced back to its source.

Information Processors Information processors are systems that interpret, transform, and summarize information for use in analysis and reporting. An important part of an information processor in accounting systems is professional judgment. Accounting principles are never so structured that they limit the need for professional judgment. Other parts of an information processor include journals, ledgers, working papers, and posting procedures. Each assists in transforming raw data to useful information.

Increasingly, computer technology (both computing hardware and software) is assisting manual information processors. This assistance is freeing accounting professionals to take on increased analysis, interpretive, and managerial roles. Web-based application service providers (ASPs) offer another type of information processor.

Information Storage Information storage is the accounting system component that keeps data in a form acces- sible to information processors. After being input and processed, data are stored for use in

Decision Insight

future analyses and reports. The database must be accessible to preparers of periodic financial

Geek Chic Cyberfashion pioneers are creating geek chic, a kind of wearable computer. Cyberfashion draws on digital cellular phones, lithium batteries, and miniature monitors. Special thread is woven into clothing to carry low-voltage signals from one part of the system to another, and fabric keyboards are sewn into clothes.These creations give new meaning to the term software.

reports. Auditors rely on this database when they audit both financial statements and a com- pany’s controls. Companies also maintain files of source documents.

Older systems consisted almost exclusively of paper documents, but most modern sys- tems depend on electronic storage devices. Advances in information storage enable ac- counting systems to increasingly store more detailed data. This means managers have more


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Chapter 7 Accounting Information Systems 265

data to access and work with in planning and controlling business activities. Note that information storage can be online, meaning that data can be accessed whenever, and from wherever, it is needed. Off-line storage means access often requires assistance and authori- zation. Information storage is increasingly augmented by Web sources such as SEC data- bases, benchmarking services, and financial and product markets.

Output Devices Output devices are the means to take information out of an accounting system and make it available to users. Common output devices are printers, monitors, LCD projectors, and Web communications. Output devices provide users a variety of items including graphics, analysis reports, bills to customers, checks to suppliers, employee paychecks, financial state- ments, and internal reports. When requests for output occur, an information processor takes the needed data from a database and prepares the necessary report, which is then sent to an output device. A special type of output is an electronic funds transfer (EFT). One example is the transfer of payroll from the company’s bank account to its employees’ bank accounts. This requires an interface to allow a company’s accounting system to send payroll data directly to the bank’s accounting system. This interface can involve a company recording its payroll data on CD and forwarding it to the bank. The bank then uses this output to transfer wages earned to employees’ accounts.

Decision Insight

Direct Output A screenless computer display, called virtual retinal display (VRD), scans rows of pixels directly onto the user’s retina by means of a laser. VRDs can simulate three-dimensional virtual worlds, including 3D financial graphics.

Decision Ethics

Accountant Your client requests advice in purchasing software for its accounting system.You have been offered a 10% commission by a software company for each purchase of its system by one of your clients. Does this commission arrangement affect your evaluation of software? Do you tell your client about the commission arrangement?

Answer—p. 287

Quick Check

1. Identify the five primary components of an accounting information system. 2. What is the aim of information processors in an accounting system? 3. How are data in the information storage component of an accounting system used?

Answers—p. 288

Special Journals in Accounting

This section describes the underlying records of accounting information systems. Designed correctly, these records support efficiency in processing transactions and events. They are part of all systems in various forms and are increasingly electronic. Even in technologically advanced systems, a basic understanding of the records we describe in this section aids in using, interpreting, and applying accounting information. It also improves our knowledge of computer-based systems. Remember that all accounting systems have common purposes and internal workings whether or not they depend on technology.

This section focuses on special journals and subsidiary ledgers that are an important part of accounting systems. We describe how special journals are used to capture transactions,

C3

Explain the goals and uses of special journals. and we explain how subsidiary ledgers are set up to capture details of accounts. This sec- tion uses a perpetual inventory system, and the special journals are set up using this sys- tem. Appendix 7A describes the change in special journals required for a periodic system. We also include a note at the bottom of each of the special journals explaining the change required if a company uses a periodic system.


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266 Chapter 7 Accounting Information Systems

Basics of Special Journals

Point: Companies can use as many

A general journal is an all-purpose journal in which we can record any transaction. Use of special journals as necessary given their unique business activities.

a general journal for all transactions is usually more costly for a business and is a less effective control procedure. Moreover, for less technologically advanced systems, use of a general journal requires that each debit and each credit entered be individually posted to its respective ledger account. To enhance internal control and reduce costs, transactions are or- ganized into common groups. A special journal is used to record and post transactions of similar type. Most transactions of a merchandiser, for instance, can be categorized into the journals shown in Exhibit 7.3. This section assumes the use of these four special journals along with the general journal. The general journal continues to be used for transactions not covered by special journals and for adjusting, closing, and correcting entries. We show in the following discussion that special journals are efficient tools in helping journalize and post transactions. This is done, for instance, by accumulating debits and credits of similar transactions, which allows posting of amounts as column totals rather than as individual amounts. The advantage of this system increases as the number of transactions increases.

Point: A specific transaction is recorded in only one journal.

Special journals allow an efficient division of labor, which is also an effective control procedure.

Exhibit 7.3

Using Special Journals with a General Journal

For recording cash receipts

Describe the use of controlling accounts and subsidiary ledgers.

Sales

Cash

Journal

Cash Receipts Journal

Purchases Journal

Disbursement Journal

For recording cash payments

General Journal

For recording credit sales

For recording credit purchases

For transactions not in special journals

C4

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7. Accounting Information Systems

It is important to note that special journals and subsidiary ledgers are designed in a man- ner that is best suited for each business. The most likely candidates for special journal sta- tus are recurring transactions—for many businesses those are sales, cash receipts, purchases, and cash disbursements. However, good systems design for a business could involve col- lapsing sales and cash receipts in one journal, or purchases and cash disbursement in an- other. It could also involve adding more special journals or additional subsidiary ledgers for other recurring transactions. This design decision extends to journal and ledger format. That is, the selection on number of columns, column headings, and so forth is based on what is best suited for each business. Thus, you should read the following sections as one example of a common systems design, but not the only design.

Subsidiary Ledgers To understand special journals, it is necessary to understand the workings of a subsidiary ledger, which is a list of individual accounts with a common characteristic. A subsidiary ledger contains detailed information on specific accounts in the general ledger. Information systems often include several subsidiary ledgers. Two of the most important are:

■ Accounts receivable ledger—stores transaction data of individual customers.

■ Accounts payable ledger—stores transaction data of individual suppliers.

Individual accounts in subsidiary ledgers are often arranged alphabetically, which is the ap- proach taken here. We describe accounts receivable and accounts payable ledgers in this sec- tion. Our discussion of special journals uses these ledgers.

Accounts Receivable Ledger When we recorded credit sales in prior chapters, we debited (increased) Accounts Receivable. When a company has more than one credit cus- tomer, the accounts receivable records must show how much each customer purchased, paid, and has yet to pay. This information is collected by keeping a separate account receivable


for each credit customer. A separate account for each customer could be kept in the general ledger with the other financial statement accounts, but this is uncommon. Instead, the gen- eral ledger usually has a single Accounts Receivable account, and a subsidiary ledger is set up to keep a separate account for each customer. This subsidiary ledger is called the accounts receivable ledger (also called accounts receivable subsidiary ledger or customers ledger), and it can exist in electronic or paper form.

Exhibit 7.4 shows the relation between the Accounts Receivable account and its individ- ual accounts in the subsidiary ledger. After all items are posted, the balance in the Accounts Receivable account must equal the sum of all balances of its customers’ accounts. The Accounts Receivable account is said to control the accounts receivable ledger and is called a controlling account. Since the accounts receivable ledger is a supplementary record con- trolled by an account in the general ledger, it is called a subsidiary ledger.

General Ledger Used for preparing financial statements and other reports

Accounts Payable Ledger There are other controlling accounts and subsidiary ledgers. We know, for example, that many companies buy on credit from several suppliers. This means that companies must keep a separate account for each supplier by keeping an Accounts Payable controlling account in the general ledger and a separate account for each supplier (creditor) in an accounts payable ledger (also called accounts payable subsidiary ledger or creditors ledger).

Other Subsidiary Ledgers Subsidiary ledgers are common for several other ac- counts. A company with many classes of equipment, for example, might keep only one Equipment account in its general ledger, but its Equipment account would control a sub- sidiary ledger in which each class of equipment is recorded in a separate account. Similar treatment is common for investments, inventory, and any accounts needing separate de- tailed records. Arctic Cat reports sales information by product line in its annual report. Yet its accounting system keeps much more detailed sales records. Arctic Cat, for instance, sells hundreds of different products and must be able to analyze the sales performance of each. This detail can be captured by many different general ledger sales accounts but is in- stead captured by using supplementary records that function like subsidiary ledgers. Overall, subsidiary ledgers are applied in many different ways to ensure that the accounting system captures sufficient details to support analyses that decision makers need.

Sales Journal A typical sales journal is used to record sales of inventory on credit. Sales of inventory for cash are not recorded in a sales journal but in a cash receipts journal. Sales of noninventory assets on credit are recorded in the general journal.

Accounts Receivable Subsidiary Ledger Used for preparing bills sent to customers along with other reports

Accounts Receivable controlling account

Controlling account balance = The sum of the balances of its subsidiary accounts

Frank Booth General Ledger

One account for each customer

Accounts

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Chapter 7 Accounting Information Systems 267

Point: When a general ledger account has a subsidiary ledger, any transaction that impacts one of them also impacts the other—some refer to this as general and subsidiaries ledgers kept in tandem.

Exhibit 7.4 Accounts Receivable Controlling Account and Its Subsidiary Ledger

Point: Subsidiary ledgers: (1) remove excessive details from general ledger, (2) provide up-to-date info on customer or other specific account balances, (3) aid in error identification for individual accounts, and (4) help with division of labor (recordkeeping tasks).

P1

Journalize transactions and using

post

special journals.


Point: Each transaction in the sales journal includes a debit to accounts receivable and a credit to sales.

Exhibit 7.5

Sales Journal with Posting*

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Journalizing Credit sale transactions are recorded with information about each sale entered separately in a sales journal. This information is often taken from a copy of the sales ticket or invoice prepared at the time of sale. The top portion of Exhibit 7.5 shows a typical sales jour- nal from a merchandiser. It has columns for recording the date, customer’s name, invoice number, posting reference, and the retail and cost amounts of each credit sale. The sales journal in this exhibit is called a columnar journal, which is any journal with more than one column.

Each transaction recorded in the sales journal yields an entry in the “Accounts Receivable Dr., Sales Cr.” column. We usually need only one column for these two accounts. (An ex- ception is when managers need more information about taxes, returns, and other sales de- tails.) Each transaction in the sales journal also yields an entry in the “Cost of Goods Sold Dr., Inventory Cr.” column. This entry reflects the perpetual inventory system of tracking costs with each sale. To illustrate, on February 2, this company sold merchandise on account to Jason Henry for $450. The invoice number is 307, and the cost of this merchandise is

Page 3

Feb. 2

Jason Henry

✓ 7

Albert Co.

✓ 13

Kam Moore

✓ 15

Paul Roth

✓ 22

Jason Henry

✓ 25

✓ 28

✓ 28 Totals

Kam Moore

307 308 309 310 311 312 313

450 500 350 200 225 175 250 2,150 (106/413)

315 355 260 150 155 Frank Booth

95 Albert Co.

170 1,500 (502/119)

Individual amounts are posted

Totals are posted at the end of the immediately to the subsidiary ledger.

period to General Ledger accounts.

Feb. 7

S3 500 500 28 S3

250 750 Feb. 25 S3 175 175

Feb. 2

S3

Customer accounts are in a subsidiary ledger and the financial statement accounts are in the General Ledger.

*The Sales Journal in a periodic system would exclude the column on the far right titled “Cost of Goods Sold Dr.,

Inventory Cr.” (see Exhibit 7A.1).

Feb. 28 S3

bal. S3

S3

2,150 2,150

Feb. 1

2,150 2,150

Feb. 28

15,700 28

1,500 14,200 S3

Feb. 28

S3 22

1,500 1,500 450 450 225 675

Feb. 13 S3 350 350

Feb. 15 S3 200 200

Text © The McGraw−Hill

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$315. This information is captured on one line in the sales journal. No further explanations or entries are necessary, saving time and effort. Moreover, this sales journal is consistent with most inventory systems that use bar codes to record both sales and costs with each sale transaction. Note that the Posting Reference (PR) column is not used when entering transactions but instead is used when posting.

Posting A sales journal is posted as reflected in the arrow lines of Exhibit 7.5. Two types of posting can be identified: (1) posting to the subsidiary ledger(s) and (2) posting to the general ledger.

Posting to subsidiary ledger. Individual transactions in the sales journal are posted regu- larly (typically concurrently) to customer accounts in the accounts receivable ledger. These postings keep customer accounts up-to-date, which is important for the person granting credit to customers. When sales recorded in the sales journal are individually posted to customer accounts in the accounts receivable ledger, check marks are entered in the sales journal’s PR column. Check marks are used rather than account numbers because customer accounts usually are arranged alphabetically in the accounts receivable ledger. Note that posting deb- its to Accounts Receivable twice—once to Accounts Receivable and once to the customer’s subsidiary account—does not violate the accounting equation of debits equal credits. The equality of debits and credits is always maintained in the general ledger.

Posting to general ledger. The sales journal’s account columns are totaled at the end of each period (the month of February in this case). For the “sales” column, the $2,150 total is debited to Accounts Receivable and credited to Sales in the general ledger (see Exhibit 7.5). For the “cost” column, the $1,500 total is debited to Cost of Goods Sold and credited to Inventory in the general ledger. When totals are posted to accounts in the general ledger, the account numbers are entered below the column total in the sales journal for tracking. For example, we enter (106/413) below the total in the sales column after this amount is posted to account number 106 (Accounts Receivable) and account number 413 (Sales).

A company identifies in the PR column of its subsidiary ledgers the journal and page number from which an amount is taken. We identify a journal by using an initial. Items posted from the sales journal carry the initial S before their journal page numbers in a PR column. Likewise, items from the cash receipts journal carry the initial R; items from the cash disbursements journal carry the initial D; items from the _ p

Point: Continuously updated cus- tomer accounts provide timely informa- tion for customer inquiries on those accounts. Keeping creditor accounts updated provides timely information on current amounts owed.

Point: PR column is only checked after the amount(s) is posted.

Point: Postings are automatic in a computerized system.

urchases journal carry the initial P; and items from the _ g

eneral journal carry the initial G.

Proving the Ledgers Account balances in the general ledger and subsidiary ledgers

Prepare and prove are periodically proved (or reviewed) for accuracy after posting. To do this we first pre-

the accuracy of pare a trial balance of the general ledger to confirm that debits equal credits. Second, we

subsidiary ledgers. test a subsidiary ledger by preparing a schedule of individual accounts and amounts. A schedule of accounts receiv- able lists each customer and the balance owed. If this total equals the balance of the Accounts Receivable controlling account, the accounts in the accounts receivable ledger are assumed correct. Exhibit 7.6 shows a schedule of accounts receivable drawn from the accounts receivable ledger of Exhibit 7.5.

Additional Issues We consider three additional issues with the sales journal: (1) record- ing sales taxes, (2) recording sales returns and allowances, and (3) using actual sales invoices as a journal.

Sales taxes. Governmental agencies such as cities and states often require sellers to collect sales taxes from customers and to periodically send these taxes to the appropriate agency.

P2

Schedule of Accounts Receivable

Exhibit 7.6 February 28

Schedule of Accounts Receivable Albert Co. . . . . . . . . . . . . . . . . . . $ 750 Frank Booth . . . . . . . . . . . . . . . . . 175 Jason Henry . . . . . . . . . . . . . . . . . 675 Kam Moore . . . . . . . . . . . . . . . . . 350 Paul Roth . . . . . . . . . . . . . . . . . . . 200 Total accounts receivable . . . . . . . $2,150

Point: In accounting, the word schedule generally means a list.


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When using a columnar sales journal, we can keep a record of taxes collected by adding a Sales Taxes Payable column as follows:

Individual amounts in the Accounts Receivable column would continue to be posted im- mediately to customer accounts in the accounts receivable ledger. Individual amounts in the Sales Taxes Payable and Sales columns are not posted. Column totals would continue to be posted as usual. (A company that collects sales taxes on its cash sales can also use a Sales Taxes Payable column in its cash receipts journal.)

Sales returns and allowances. A company with only a few sales returns and allowances can record them in a general journal with an entry such as this:

Assets Liabilities Equity 175 175

Quick Check

4. When special journals are used, where are cash payments by check recorded? 5. How does a columnar journal save posting time and effort? 6. How do debits and credits remain equal when credit sales are posted twice (once to

Accounts Receivable and once to the customer’s subsidiary account)? 7. How do we identify the journal from which an amount in a ledger account was posted? 8. How are sales taxes recorded in the context of special journals? 9. What is direct posting of sales invoices? Answers—p. 288

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7. Accounting Information Systems

Page 3 Cost of Goods Sold Dr. Inventory Cr. 75

May 17 Sales Returns and Allowances . . . . . . . . . . . . . . 414 175

Accounts Receivable—Ray Ball . . . . . . . . . 106/✓ 175 Customer returned merchandise.

The debit in this entry is posted to the Sales Returns and Allowances account (no. 414). The credit is posted to both the Accounts Receivable controlling account (no. 106) and to the cus- tomer’s account. When we enter the account number and the check mark, 106/✓, in the PR column on the credit line, this means both the Accounts Receivable controlling account in the general ledger and the Ray Ball account in the accounts receivable ledger are credited for $175. [Note: If the returned goods can be resold to another customer, the company would debit (increase) the Inventory account and credit (decrease) the Cost of Goods Sold account. If the returned goods are defective (worthless), the company could simply leave their costs in the Cost of Goods Sold account (see Chapter 5).] A company with a large number of sales returns and allowances can save time by recording them in a separate sales returns and allowances journal.

Sales invoices as a sales journal. To save costs, some small companies avoid using a sales journal for credit sales and instead post each sales invoice amount directly to the customer’s account in the accounts receivable ledger. They then put copies of invoices in a file. At the end of the period, they total all invoices for that period and make a general journal entry to debit Accounts Receivable and credit Sales for the total amount. The file of invoice copies act as a sales journal. This is called direct posting of sales invoices.

Accounting System

Account

Invoice

Accounts

Sales Taxes Date

Debited

Number PR

Receivable Dr.

Payable Cr. Sales Cr. Dec. 1 Favre Co. 7-1698 103 3 100


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Chapter 7 Accounting Information Systems 271

Cash Receipts Journal A cash receipts journal is typically used to record all receipts of cash. Exhibit 7.7 shows one common form of the cash receipts journal.

Exhibit 7.7 Cash Receipts Journal with Posting*

Feb. 7 12 14 17 20 21 22 23 25 28 28

4,450

4,450

3,150 ✓

441

9

450 ✗

3,925 ✓

500

4,700 409 ✓

7 ✓

4

200 ✗

4,225

4,225 19,770

17,300 1,000

12,550 (101) (415)

3,925

4,700

(413) (✗)

Feb. 7

Feb. 25

2,950 490 750

250 343 196

10 245

750 ✗

30

1,500

3,400 250 350

3,050

(106)

(502/119)

Individual line item amounts in the Other Accounts Cr. and Accounts Receivable Cr. columns are posted immediately.

*The Cash Receipts Journal in a periodic system would exclude the column on the far right titled “Cost of Goods Sold

Dr., Inventory Cr.” (see Exhibit 7A.2).

Column totals are posted at the end of the period.

S3

500 500

Feb. 28

R2

19,770

19,770 17

R2

500 0 28 S3

250

250

Feb. 28

S3

2,150 2,150 28

R2

1,500

650

S3

175 175

Feb. 1

bal.

15,700 28

S3

1,500

14,200

Feb. 2

S3

450

450

28

R2

12,550 1,650 12

R2

450 0 22

S3

225 225

Kam Moore

Feb. 20

R2

750 750

Feb. 13

S3

350 350 23

R2

350

0

Feb. 22

R2

250

250

Feb. 28

S3

2,150 2,150 Feb. 15

S3

200

200 28

R2

17,300 19,450 25

R2

200 0

Feb. 28

R2

30 30

Feb. 28

S3

1,500 1,500 28

R2

12,550 14,050

Larson−Wild−Chiappetta: Fundamental Accounting Principles, Seventeenth Edition

Sales Cash sales Jason Henry

Invoice, 2/2 Sales

Cash sales Albert Co. Notes Payable Sales Interest revenue

Invoice, 2/13 Paul Roth

Invoice, 2/15 Sales

Cash sales Totals

Invoice, 2/7 Note to bank Cash sales Bank account Kam Moore

7. Accounting Information Systems


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272 Chapter 7 Accounting Information Systems

Point: Each transaction in the cash

Journalizing and Posting Cash receipts can be separated into one of three types: receipts journal involves a debit to Cash. Credit accounts will vary.

(1) cash from credit customers in payment of their accounts, (2) cash from cash sales, and (3) cash from other sources. The cash receipts journal in Exhibit 7.7 has a separate credit column for each of these three sources. We describe how to journalize transactions from each of these three sources. (An Explanation column is included in the cash receipts journal to identify the source.)

Cash from credit customers. Journalizing. To record cash received in payment of a cus- tomer’s account, the customer’s name is first entered in the Account Credited column—see transactions dated February 12, 17, 23, and 25. Then the amounts debited to both Cash and the Sales Discount (if any) are entered in their respective columns, and the amount credited to the customer’s account is entered in the Accounts Receivable Cr. column.

Posting. Individual amounts in the Accounts Receivable Cr. column are posted immedi- ately to customer accounts in the subsidiary accounts receivable ledger. The $1,500 column total is posted at the end of the period (month in this case) as a credit to the Accounts Receivable controlling account in the general ledger.

Cash sales. Journalizing. The amount for each cash sale is entered in the Cash Dr. col- umn and the Sales Cr. column. The February 7, 14, 21, and 28 transactions are examples. (Cash sales are usually journalized daily or at point of sale, but are journalized weekly in

Point: Some software packages put cash sales in the sales journal.

Exhibit 7.7 for brevity.) Each cash sale also yields an entry to Cost of Goods Sold Dr. and Inventory Cr. for the cost of merchandise—see the far right column.

Posting. For cash sales, we place an x in the PR column to indicate that its amount is not individually posted. We do post the $17,300 Sales Cr. total and the $12,550 total from the “cost” column.

Example: Record in the cash receipts

Cash from other sources. Journalizing. Examples of cash from other sources are money journal a $700 cash sale of land when

borrowed from a bank, cash interest received on account, and cash sale of noninventory as- the land carries a $700 original cost. Answer: Debit the Cash column for $700, and credit the Other Accounts column for $700 (the account credited is Land).

sets. The transactions of February 20 and 22 are illustrative. The Other Accounts Cr. col- umn is used for these transactions.

Posting. Amounts from these transactions are immediately posted to their general ledger accounts and the PR column identifies those accounts.

Footing, Crossfooting, and Posting To be sure that total debits and credits in a columnar journal are equal, we often crossfoot column totals before posting them. To foot

Point: Subsidiary ledgers and their controlling accounts are in balance only after all posting is complete.

a column of numbers is to add it. To crossfoot in this case is to add the Debit column to- tals, then add the Credit column totals, and compare the two sums for equality. Footing and crossfooting of the numbers in Exhibit 7.7 results in the report in Exhibit 7.8.

Exhibit 7.8

Debit Columns Credit Columns Footing and Crossfooting Journal Totals

Cash Dr. . . . . . . . . . . . . . . . . . . . $19,770 Accounts Receivable Cr. . . . . . . . $ 1,500 Sales Discounts Dr. . . . . . . . . . . . 30 Sales Cr. . . . . . . . . . . . . . . . . . . . 17,300 Cost of Goods Sold Dr. . . . . . . . 12,550 Other Accounts Cr. . . . . . . . . . . . 1,000 Inventory Cr. . . . . . . . . . . . . . . . 12,550 Total . . . . . . . . . . . . . . . . . . . . . $32,350 Total . . . . . . . . . . . . . . . . . . . . . . $32,350

At the end of the period, after crossfooting Decision Maker

the journal to confirm that debits equal credits,

Entrepreneur You want to know how promptly customers are paying their bills.This information can help you decide whether to extend credit and to plan your cash payments. Where do you find this information?

the total amounts from the columns of the cash receipts journal are posted to their general ledger accounts. The Other Accounts Cr. col- umn total is not posted because the individual amounts are directly posted to their general Answer—p. 287

ledger accounts. We place an x below the Other

Larson−Wild−Chiappetta: Fundamental Accounting Principles, Seventeenth Edition

7. Accounting Information Systems


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Chapter 7 Accounting Information Systems 273

Accounts Cr. column to indicate that this column total is not posted. The account numbers for the column totals that are posted are entered in parentheses below each column. (Note: Posting items immediately from the Other Accounts Cr. column with a delayed posting of their offsetting items in the Cash column total causes the general ledger to be out of bal- ance during the period. Posting the Cash Dr. column total at the end of the period corrects this imbalance in the general ledger before the trial balance and financial statements are prepared.)

Purchases Journal A purchases journal is typically used to record all credit purchases, including those for in- ventory. Purchases for cash are recorded in the Cash Disbursements Journal.

Journalizing Entries in the purchases journal in Exhibit 7.9 reflect purchase invoices or other source documents. We use the invoice date and terms to compute the date when payment

Point: The number of special journals and the design of each are based on a company’s specific needs.

Page 1

Feb. 3 5 13 20 25 28 28

275

75 200 150 300 100 125

25

75 100

75 (119) (124) (✗)

Feb. 5 Feb. 1

Feb. 28

Feb. 28

Feb. 28

1,150

Individual amounts in the Other Accounts Dr. and the Accounts

Column totals, except for Other Payable Cr. columns are posted

Accounts Dr. column, are immediately.

posted at the end of the period.

P1

200

200

bal.

15,700 25

P1

100

300 28

S3

1,500

14,200 28

R2

12,550

1,650 28

P1

1,150

2,800

Feb. 3

P1

350 350

P1

100

100

Feb. 28

P1

225

225 P1

75 75

Feb. 20

P1

300

300

P1

1,325 1,325

Feb. 13

P1

150 150

*The Purchases Journal in a periodic system replaces “Inventory Dr.” with “Purchases Dr.” (see Exhibit 7A.3).

Larson−Wild−Chiappetta: Fundamental Accounting Principles, Seventeenth Edition

Horning Supply Co. Ace Mfg. Co. Wynet & Co. Smite Co. Ace Mfg. Co. Store Supplies/ITT Co. Totals

7. Accounting Information Systems

2/2 2/5 2/10

2/18 2/24 2/28

n/30 2/10, n/30 2/10, n/30 2/10, n/30 2/10, n/30 n/30

✓ ✓ ✓ ✓ ✓ 125/✓

350 200 150 300 100 225 1,325 (201)

Exhibit 7.9 Purchases Journal with Posting*


7. Larson−Wild−Chiappetta:

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Systems Principles, Seventeenth Edition

Text © The McGraw−Hill

Companies, 2004

274 Chapter 7 Accounting Information Systems

for each purchase is due. The Accounts Payable Cr. column is used to record the amounts owed to each creditor. Inventory purchases are recorded in the Inventory Dr. column.

To illustrate, inventory costing $200 is purchased from Ace Manufacturing on February 5. The creditor’s name (Ace) is entered in the Account column, the invoice date is entered in the Date of Invoice column, the purchase terms are entered in the Terms column, and the $200 amount is entered in the Accounts Payable Cr. and the Inventory Dr. columns. When a purchase involves an amount recorded in the Other Accounts Dr. column, we use the Point: Each transaction in the pur-

Account column to identify the general ledger account debited. For example, the February chases journal involves a credit to

28 transaction involves purchases of inventory, office supplies, and store supplies from ITT. Accounts Payable. Debit accounts will vary.

The journal has no column for store supplies, so the Other Accounts Dr. column is used. In this case, Store Supplies is entered in the Account column along with the creditor’s name

Point: The Other Accounts Dr. col- umn allows the purchases journal to be used for any purchase transaction on credit.

(ITT). This purchases journal also includes a separate column for credit purchases of office supplies. A separate column such as this is useful when several transactions involve debits to the same account. Each company uses its own judgment in deciding on the number of separate columns necessary.

Posting The amounts in the Accounts Payable Cr. column are immediately posted to in- dividual creditor accounts in the accounts payable subsidiary ledger. Individual amounts in the Other Accounts Dr. column are immediately posted to their general ledger accounts. At the end of the period, all column totals except the Other Accounts Dr. column are posted to their general ledger accounts.

Proving the Ledger Accounts payable balances in the subsidiary ledger are proved after posting the purchases journal. We prove the subsidiary ledger by preparing a schedule of accounts payable, which is a list of accounts from the accounts payable ledger with their balances and the total. If this total equals the balance of the Accounts Point: The balance in the Accounts Payable controlling account must equal the sum of the individual account bal- ances in the accounts payable subsidiary ledger after posting. Exhibit 7.10

Schedule of Accounts Payable

Payable controlling account, the accounts in the accounts payable ledger are assumed correct. Exhibit 7.10 shows a schedule of accounts payable drawn from the accounts payable ledger of Exhibit 7.9.

Cash Disbursements Journal A cash disbursements journal, also called a cash payments journal, is typically used to record all cash payments.

Journalizing The cash disbursements journal shown in Exhibit 7.11 illustrates repetitive entries to the Cash Cr. column of this journal (reflecting cash payments). Also note the fre- quent credits to Inventory (which reflect purchase discounts) and the debits to Accounts Payable. For example, on February 15, the company pays Ace on account (credit terms of 2/10, n/30—see February 5 transaction in Exhibit 7.9). Since payment occurs in the discount period, the company pays $196 ($200 invoice less $4 discount). The $4 discount is credited to Inventory. Note that when this company purchases inventory for cash, it is recorded using the Other Accounts Dr. column and the Cash Cr. column as illustrated in the February 3 and 12 transactions. Generally, the Other Accounts column is used to record cash payments on items for which no column exists. For example, on February 15, the company pays salaries expense of $250. The title of the account deb- ited (Salaries Expense) is entered in the Account Debited column.

The cash disbursements journal has a column titled Ck. No. (check number). For control over cash disbursements, all payments except for those of small amounts are made by check. Schedule of Accounts Payable February 28

Ace Mfg. Company . . . . . . . . . . . . $ 300 Horning Supply Company . . . . . . . 350 ITT Company . . . . . . . . . . . . . . . . 225 Smite Company . . . . . . . . . . . . . . . 300 Wynet & Company . . . . . . . . . . . . 150 Total accounts payable . . . . . . . . . . $1,325

Point: Each transaction in the cash disbursements journal involves a credit to Cash. Debit accounts will vary.

Decision Maker

Controller You wish to analyze your company’s cash payments to suppliers and its purchases discounts.Where do you find this information?

Answer—p. 287


Text © The McGraw−Hill

Companies, 2004

Chapter 7 Accounting Information Systems 275

Checks should be prenumbered and each check’s number entered in the journal in numerical order in the column headed Ck. No. This makes it possible to scan the numbers in the col- umn for omitted checks. When a cash disbursements journal has a column for check numbers, it is sometimes called a check register.

Posting Individual amounts in the Other Accounts Dr. column of a cash disbursements journal are immediately posted to their general ledger accounts. Individual amounts in the Accounts Payable Dr. column are also immediately posted to creditors’ accounts in the sub- sidiary Accounts Payable ledger. At the end of the period, we crossfoot column totals and post the Accounts Payable Dr. column total to the Accounts Payable controlling account.

Exhibit 7.11 Cash Disbursements Journal

Page 2

with Posting*

Feb. 3 105 L. & N. Railroad Inventory

119 15 15 12 106 East Sales Co. Inventory 119 25 25 15 107 Ace Mfg. Co. Ace Mfg. Co. ✓ 196 4 200 15 108 Jerry Hale 20

Salaries Expense

622 ✓

250 3 28

6 28 13

250 109

Wynet & Co.

Wynet & Co.

147 150 110

Smite Co.

Smite Co.

294 Totals

927 290 (101) (119) (✗) (201) Feb. 28 Feb. 5

Feb. 3

300 650

Individual amounts in the Other Accounts Column totals, except for Other Accounts

Dr. column and Accounts Payable Dr. column, are posted at the end of the period.

column are posted immediately.

R2

R2

*The Cash Disbursements Journal in a periodic system replaces “Inventory Cr.” with “Purchases Discounts Cr.”

(see Exhibit 7A.4).

19,770

19,770 927

18,843

S3

P1

P1

D2

200 200 28

D2

15 25

D2 D2

D2

Feb. 28

300

Feb. 15

Feb. 13

D2

200

0 P1

100 100

Feb. 1

bal.

15,700 3

15

15,715 12

25

15,740

P1

350

350

28

14,240 28 28 28

13

P1

225 225

1,325 1,325 D2

0

D2

0 1,500 12,550

1,690 1,150

2,840 2,827

650

250 250

Feb. 28

P1 28

675

Feb. 20

P1

300 300 28

P1

150 150 20

D2

150

Larson−Wild−Chiappetta: Fundamental Accounting Principles, Seventeenth Edition

7. Accounting Information Systems


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Systems Principles, Seventeenth Edition

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Companies, 2004

276 Chapter 7 Accounting Information Systems

Also, the Inventory Cr. column total is posted to the Inventory account, and the Cash Cr. column total is posted to the Cash account.

General Journal Transactions When special journals are used, we still need a general journal for adjusting, closing, and any other transactions for which no special journal has been set up. Examples of these other transactions might include purchases returns and allowances, purchases of plant assets by issuing a note payable, sales returns if a sales returns and allowances journal is not used, and receipt of a note receivable from a customer. We described the recording of transactions in a general journal in Chapters 2 and 3.

Quick Check

10. What are the normal recording and posting procedures when using special journals and

controlling accounts with subsidiary ledgers? 11. What is the process for posting to a subsidiary ledger and its controlling account? 12. How do we prove the accuracy of account balances in the general ledger and subsidiary

ledgers after posting? 13. Why does a company need a general journal when using special journals for sales, purchases,

cash receipts, and cash disbursements? Answers—p. 288

Technology-Based Accounting Systems C5

Explain based information how technology-

systems

Accounting information systems are supported with technology, which can range from sim- ple calculators to advanced computerized systems. Since technology is increasingly impor- impact accounting.

tant in accounting information systems, we discuss the impact of computer technology, how data processing works with accounting data, and the role of computer networks.

Decision Insight

Middleware is software allowing different

Computer Technology in Accounting

computer programs in a company or across

Computer technology provides accuracy, companies to work together. It allows trans-

speed, efficiency, and convenience in perform- fer of purchase orders, invoices, and other

ing accounting tasks. A program can be writ- electronic documents between accounting

ten, for instance, to process customers’ mer- systems. For example, suppliers can monitor

chandise orders. Multipurpose off-the-shelf inventory levels of their buyers for produc-

software applications exist for a variety of tion and shipping purposes.

business operations. These include familiar accounting programs such as Peachtree® and QuickBooks®. Off-the-shelf programs are de- signed to be user friendly and menu driven, and many operate more efficiently as integrated systems. In an integrated system, actions taken in one part of the system automatically affect related parts. When a credit sale is recorded in an integrated system, for instance, several parts of the system are automatically updated,

Decision Insight

such as posting.

Computer technology can dramatically re-

A new generation of Windows- and Web-based accounting support is avail- able.With the touch of a key, users can create real-time inventory reports showing all payments, charges, and credit limits at any point in the accounting cycle. Many services also include “alert signals” notifying the company when, for example, a large order exceeds a customer’s credit limit or when pur- chases need to be made.

duce the time and effort devoted to record- keeping. Less effort spent on recordkeeping means more time for accounting professionals to concentrate on analysis and managerial de- cision making. These advances have created a greater demand for accounting professionals who understand financial reports and can draw


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Accounting Information Fundamental Accounting

Systems Principles, Seventeenth Edition

Text © The McGraw−Hill

Companies, 2004

Chapter 7 Accounting Information Systems 277

insights and information from mountains of processed data. Accounting professionals have expertise in determining relevant and reliable information for decision making. They also can assess the effects of transactions and events on a company and its financial statements.

Data Processing in Accounting Accounting systems differ with regard to how input is entered and processed. Online processing enters and processes data as soon as source documents are available. This means that databases are immediately updated. Batch processing accumulates source docu- ments for a period of time and then processes them all at once such as daily, weekly, or monthly. The advantage of online processing is timeliness. This often requires additional costs related to both software and hardware requirements. Companies such as NetLedger (NetLedger.com) are making online processing of accounting data a reality for many busi- nesses. The advantage of batch processing is that it requires only periodic updating of data- bases. Records used to send bills to customers, for instance, might require updating only once a month. The disadvantage of batch processing is the lack of updated databases for management to use when making business decisions.

Computer Networks in Accounting Networking, or linking computers with each other, can create information advantages (and cost efficiencies). Computer networks are links among computers giving different users and different computers access to common databases, programs, and hardware. Many college computer labs, for instance, are networked. A small computer network is called a local area network (LAN); it links machines with hard-wire hookups. Large computer networks extending over long distances often rely on modem or wireless communication.

Demand for information sometimes requires advanced networks such as the systems Federal Express and UPS use to track packages and bill cus- tomers and the system Wal-Mart uses to monitor inventory levels in its stores. These networks include many computers and satellite communications to gather information and to provide ready access to its databases from all locations.

Enterprise Resource Planning Software Enterprise resource planning (ERP) software includes the programs that manage a com- pany’s vital operations. They extend from order taking to manufacturing to accounting. When working properly, these integrated programs can speed decision making, identify costs for reduction, and give managers control over operations with the click of a mouse. For many managers, ERP software allows them to scrutinize business, identify where in- ventories are piling up, and see what plants are most efficient. The software is designed to link every part of a company’s operations. This software allowed Monsanto to slash pro- duction planning from six weeks to three, trim its in- ventories, and increase its bargaining power with sup- pliers. Monsanto estimates that this software saves the company $200 million per year.

ERP has six major suppliers. SAP leads the market, with Oracle a distant second. SAP software is used by roughly half of the world’s 500 largest companies. It links ordering, inventory, production, purchasing, planning, tracking, and human resources. A transaction or event triggers an immediate chain reaction of events through- out the enterprise. It is making companies more efficient and profitable.

Total ERP Market: About $13 Billion

Other 34%

SSA 5%

J.D. Edwards 7%

SAP 33%

Oracle 10%

Baan 5%

Peoplesoft 6%


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Systems Principles, Seventeenth Edition

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278 Chapter 7 Accounting Information Systems

ERP is pushing into cyberspace. Now companies can share data with customers and suppliers. Applesauce maker Mott’s is using SAP so that distributors can check the status of orders and place them over the Net, and the Coca-Cola Company uses it to ship soda on time. ERP is also increasingly used by small business. For example, NetLedger’s accounting services to small and medium businesses are powered by Oracle’s system.

Quick Check

14. Identify an advantage of an integrated computer-based accounting system. 15. What advantages do computer systems offer over manual systems? 16. Identify an advantage of computer networks. 17. Describe ERP software and its potential advantages to businesses. Answers—p. 288

Decision Analysis

Segment Return on Assets Good accounting information systems collect financial data for a company’s various segments. A segment refers to a part of a company that is separately identified by its products or services, or by the geographic market it serves. Harley-Davidson reports that it operates in two business seg- ments: (1) motorcycles and related and Exhibit 7.12

(2) financial services. Users of financial statements are especially interested in Companies Reporting Operations by These Segments*

59%

segment information to better under- stand a company’s activities because

43%

segments often vary on profitability, risk, and growth.

Full disclosure by segments is rare be- 27%

cause managers are reluctant to release information that can harm its competitive

Point: Publicly traded companies must report segment information, including their sales, operating income, identifiable assets, capital expenditures, depreciation,

28%

position. Exhibit 7.12 shows survey re- sults on the number of companies with different (reported) segments.

One measure of success for business segments is the segment return on as- depletion, and amortization.

sets ratio defined as follows:

This ratio reflects on the profitability of a segment. Exhibit 7.13 shows the segment return on assets for Harley-Davidson from 2000 through 2002.

Exhibit 7.13

Harley-Davidson’s Segment Return on Assets ($ millions)

Industry

Geographic

Export Sales

Major Customers

0 20 40 60

*Total exceeds 100% because companies can report more than one type of segment.

A1

Compute segment return on assets and use it to evaluate segment performance.

Segment return on assets

Segment operating income Segment average assets

2002 2001 2000

Operating Average Return on Operating Average Return on Return on Segment Income* Assets Assets Income Assets Assets Assets

Motorcycles and $791 $1,464 54% $613 $1,272 48% 44%

related Financial services 104 1,310 8 61 977 6 4

* A segment’s operating income is usually measured as income before taxes, and assets is usually measured as identifiable assets.


7. Larson−Wild−Chiappetta:

Accounting Information Fundamental Accounting

Systems Principles, Seventeenth Edition

Text © The McGraw−Hill

Companies, 2004

Pepper Company completed the following selected transactions and events during March of this year. (Terms of all credit sales for the company are 2/10, n/30.) Mar. 4 Sold merchandise on credit to Jennifer Nelson, Invoice No. 954, for $16,800 (cost is $12,200). 6 Purchased $1,220 of office supplies on credit from Mack Company. Invoice dated March

3, terms n/30. 6 Sold merchandise on credit to Dennie Hoskins, Invoice No. 955, for $10,200 (cost is $8,100). 11 Purchased $52,600 of merchandise, invoice dated March 6, terms 2/10, n/30, from Defore

Industries. 12 Borrowed $26,000 cash by giving Commerce Bank a long-term promissory note payable. 14 Received cash payment from Jennifer Nelson for the March 4 sale less the discount. 16 Received a $200 credit memorandum from Defore Industries for unsatisfactory merchan-

dise Pepper purchased on March 11 and later returned. 16 Received cash payment from Dennie Hoskins for the March 6 sale less the discount. 18 Purchased $22,850 of store equipment on credit from Schmidt Supply, invoice dated March

15, terms n/30. 20 Sold merchandise on credit to Marjorie Allen, Invoice No. 956, for $5,600 (cost is $3,800). 21 Sent Defore Industries Check No. 516 in payment of its March 6 dated invoice less the re-

turn and the discount. 22 Purchased $41,625 of merchandise, invoice dated March 18, terms 2/10, n/30, from Welch

Company. 26 Issued a $600 credit memorandum to Marjorie Allen for defective merchandise Pepper sold

on March 20 and Allen later returned. 31 Issued Check No. 517, payable to Payroll, in payment of $15,900 sales salaries for the

month. Cashed the check and paid the employees. 31 Cash sales for the month are $134,680 (cost is $67,340). (Cash sales are recorded daily

but are recorded only once here to reduce repetitive entries.)

Required 1. Open the following selected general ledger accounts: Cash (101), Accounts Receivable (106) Inventory (119), Office Supplies (124), Store Equipment (165), Accounts Payable (201), Long-Term Notes Payable (251), Sales (413), Sales Returns and Allowances (414), Sales Discounts (415), Cost of Goods Sold (502), and Sales Salaries Expense (621). Open the following accounts receivable ledger accounts: Marjorie Allen, Dennie Hoskins, and Jennifer Nelson. Open the following accounts payable ledger accounts: Defore Industries, Mack Company, Schmidt Supply, and Welch Company. 2. Enter the transactions using a sales journal, a purchases journal, a cash receipts journal, a cash disbursements journal, and a general journal similar to the ones illustrated in the chapter. Regularly post to the individual customer and creditor accounts. Also, post any amounts that should be posted as individual amounts to general ledger accounts. Foot and crossfoot the journals and make the month-end postings. Pepper Co. uses the perpetual inventory system. 3. Prepare a trial balance for the selected general ledger accounts in part 1 and prove the accuracy

of subsidiary ledgers by preparing schedules of accounts receivable and accounts payable. Planning the Solution

Set up the required general ledger, the subsidiary ledger accounts, and the five required journals as illustrated in the chapter.

Chapter 7 Accounting Information Systems 279

The trend in Harley’s segment return on assets is in- creasing for both segments, but its motorcycles seg- ment is much more profitable (54%) than its finan- cial services (8%) segment. Harley should consider further investment in its motorcycles segment if such returns can be sustained. Analysis can also be extended to geographical segments and any other segments that are reported.

Decision Maker

Banker A bicycle merchandiser requests a loan from you to expand operations. Its net income is $220,000, reflecting a 10% increase over the prior year. You ask about segment results. The owner reports that $160,000 of net income is from Cuban operations, reflecting a 60% increase over the prior year. The remaining $60,000 of net income is from U.S. operations, reflecting a 40% decrease. Does this segment information impact your loan decision?

Answer—p. 287

Demonstration Problem—Perpetual System


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280 Chapter 7 Accounting Information Systems

Read and analyze each transaction and decide in which special journal (or general journal) the transaction is recorded.

Record each transaction in the proper journal (and post the appropriate individual amounts).

Once you have recorded all transactions, total the journal columns. Post from each journal to the appropriate ledger accounts.

Prepare a trial balance to prove the equality of the debit and credit balances in your general ledger.

Prepare schedules of accounts receivable and accounts payable. Compare the totals of these sched- ules to the Accounts Receivable and Accounts Payable controlling account balances, making sure that they agree. Solution to Demonstration Problem—Perpetual System

General Journal Page 2

Mar. 16 Accounts Payable—Defore Industries. . . . . . . . . . 201/✓ 200

Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . 119 200 To record credit memorandum received. 26 Sales Returns and Allowances . . . . . . . . . . . . . . . 414 600

Accounts Receivable—Marjorie Allen . . . . . . 106/✓ 600 To record credit memorandum issued.

Page 3

Date Explanation PR

Cost of Sales

Accounts

Goods Discount

Receivable

Sold Dr. Dr.

Cr.

Inventory Cr. Other Account

Cash

Sales

Accounts Credited

Dr.

Cr.

Cr. Mar. 12 L.T. Notes Payable Note to bank 14

Jennifer Nelson

Invoice, 3/4

251 ✓

26,000 16,464

336

16,800 9,996 134,680 187,140

(101)

26,000

16

Dennie Hoskins 31

Sales

Invoice, 3/6 Cash sales

✓ x

204

10,200

134,680 31 Totals

540 27,000 134,680

26,000

67,340 (415) (106) (413) (x)

67,340

(502/119)

Page 3 Accounts Payable

Inventory Cr.

Dr.

Office Supplies Dr.

Other Date of

Accounts Date Account

Invoice Terms PR

Dr.

Mar. 6 Office Supplies/Mack Co

3/3 n/30 ✓

1,220 1,220 11

Defore Industries

3/6 2/10, n/30

52,600 52,600 18

Store Equipment/Schmidt Supp

3/15

n/30 165/✓

22,850 22,850 22

Welch Company

3/18

2/10, n/30

41,625 41,625 31

Totals

118,295

94,225 1,220 22,850 (201) (119) (124) (x)

Mar. 21 31 31

Page 3

Inventory Date

Cr. Other

Accounts Ck.

Cash

Accounts

Payable No. Payee Account Debited PR

Cr.

Dr.

Dr.

51,352 1,048 52,400 15,900 15,900 67,252

1,048 15,900 52,400 (101) (119) (x)

(201)

Larson−Wild−Chiappetta: Fundamental Accounting Principles, Seventeenth Edition

516

Defore Industries Defore Industries ✓ 517 Payroll Sales Salaries Expense

621 Totals

7. Accounting Information Systems

Mar. 4 6 20 31

Page 2

Date

Account Debited

Invoice Number PR

Accounts Receivable Dr. Sales Cr.

Cost of Goods Sold Dr. Inventory Cr.

Jennifer Nelson Dennie Hoskins Marjorie Allen Totals

954 955 956

✓ ✓ ✓

16,800 10,200 5,600 32,600 (106/413)

12,200 8,100 3,800 24,100 (502/119)


7. Larson−Wild−Chiappetta:

Accounting Information Fundamental Accounting

Systems Principles, Seventeenth Edition

Text © The McGraw−Hill

Companies, 2004

Chapter 7 Accounting Information Systems 281

Accounts Receivable Ledger

Marjorie Allen

Date PR Debit Credit Balance

Mar. 20 S2 5,600 5,600 26 G2 600 5,000

Dennie Hoskins

Date PR Debit Credit Balance

Mar. 6 S2 10,200 10,200 16 R3 10,200 0

Jennifer Nelson

Date PR Debit Credit Balance

Mar. 4 S2 16,800 16,800 14 R3 16,800 0

Accounts Payable Ledger

Defore Industries

Date PR Debit Credit Balance

Mar. 11 P3 52,600 52,600 16 G2 200 52,400 21 D3 52,400 0

Mack Company

Date PR Debit Credit Balance

Mar. 6 P3 1,220 1,220

Schmidt Supply

Date PR Debit Credit Balance

Mar. 18 P3 22,850 22,850

Welch Company

Date PR Debit Credit Balance

Mar. 22 P3 41,625 41,625

General Ledger (Partial Listing)

Cash Acct. No. 101

Long-Term Notes Payable Acct. No. 251

Date PR Debit Credit Balance

Date PR Debit Credit Balance

Mar. 31 R3 187,140 187,140

Mar. 12 R3 26,000 26,000 31 D3 67,252 119,888

Sales Acct. No. 413 Accounts Receivable Acct. No. 106

Date PR Debit Credit Balance Date PR Debit Credit Balance

Mar. 31 S2 32,600 32,600 Mar. 26 G2 600 (600)

31 R3 134,680 167,280 31 S2 32,600 32,000 31 R3 27,000 5,000

Sales Returns and Allowances Acct. No. 414

Date PR Debit Credit Balance Inventory Acct. No. 119

Date PR Debit Credit Balance

Mar. 26 G2 600 600

Mar. 16 G2 200 (200)

Sales Discounts Acct. No. 415

21 D3 1,048 (1,248)

Date PR Debit Credit Balance

31 P3 94,225 92,977

Mar. 31 R3 540 540 31 S2 31 R3 24,100 68,877 67,340 1,537

Cost of Goods Sold Acct. No. 502

Office Supplies Acct. No. 124

Date PR Debit Credit Balance

Date PR Debit Credit Balance

Mar. 31 R3 67,340 31 S2 24,100 67,340 91,440 Mar. 31 P3 1,220 1,220

Sales Salaries Expense Acct. No. 621 Store Equipment Acct. No. 165

Date PR Debit Credit Balance Date PR Debit Credit Balance

Mar. 31 D3 15,900 15,900 Mar. 18 P3 22,850 22,850

Accounts Payable Acct. No. 201

Date PR Debit Credit Balance

Mar. 16 G2 200 (200)

31 P3 118,295 118,095 31 D3 52,400 65,695


7. Larson−Wild−Chiappetta:

Accounting Information Fundamental Accounting

Systems Principles, Seventeenth Edition

Text © The McGraw−Hill

Companies, 2004

282 Chapter 7 Accounting Information Systems

PEPPER COMPANY Trial Balance (partial) March 31

Debit Credit Cash . . . . . . . . . . . . . . . . . . . . . . . . . $119,888 Accounts receivable . . . . . . . . . . . . . . 5,000 Inventory . . . . . . . . . . . . . . . . . . . . . 1,537 Office supplies . . . . . . . . . . . . . . . . . . 1,220 Store equipment . . . . . . . . . . . . . . . . 22,850 Accounts payable . . . . . . . . . . . . . . . . $ 65,695 Long-term notes payable . . . . . . . . . . 26,000 Sales . . . . . . . . . . . . . . . . . . . . . . . . . 167,280 Sales returns and allowances . . . . . . . 600 Sales discounts . . . . . . . . . . . . . . . . . 540 Cost of goods sold . . . . . . . . . . . . . . 91,440 Sales salaries expense . . . . . . . . . . . . 15,900 Totals . . . . . . . . . . . . . . . . . . . . . . . . $258,975 $258,975

reconciled reconciled

PEPPER COMPANY

PEPPER COMPANY Schedule of Accounts Receivable

Schedule of Accounts Payable March 31

March 31

Marjorie Allen . . . . . . . . . . . . . . . $5,000

Mack Company . . . . . . . . . . . . $ 1,220 Total accounts receivable . . . . . . . $5,000

Schmidt Supply . . . . . . . . . . . . . 22,850 Welch Company . . . . . . . . . . . . 41,625 Total accounts payable . . . . . . . $65,695

APPENDIX 7A

Special Journals under a Periodic System

P3

Journalize transactions and using

post

This appendix describes special journals under a periodic inventory system. Each journal is slightly impacted. The sales journal and the cash receipts journal both require one less column (namely that special journals in a periodic

of Cost of Goods Sold Dr., Inventory Cr.). The Purchases Journal replaces the Inventory Dr. column inventory system.

with a Purchases Dr. column in a periodic system. The cash disbursements journal replaces the Inventory Cr. column with a Purchases Discounts Cr. column in a periodic system. These changes are illustrated.

Sales Journal

The sales journal using the periodic inventory system is shown in Exhibit 7A.1. The difference in the sales journal between the perpetual and periodic system is the exclusion of the column to record cost of goods sold and inventory amounts for each sale. The periodic system does not record the increase in cost of goods sold and the decrease in inventory at the time of each sale.


Text © The McGraw−Hill

Companies, 2004

Chapter 7 Accounting Information Systems 283

Exhibit 7A.1 Sales Journal—Periodic System

Cash Receipts Journal

The cash receipts journal using the periodic system is shown in Exhibit 7A.2. Note the absence of the column on the far right side to record debits to Cost of Goods Sold and credits to Inventory for the cost of merchandise sold (seen under the perpetual system). Consistent with the cash receipts jour- nal shown in Exhibit 7.7, we show only the weekly (summary) cash sale entries.

Exhibit 7A.2 Cash Receipts Journal— Periodic System

Purchases Journal

The purchases journal using the periodic system is shown in Exhibit 7A.3. This journal under a per- petual system included an Inventory column where the periodic system now has a Purchases column.

Exhibit 7A.3 Purchases Journal— Periodic System

Cash Disbursements Journal

The cash disbursements journal using a periodic system is shown in Exhibit 7A.4. This journal un- der the perpetual system included an Inventory column where the periodic system now has the Purchases Discounts column.

Sales Feb. 7

x 12 14 17 20 21 22 23 25 28 28

Jason Henry Sales Albert Co. Notes Payable Sales Interest revenue Kam Moore Paul Roth Sales Totals

Date

Feb. 3 Horning Supply Co.

2/2 n/30

✓ 5

Ace Mfg. Co.

2/5

✓ 13 20

Smite Co.

✓ 25

Ace Mfg. Co. 28

Store Supplies/ITT Co.

n/30 28

Totals

2/10, n/30 Wynet and Co.

2/10, n/30 2/10, n/30 2/10, n/30 2/10

✓ 2/18 2/24

✓ 2/28

125/✓

Date Account

Page 3

Date

Account Debited

Invoice

Accounts Receivable Dr. Number PR

Sales Cr. Feb. 2

450 7 Albert Co. 308 ✓ 500 13

350 15

200 22

225 25

175 28

250 28

2,150 (106/413)

Larson−Wild−Chiappetta: Fundamental Accounting Principles, Seventeenth Edition

Account Credited

Explanation PR Cash sales Invoice, 2/2 Cash sales Invoice, 2/7 Note to bank Cash sales Bank account Invoice, 2/13 Invoice, 2/15 Cash sales

Jason Henry

Kam Moore Paul Roth Jason Henry Frank Booth Albert Co. Total

7. Accounting Information Systems

307

309 310 311 312 313

Date of Invoice Terms PR

✓ x ✓ 245 x 409 ✓ ✓ x

✓ ✓ ✓ ✓ ✓

Cash Dr.

4,450 441 3,925 490 750 4,700 250 343 196 4,225 19,770 (101)

9

10

7 4

(415)

Sales Discount Dr.

Page 1 Accounts Payable Cr.

350

275

75 200

200 150

150 300

300 100

100 225

125

25

75 1,325

1,150

100

75 (201)

(505)

(124)

(x)

Page 2

Accounts Receivable Cr.

450

500

350 200

(106)

4,450

3,925

750 4,700

250

4,225 30

1,500 17,300 1,000 (413) (x)

Purchases Dr.

Office Supplies Dr.

Sales Cr.

Other Accounts Cr.

Other Accounts Dr.


Text © The McGraw−Hill

Companies, 2004

284 Chapter 7 Accounting Information Systems

Exhibit 7A.4 Cash Disbursements Journal—Periodic System

Demonstration Problem—Periodic System

Refer to Pepper Company’s selected transactions described under the Demonstration Problem— Perpetual System to fulfill the following requirements.

Required 1. Open the following selected general ledger accounts: Cash (101), Accounts Receivable (106), Office Supplies (124), Store Equipment (165), Accounts Payable (201), Long-Term Notes Payable (251), Sales (413), Sales Returns and Allowances (414), Sales Discounts (415), Purchases (505), Purchases Returns and Allowances (506), Purchases Discounts (507), and Sales Salaries Expense (621). Open the following accounts receivable ledger accounts: Marjorie Allen, Dennie Hoskins, and Jennifer Nelson. Open the following accounts payable ledger accounts: Defore Industries, Mack Company, Schmidt Supply, and Welch Company. 2. Enter the transactions using a sales journal, a purchases journal, a cash receipts journal, a cash disbursements journal, and a general journal similar to the ones illustrated in Appendix 7A. Regularly post to the individual customer and creditor accounts. Also, post any amounts that should be posted as individual amounts to general ledger accounts. Foot and crossfoot the journals and make the month-end postings. Pepper Co. uses the periodic inventory system in this problem. 3. Prepare a trial balance for the selected general ledger accounts in part 1 and prove the accuracy

of subsidiary ledgers by preparing schedules of accounts receivable and accounts payable. Solution to Demonstration Problem—Periodic System

Summary

Feb. 3 12 15 15 20 28 28

Date

Page 3

Date

Sales Discount Dr.

336 204

540 (415)

Accounts Receivable Cr.

16,800 10,200

27,000 (106)

Other Account

Cash

Sales

Accounts Credited Explanation

PR

Dr.

Cr.

Cr. Mar. 12 L.T. Notes Payable Note to bank

251

26,000

26,000 14

Jennifer Nelson

Invoice, 3/4

16,464 16

Dennie Hoskins

Invoice, 3/6

9,996 31

Sales 31

Totals

Cash sales

x

134,680 187,140

134,680 134,680

26,000 (101)

(413)

(x)

Larson−Wild−Chiappetta: Fundamental Accounting Principles, Seventeenth Edition

105 106 107 108 109 110

Ck. No. Payee Account Debited PR

505 L. and N. Railroad East Sales Co. Ace Mfg. Co. Jerry Hale Wynet and Co. Smite Co. Totals

Purchases Purchases Ace Mfg. Co. Salaries Expense Wynet and Co. Smite Co.

505 ✓ 622 ✓ ✓

7. Accounting Information Systems

Page 2

Date

Account Debited

Invoice Number PR

Accounts Receivable Dr. Sales Cr.

Mar. 4 6 20 31

Jennifer Nelson Dennie Hoskins Marjorie Allen Totals

954 ✓ 955

✓ 956

Page 2

25 196 250 147 294

(101)

Purchases Cash

Discounts Cr.

Cr. 15

15 25 4

200 250 3

150 6

300 927

13

290

650 (507)

(x)

(201)

16,800 10,200 5,600 32,600

(106/413)

Other Accounts Dr.

Accounts Payable Dr.


7. Larson−Wild−Chiappetta:

Accounting Information Fundamental Accounting

Systems Principles, Seventeenth Edition

Text © The McGraw−Hill

Companies, 2004

Chapter 7 Accounting Information Systems 285

General Journal Page 2

Mar. 16 Accounts Payable—Defore Industries . . . . . . . . . 201/✓ 200

Purchases Returns and Allowances . . . . . . . . 506 200 To record credit memorandum received. 26 Sales Returns and Allowances . . . . . . . . . . . . . . . 414 600

Accounts Receivable—Marjorie Allen . . . . . . 106/✓ 600 To record credit memorandum issued.

Accounts Receivable Ledger

Marjorie Allen

Date PR Debit Credit Balance

Mar. 20 S2 5,600 5,600 26 G2 600 5,000

Dennie Hoskins

Date PR Debit Credit Balance

Mar. 6 S2 10,200 10,200 16 R3 10,200 0

Jennifer Nelson

Date PR Debit Credit Balance

Mar. 4 S2 16,800 16,800 14 R3 16,800 0

Page 3

Accounts

Office

Other Date of

Payable

Purchases

Supplies

Accounts Date Account

Invoice Terms PR

Cr.

Dr. Dr.

Dr. Mar. 6 Office Supplies/Mack Co

3/3 n/30 ✓

1,220 1,220 11

Defore Industries

3/6 2/10, n/30

52,600 52,600 18

Store Equipment/Schmidt Supp

3/15

n/30 165/✓

22,850 22,850 22

Welch Company

3/18

2/10, n/30

41,625 41,625 31

Totals

118,295

94,225 1,220 22,850

(201) (505) (124) (x)

Page 3

Purch.

Other Discount

Accounts Cr.

Dr.

Accounts Ck.

Cash

Payable Date

No. Payee Account Debited PR

Cr.

Dr. Mar. 21

516

Defore Industries Defore Industries

51,352 1,048

52,400 31

517 Payroll Sales Salaries Expense

621

15,900 15,900 31

Totals

67,252

1,048

15,900 52,400 (101) (507)

(x) (201) Accounts Payable Ledger

Defore Industries

Date PR Debit Credit Balance

Mar. 11 P3 52,600 52,600 16 G2 200 52,400 21 D3 52,400 0

Mack Company

Date PR Debit Credit Balance

Mar. 6 P3 1,220 1,220

Schmidt Supply

Date PR Debit Credit Balance

Mar. 18 P3 22,850 22,850

Welch Company

Date PR Debit Credit Balance

Mar. 22 P3 41,625 41,625


7. Larson−Wild−Chiappetta:

Accounting Information Fundamental Accounting

Systems Principles, Seventeenth Edition

Text © The McGraw−Hill

Companies, 2004

286 Chapter 7 Accounting Information Systems

General Ledger (Partial Listing)

Cash Acct. No. 101

Long-Term Notes Payable Acct. No. 251

Date PR Debit Credit Balance

Date PR Debit Credit Balance

Mar. 31 R3 187,140 187,140

Mar. 12 R3 26,000 26,000 31 D3 67,252 119,888

Sales Acct. No. 413 Accounts Receivable Acct. No. 106

Date PR Debit Credit Balance Date PR Debit Credit Balance

Mar. 31 S2 32,600 32,600 Mar. 26 G2 600 (600)

31 R3 134,680 167,280 31 S2 32,600 32,000

Sales Returns and Allowances Acct. No. 414 31 R3 27,000 5,000

Date PR Debit Credit Balance Office Supplies Acct. No. 124

Date PR Debit Credit Balance

Mar. 26 G2 600 600

Sales Discounts Acct. No. 415 Mar. 31 P3 1,220 1,220

Date PR Debit Credit Balance Store Equipment Acct. No. 165

Date PR Debit Credit Balance

Mar. 31 R3 540 540

Purchases Acct. No. 505 Mar. 18 P3 22,850 22,850

Date PR Debit Credit Balance Accounts Payable Acct. No. 201

Date PR Debit Credit Balance

Mar. 31 P3 94,225 Purchases Returns

94,225

Mar. 16 G2 200 (200)

and Allowances Acct. No. 506 31 P3 118,295 118,095 31 D3 52,400 65,695

Date PR Debit Credit Balance

Mar. 16 G2 200 200

Purchases Discounts Acct. No. 507

Date PR Debit Credit Balance

Mar. 31 D3 1,048 1,048

Sales Salaries Expense Acct. No. 621

Date PR Debit Credit Balance

Mar. 31 D3 15,900 15,900

PEPPER COMPANY Trial Balance (partial) March 31

Debit Credit Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . $119,888 Accounts receivable . . . . . . . . . . . . . . . . . 5,000

PEPPER COMPANY Schedule of Accounts Receivable March 31 Office supplies . . . . . . . . . . . . . . . . . . . . . 1,220 Store equipment . . . . . . . . . . . . . . . . . . . . 22,850

Marjorie Allen . . . . . . . . . . . . . . $5,000

Accounts payable . . . . . . . . . . . . . . . . . . . $ 65,695

Total accounts receivable . . . . . . $5,000

Long-term notes payable . . . . . . . . . . . . . . 26,000 Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167,280 Sales returns and allowances . . . . . . . . . . . 600 Sales discounts . . . . . . . . . . . . . . . . . . . . . 540 Purchases . . . . . . . . . . . . . . . . . . . . . . . . . 94,225 Purchases returns and allowances . . . . . . . 200 Purchases discounts . . . . . . . . . . . . . . . . . 1,048 Sales salaries expense . . . . . . . . . . . . . . . . 15,900 Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . $260,223 $260,223

PEPPER COMPANY Schedule of Accounts Payable March 31

Mack Company . . . . . . . . . . . . $ 1,220 Schmidt Supply . . . . . . . . . . . . . 22,850 Welch Company . . . . . . . . . . . . 41,625 Total accounts payable . . . . . . . $65,695


7. Larson−Wild−Chiappetta:

Accounting Information Fundamental Accounting

Systems Principles, Seventeenth Edition

Text © The McGraw−Hill

Companies, 2004

Chapter 7 Accounting Information Systems 287

Summary

C1

Identify tion systems. fundamental Accounting principles information of accounting systems are informa-

governed

P1

by five fundamental principles: control, relevance, compatibility, flexibility, and cost-benefit. C2

Identify The five basic components components of accounting of an accounting information information

systems.

system are source documents, input devices, information proces- sors, information storage, and output devices. C3

Explain journals are the used goals for and recording uses of transactions special journals. of similar

Special

type, each meant to cover one kind of transaction. Four of the most common special journals are the sales journal, cash re- ceipts journal, purchases journal, and cash disbursements jour- nal. Special journals are efficient and cost-effective tools in the journalizing and posting processes. C4

Describe the use of controlling accounts and subsidiary ledgers. A general ledger keeps controlling accounts such as Accounts Receivable and Accounts Payable, but details on in- dividual accounts making up the controlling account are kept in subsidiary ledgers (such as an accounts receivable ledger). The balance in a controlling account must equal the sum of its sub- sidiary account balances after posting is complete. C5

Explain pact accounting. how technology-based Technology-based information information systems systems

im-

aim to increase the accuracy, speed, efficiency, and convenience of accounting procedures.

Compute segment return on assets and use it to evaluate segment performance. A business segment is a part of a company that is separately identified by its products or services or by the geographic market it serves. Analysis of a company’s segments is aided by the segment return on assets (segment oper- ating income divided by segment average assets).

Guidance Answers to Decision Maker and Decision Ethics

Accountant The main issue is whether commissions have an actual or perceived impact on the integrity and objectivity of your advice. You probably should not accept a commission arrangement (the AICPA Code of Ethics prohibits it when you perform the au- dit or a review). In any event, you should tell the client of your com- mission arrangement. Also, you need to seriously examine the mer- its of agreeing to a commission arrangement when you are in a position to exploit it.

Entrepreneur The accounts receivable ledger has much of the information you need. It lists detailed information for each customer’s account, including the amounts, dates for transac- tions, and dates of payments. It can be reorganized into an “aging schedule” to show how long customers wait before paying their bills.

Journalize and post transactions using special journals. Each special journal is devoted to similar kinds of transac- tions. Transactions are journalized on one line of a special jour- nal, with columns devoted to specific accounts, dates, names, posting references, explanations, and other necessary informa- tion. Posting is threefold: (1) individual amounts in the Other Accounts column are posted to their general ledger accounts on a regular (daily) basis, (2) individual amounts in a column whose total is not posted to a controlling account at the end of a period (month) are posted regularly (daily) to their general ledger accounts, and (3) total amounts for all columns except the Other Accounts column are posted at the end of a period (month) to their column’s account title in the general ledger. Most companies also maintain subsidiary ledgers for special accounts such as accounts receivable and accounts payable. Transactions that impact subsidiary ledgers are posted on a regular (daily) basis. P2

Prepare Account balances and prove in the the accuracy of subsidiary ledgers. general ledger and its subsidiary ledgers are tested for accuracy after posting is complete. This procedure is twofold: (1) prepare a trial balance of the general ledger to confirm that debits equal credits and (2) prepare a schedule to confirm that the controlling account’s balance equals the subsidiary ledger’s balance. P3A

Journalize in a periodic and inventory post transactions system. Transactions using special are journals journal- A1

ized and posted using special journals in a periodic system. The methods are similar to those in a perpetual system; the primary difference is that both cost of goods sold and inventory are not adjusted at the time of each sale. This usually results in the dele- tion (or renaming) of one or more columns devoted to these ac- counts in each special journal.

Controller Much of the information you need is in the accounts payable ledger. It contains information for each supplier, the amounts due, and when payments are made. This subsidiary ledger along with information on credit terms should enable you to con- duct your analyses.

Banker This merchandiser’s segment information is likely to greatly impact your loan decision. The risks associated with the company’s two sources of net income are quite different. While net income is up by 10%, U.S. operations are performing poorly and Cuban operations are subject to many uncertainties. These uncer- tainties depend on political events, legal issues, business relation- ships, Cuban economic conditions, and a host of other risks. Overall, net income results suggested a low-risk loan opportunity, but the segment information reveals a high-risk situation.

Guidance Answers to Quick Checks

1. The five components are source documents, input devices, information processors, information storage, and output devices.

2. Information processors interpret, transform, and summarize the recorded accounting information so that it can be used in analysis, interpretation, and decision making.


m o

7. Larson−Wild−Chiappetta:

Accounting Information Fundamental Accounting

Systems Principles, Seventeenth Edition

Text © The McGraw−Hill

Companies, 2004

288 Chapter 7 Accounting Information Systems

3. Data saved in information storage are used to prepare periodic

11. Controlling accounts are debited periodically for an amount financial reports and special-purpose internal reports as well

or amounts equal to the sum of their respective debits in the as source documentation for auditors.

subsidiary ledgers (equals journal column totals), and they 4. All cash payments by check are recorded in the cash dis-

bursements journal. 5. Columnar journals allow us to accumulate repetitive debits and credits and post them as column totals rather than as individ- ual amounts from each entry. 6. The equality of debits and credits is kept within the general ledger. The subsidiary ledger keeps the customer’s individual account and is used only for supplementary information. 7. An initial and the page number of the journal from which the amount was posted are entered in the PR column next to the amount.

Accounting information systems (p. 262) Accounts payable ledger (p. 267) Accounts receivable ledger (p. 267) Batch processing (p. 277) Cash disbursements journal (p. 274) Cash receipts journal (p. 271) Check register (p. 275) Columnar journal (p. 268) Compatibility principle (p. 263) Components of accounting systems (p. 263)

are credited periodically for an amount or amounts equal to the sum of their respective credits in the subsidiary ledgers (from journal column totals). 12. Tests for accuracy of account balances in the general ledger and subsidiary ledgers are twofold. First, we prepare a trial balance of the general ledger to confirm that debits equal cred- its. Second, we prove the subsidiary ledgers by preparing schedules of accounts receivable and accounts payable. 13. The general journal is still needed for adjusting, closing, and correcting entries and for special transactions such as sales re- turns, purchases returns, and certain asset purchases. 14. Integrated systems can save time and minimize errors. This is 8. A separate column for Sales Taxes Payable can be included in

so because actions taken in one part of the system automati- both the cash receipts journal and the sales journal.

cally affect and update related parts. 9. This refers to a procedure of using copies of sales invoices as

15. Computer systems offer increased accuracy, speed, efficiency, a sales journal. Each invoice amount is posted directly to the

and convenience. customer’s account. All invoices are totaled at period-end for

16. Computer networks can create advantages by linking comput- posting to the general ledger accounts.

ers, and giving different users and different computers access 10. The normal recording and posting procedures are threefold.

to common databases, programs, and hardware. First, transactions are entered in a special journal if applica-

17. ERP software involves integrated programs, from order ble. Second, individual amounts are posted to any subsidiary

taking to manufacturing to accounting. It can speed decision- ledger accounts. Third, column totals are posted to general

making, help identify costs for reduction, and aid managers in ledger accounts if not already individually posted.

controlling operations.

/ l a r s

o

n

Key Terms c . e h

h

m

Key Terms are available at the book’s Website for learning and testing in an online Flashcard Format.

Computer networks (p. 277)

Internal controls (p. 262) Controlling account (p. 267)

Online processing (p. 277) Control principle (p. 262)

Output devices (p. 265) Cost-benefit principle (p. 263)

Purchases journal (p. 273) Enterprise resource planning (ERP)

Relevance principle (p. 262) software (p. 277)

Sales journal (p. 267) Flexibility principle (p. 263)

Schedule of accounts payable (p. 274) General journal (p. 266)

Schedule of accounts receivable (p. 269) Information processors (p. 264)

Segment return on assets (p. 278) Information storage (p. 264)

Special journal (p. 266) Input devices (p. 264)

Subsidiary ledger (p. 266)

m o c /

. l a

e r s

o

n

m

Personal Interactive Quiz

h

h

Personal Interactive Quizzes A and B are available at the book’s Website to reinforce and assess your learning.

1. What are the five fundamental principles of accounting in-

formation systems?

Superscript A denotes assignments based on Appendix 7A.

Discussion Questions

2. What are five basic components of an accounting system? 3. What are source documents? Give two examples.


Text © The McGraw−Hill

Companies, 2004

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4. What is the purpose of an input device? Give examples of

11. Credits to customer accounts and credits to Other Accounts input devices for computer systems.

are individually posted from a cash receipts journal such as 5. What is the difference between data that are stored off-line

the one in Exhibit 7.7. Why not put both types of credits in and data that are stored online?

the same column and save journal space? 6. What purpose is served by the output devices of an ac-

12. Why should sales to and receipts of cash from credit cus- counting system?

tomers be recorded and posted immediately? 7. When special journals are used, they are usually used to

13. Locate the note that discusses Krispy Kreme’s record each of four different types of transactions. What are

operations by segments in Appendix A. In what these four types of transactions?

segment does it predominantly operate? 8. What notations are entered into the Posting Reference col-

umn of a ledger account?

14. Does the income statement of Tastykake in Appendix A indicate the net income earned by 9. When a general journal entry is used to record sales returns,

its business segments? If so, list them. the credit of the entry must be posted twice. Does this cause the trial balance to be out of balance? Explain. 10. Describe the procedures involving the use of copies of a com-

pany’s sales invoices as a sales journal.

15. Does the balance sheet of Harley-Davidson in Appendix A indicate the identifiable assets owned by its business segments? If so, list them.

Red numbers denote Discussion Questions that involve decision-making.

Homework Manager repeats all numerical Quick Studies on the book’s Website with new numbers.

Place the letter of each system principle in the blank next to its best description. A. Control principle D. Flexibility principle B. Relevance principle E. Cost-benefit principle C. Compatibility principle 1. The principle prescribes the accounting information system to change in response to tech-

nological advances and competitive pressures. 2. The principle prescribes the accounting information system to help monitor activities. 3. The principle prescribes the accounting information system to provide timely informa-

tion for effective decision making. 4. The principle prescribes the accounting information system to adapt to the unique char-

acteristics of the company. 5. The principle that affects all other accounting information system principles.

QUICK STUDY

QS 7-1 Accounting information system principles C1

Fill in the blanks to complete the following descriptions:

QS 7-2 1. With processing, source documents are accumulated for a period and then processed all

Accounting information system at the same time, such as once a day, week, or month.

C2 2. A computer allows different computer users to share access to data and programs. 3. A is an input device that captures writing and other input directly from source documents. 4. software comprises programs that help manage a company’s vital op-

erations, from manufacturing to accounting.

Identify the most likely role in an accounting system played by each of the numbered items 1 through 12 by assigning a letter from the list A through E on the left: A. Source documents B. Input devices C. Information processors D. Information storage E. Output devices

1. Bar code reader 2. Filing cabinet 3. Bank statement 4. Computer scanner 5. Computer keyboard 6. Zip drive 7. Computer monitor 8. Invoice from a supplier 9. Computer software 10. Computer printer 11. Digital camera 12. MP3 player

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QS 7-3 Accounting information system components C2

Harley- Davidson


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QS 7-4 Identifying the special journal of entry C3

Damron Electronics uses a sales journal, a purchases journal, a cash receipts journal, a cash dis- bursements journal, and a general journal as illustrated in this chapter. Damron recently completed the following transactions a through h. Identify the journal in which each transaction should be recorded. a. Paid cash to a creditor. e. Borrowed cash from the bank. b. Sold merchandise on credit. f. Sold merchandise for cash. c. Purchased shop supplies on credit. g. Purchased merchandise on credit. d. Paid an employee’s salary in cash. h. Purchased inventory for cash.

QS 7-5 Entries in the general journal C3

QS 7-6 Required segment reporting A1

Lue Gifts uses a sales journal, a purchases journal, a cash receipts journal, a cash disbursements jour- nal, and a general journal as illustrated in this chapter. Journalize its November transactions that should be recorded in the general journal. For those not recorded in the general journal, identify the special journal where each should be recorded. Nov. 2 Purchased $2,900 of merchandise on credit from the Elko Co., terms 2/10, n/30.

12 The owner, T. Lue, contributed an automobile worth $15,000 to the business. 16 Sold $1,100 of merchandise (cost is $700) on credit to K. Gould, terms n/30. 19 K. Gould returned $150 of (worthless) merchandise originally purchased on November 16

(assume the cost of this merchandise is left in cost of goods sold).

Debray is a company with publicly traded securities and it operates in more than one industry. Which of the following items of information about each industry segment must the company report? a. Operating income c. Inventory e. Cash flows g. Identifiable assets b. Depreciation d. Sales f. Capital expenditures h. Amortization

Homework Manager repeats all numerical Exercises on the book’s Website with new numbers.

EXERCISES

Hutton Company uses a sales journal, a purchases journal, a cash receipts journal, a cash disburse- ment journal, and a general journal. The following transactions occur in the month of March: Exercise 7-1 Sales journal—perpetual P1

Mar. 2 Sold merchandise costing $300 to B. Fager for $450 cash, invoice no. 5703.

5 Purchased $2,300 of merchandise on credit from Marsh Corp. 7 Sold merchandise costing $800 to J. Dryer for $1,150, terms 2/10, n/30, invoice no. 5704. 8 Borrowed $8,000 cash by signing a note payable to the bank. 12 Sold merchandise costing $200 to R. Land for $320, terms n/30, invoice no. 5705. 16 Received $1,127 cash from J. Dryer to pay for the purchase of March 7. 19 Sold used store equipment for $900 cash to Malone, Inc. 25 Sold merchandise costing $350 to T. Burton for $550, terms n/30, invoice no. 5706. Prepare headings for a sales journal like the one in Exhibit 7.5. Journalize the March transactions that should be recorded in this sales journal.

Exercise 7-2 Identifying journal of entry C3

Refer to Exercise 7-1 and for each of the March transactions identify the journal in which it would be recorded. Assume the company uses a sales journal, purchases journal, cash receipts journal, cash disbursements journal, and general journal as illustrated in this chapter.

Exercise 7-3A

Prepare headings for a sales journal like the one in Exhibit 7A.1. Journalize the March transactions Sales journal—periodic P3

shown in Exercise 7-1 that should be recorded in the sales journal assuming that the periodic inven- tory system is used.

Exercise 7-4

Moeder Co. uses a sales journal, a purchases journal, a cash receipts journal, a cash disbursements Cash receipts journal—perpetual

journal, and a general journal. The following transactions occur in the month of November. P1

Nov. 3 Purchased $3,100 of merchandise on credit from Hargrave Co., terms n/20.

7 Sold merchandise costing $840 on credit to J. York for $900, subject to a $18 sales dis-

count if paid by the end of the month. 9 Borrowed $2,750 cash by signing a note payable to the bank. 13 J. Emling, the owner, contributed $4,000 cash to the company. 18 Sold merchandise costing $130 to B. Box for $230 cash. 22 Paid Hargrave Co. $3,100 cash for the merchandise purchased on November 3.


27 Received $882 cash from J. York in payment of the November 7 purchase. 30 Paid salaries of $1,600 in cash. Prepare headings for a cash receipts journal like the one in Exhibit 7.7. Journalize the November transactions that should be recorded in the cash receipts journal.

Exercise Refer to Exercise 7-4 and for each of the November transactions identify the journal in which it would be recorded. Assume the company uses a sales journal, purchases journal, cash receipts journal, cash

7-5 Identifying journal of entry C3 disbursements journal, and general journal as illustrated in this chapter.

Prepare headings for a cash receipts journal like the one in Exhibit 7A.2. Journalize the November transactions shown in Exercise 7-4 that should be recorded in the cash receipts journal assuming that the periodic inventory system is used.

Exercise 7-6A Cash receipts journal—periodic P3

Prepare headings for a cash disbursements journal like the one in Exhibit 7A.4. Journalize the April transactions from Exercise 7-10 that should be recorded in the cash disbursements journal assuming that the periodic inventory system is used.

Prepare headings for a purchases journal like the one in Exhibit 7A.3. Journalize the June transac- tions from Exercise 7-7 that should be recorded in the purchases journal assuming the periodic in- ventory system is used.

Politte Supply uses a sales journal, a purchases journal, a cash receipts journal, a cash disbursements journal, and a general journal. The following transactions occur in the month of April. Apr. 3 Purchased merchandise for $2,750 on credit from Scott, Inc., terms 2/10, n/30.

9 Issued check no. 210 to Kidman Corp. to buy store supplies for $450. 12 Sold merchandise costing $400 on credit to C. Myers for $670, terms n/30. 17 Issued check no. 211 for $1,500 to pay off a note payable to City Bank. 20 Purchased merchandise for $3,500 on credit from LeBron, terms 2/10, n/30. 29 Issued check no. 212 to LeBron to pay the amount due for the purchase of April 20, less

the discount. 30 Paid salary of $1,700 to B. Decker by issuing check no. 213. 31 Issued check no. 214 to Scott, Inc., to pay the amount due for the purchase of April 3. Prepare headings for a cash disbursements journal like the one in Exhibit 7.11. Journalize the April transactions that should be recorded in the cash disbursements journal.

Refer to Exercise 7-10 and for each of the April transactions identify the journal in which it would be recorded. Assume the company uses a sales journal, purchases journal, cash receipts journal, cash disbursements journal, and general journal as illustrated in this chapter.

Refer to Exercise 7-7 and for each of the June transactions identify the journal in which it would be recorded. Assume the company uses a sales journal, purchases journal, cash receipts journal, cash dis- bursements journal, and general journal as illustrated in this chapter.

Redmon Company uses a sales journal, a purchases journal, a cash receipts journal, a cash disburse- ments journal, and a general journal. The following transactions occur in the month of June. June 1 Purchased $8,100 of merchandise on credit from Vick, Inc., terms n/30.

8 Sold merchandise costing $900 on credit to R. Panke for $1,500 subject to a $30 sales dis-

count if paid by the end of the month. 14 Purchased $240 of store supplies from Poe Company on credit, terms n/30. 17 Purchased $260 of office supplies on credit from Rehmer Company, terms n/30. 24 Sold merchandise costing $400 to L. Barnett for $630 cash. 28 Purchased store supplies from Piburn’s for $90 cash. 29 Paid Vick, Inc., $8,100 cash for the merchandise purchased on June 1. Prepare headings for a purchases journal like the one in Exhibit 7.9. Journalize the June transactions that should be recorded in the purchases journal.

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Exercise 7-7 Purchases journal—perpetual P1

Exercise 7-8 Identifying journal of entry C3

Exercise 7-9A Purchases journal—periodic P3

Exercise 7-10 Cash disbursements journal—perpetual P1

Exercise 7-11 Identifying journal of entry C3

Exercise 7-12A Cash disbursements journal—periodic P3


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Exercise 7-13 Special journal transactions and error discovery P1

Clear View also recorded the return of defective merchandise with the following entry:

Exercise 7-15 Accounts receivable ledger; posting from sales journal P1 P2

Porter Pharmacy uses the following journals: sales journal, purchases journal, cash receipts journal, cash disbursements journal, and general journal. On June 5, Porter purchased merchandise priced at $12,000, subject to credit terms of 2/10, n/30. On June 14, the pharmacy paid the net amount due for the merchandise. In journalizing the payment, the pharmacy debited Accounts Payable for $12,000 but failed to record the cash discount on the purchases. Cash was properly credited for the actual $11,760 paid. (a) In what journals would the June 5 and the June 14 transactions be recorded? (b) What procedure is likely to discover the error in journalizing the June 14 transaction?

Exercise 7-14

At the end of May, the sales journal of Clear View appears as follows: Posting to subsidiary ledger accounts; preparing a schedule of accounts receivable P1 P2

May 20 Sales Returns and Allowances . . . . . . . . . . . . . . . 250

Accounts Receivable—Anna Page . . . . . . . . 250 Customer returned (worthless) merchandise.

Required 1. Open an accounts receivable subsidiary ledger that has a T-account for each customer listed in the sales journal. Post to the customer accounts the entries in the sales journal and any portion of the general journal entry that affects a customer’s account. 2. Open a general ledger that has T-accounts for Accounts Receivable, Inventory, Sales, Sales Returns and Allowances, and Cost of Goods Sold. Post the sales journal and any portion of the general journal entry that affects these accounts. 3. Prepare a schedule of accounts receivable and prove that its total equals the balance in the Accounts

Receivable controlling account.

June 2 Joe Mack . . . . . . . . . . . . . $ 3,600 8 Eric Horner . . . . . . . . . . . 6,100 10 Tess Cox . . . . . . . . . . . . . 13,400 14 Hong Jiang . . . . . . . . . . . . 20,500 20 Tess Cox . . . . . . . . . . . . . 11,200 29 Joe Mack . . . . . . . . . . . . . 7,300 Total credit sales . . . . . . . $62,100

Required 1. Open an accounts receivable subsidiary ledger having a T-account for each customer. Post the in-

voices to the subsidiary ledger. 2. Open an Accounts Receivable controlling T-account and a Sales T-account to reflect general ledger

accounts. Post the end-of-month total from the sales journal to these accounts. 3. Prepare a schedule of accounts receivable and prove that its total equals the Accounts Receivable

controlling account balance.

Cost of Goods Sold Dr. Inventory Cr.

Check (3) Accounts Receivable, $5,760

Winslow Company posts its sales invoices directly and then binds them into a Sales Journal. Winslow had the following credit sales to these customers during June:

May 6 10 17 25 31

Date

Aaron Reckers Sara Reed Anna Page Sara Reed Totals

Account Debited

190 191 192 193

Invoice Number PR

Accounts Receivable Dr. Sales Cr.

2,880 1,940 850 340 6,010

2,200 1,600 500 200 4,500


A company that records credit purchases in a purchases journal and records purchases returns in a general journal made the following errors. Indicate when each error should be discovered. 1. Posted a purchases return to the Accounts Payable account and to the creditor’s subsidiary account

but did not post the purchases return to the Inventory account. 2. Posted a purchases return to the Inventory account and to the Accounts Payable account but did

not post to the creditor’s subsidiary account. 3. Correctly recorded a $4,000 purchase in the purchases journal but posted it to the creditor’s sub-

sidiary account as a $400 purchase. 4. Made an addition error in determining the balance of a creditor’s subsidiary account. 5. Made an addition error in totaling the Office Supplies column of the purchases journal.

Refer to Exhibit 7.13 and complete the segment return on assets table for Wolfe Company. Analyze your findings and identify the segment with the highest, and that with the lowest, segment return on assets.

Segment Operating Segment Assets Segment Return

Income (in $ mil.) (in $ mil.) on Assets

Segment 2004 2003 2004 2003 2004

Specialty

Skiing Group . . . . . . . . . . . . $ 62 $ 58 $ 581 $440 Skating Group . . . . . . . . . . . 9 6 53 42 Specialty Footwear . . . . . . . . 22 19 155 136 Other Specialty . . . . . . . . . . 11 4 37 24 Subtotal . . . . . . . . . . . . . . . . 104 87 826 642 General Merchandise

South America . . . . . . . . . . . 32 36 305 274 United States . . . . . . . . . . . . 7 8 52 35 Europe . . . . . . . . . . . . . . . . 5 3 14 12 Subtotal . . . . . . . . . . . . . . . . 44 47 371 321 Total . . . . . . . . . . . . . . . . . . . . $148 $134 $1197 $963

Wise Company completes these transactions during April of the current year (the terms of all its credit sales are 2/10, n/30): Apr. 2 Purchased $13,300 of merchandise on credit from Negi Company, invoice dated April 2,

terms 2/10, n/60. 3 Sold merchandise on credit to Brooke Sledd, Invoice No. 760, for $3,000 (cost is $2,000). 3 Purchased $1,380 of office supplies on credit from Madison, Inc. Invoice dated April 2,

terms n/10 EOM. 4 Issued Check No. 587 to U.S. View for advertising expense, $999. 5 Sold merchandise on credit to Paul Kohr, Invoice No. 761, for $8,000 (cost is $6,500). 6 Received an $85 credit memorandum from Madison, Inc., for the return of some of the of-

fice supplies received on April 3. 9 Purchased $11,125 of store equipment on credit from Ned’s Supply, invoice dated April 9,

terms n/10 EOM. 11 Sold merchandise on credit to Amy Nilson, Invoice No. 762, for $9,500 (cost is $7,000). 12 Issued Check No. 588 to Negi Company in payment of its April 2 invoice, less the dis-

count. 13 Received payment from Brooke Sledd for the April 3 sale, less the discount. 13 Sold $4,100 of merchandise on credit to Brooke Sledd (cost is $2,600), Invoice No. 763. 14 Received payment from Paul Kohr for the April 5 sale, less the discount. 16 Issued Check No. 589, payable to Payroll, in payment of sales salaries expense for the first

half of the month, $9,750. Cashed the check and paid employees.

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Chapter 7 Accounting Information Systems 293

Exercise 7-17 Computing and analyzing segment return on assets A1

Exercise 7-16 Purchases journal and error identification P1

Check Europe segment return, 38.5%

PROBLEM SET A

Problem 7-1A Special journals, subsidiary ledgers, and schedule of accounts receivable—perpetual C4 P1 P2


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Problem 7-2AA Special journals, subsidiary ledgers, and schedule of accounts receivable—periodic C4 P2 P3

16 Cash sales for the first half of the month are $50,840 (cost is $33,880). (Cash sales are recorded daily from cash register data but are recorded only twice in this problem to re- duce repetitive entries.) 17 Purchased $12,750 of merchandise on credit from Price Company, invoice dated April 17,

terms 2/10, n/30. 18 Borrowed $50,000 cash from First State Bank by signing a long-term note payable. 20 Received payment from Amy Nilson for the April 11 sale, less the discount. 20 Purchased $730 of store supplies on credit from Ned’s Supply, invoice dated April 19, terms

n/10 EOM. 23 Received a $400 credit memorandum from Price Company for the return of defective mer-

chandise received on April 17. 23 Received payment from Brooke Sledd for the April 13 sale, less the discount. 25 Purchased $10,375 of merchandise on credit from Negi Company, invoice dated April 24,

terms 2/10, n/60. 26 Issued Check No. 590 to Price Company in payment of its April 17 invoice, less the return

and the discount. 27 Sold $3,070 of merchandise on credit to Paul Kohr, Invoice No. 764 (cost is $2,420). 27 Sold $5,700 of merchandise on credit to Amy Nilson, Invoice No. 765 (cost is $3,305). 30 Issued Check No. 591, payable to Payroll, in payment of the sales salaries expense for the

last half of the month, $9,750. 30 Cash sales for the last half of the month are $70,975 (cost is $55,900).

Required 1. Prepare a sales journal like that in Exhibit 7.5 and a cash receipts journal like that in Exhibit 7.7. Number both journal pages as page 3. Then review the transactions of Wise Company and enter those that should be journalized in the sales journal and those that should be journalized in the cash receipts journal. Ignore any transactions that should be journalized in a purchases journal, a cash disbursements journal, or a general journal. 2. Open the following general ledger accounts: Cash, Accounts Receivable, Inventory, Long-Term Notes Payable, Cost of Goods Sold, Sales, and Sales Discounts. Enter the March 31 balances for Cash ($85,000), Inventory ($125,000), and Long-Term Notes Payable ($210,000). Also open accounts receivable subsidiary ledger accounts for Paul Kohr, Brooke Sledd, and Amy Nilson. 3. Verify that amounts that should be posted as individual amounts from the journals have been posted. (Such items are immediately posted.) Foot and crossfoot the journals and make the month-end postings.

Check Trial balance totals, $415,185

4. Prepare a trial balance of the general ledger and prove the accuracy of the subsidiary ledger by

preparing a schedule of accounts receivable.

Analysis Component 5. Assume that the total for the schedule of Accounts Receivable does not equal the balance of the controlling account in the general ledger. Describe steps you would take to discover the error(s).

Check Trial balance totals, $415,185

Assume that Wise Co. in Problem 7-1A uses the periodic inventory system.

Required 1. Prepare headings for a sales journal like the one in Exhibit 7A.1. Prepare headings for a cash receipts journal like the one in Exhibit 7A.2. Journalize the April transactions shown in Problem 7-1A that should be recorded in the sales journal and the cash receipts journal assuming the periodic inventory system is used. 2. Open the general ledger accounts with balances as shown in Problem 7-1A (do not open a Cost of Goods Sold ledger account). Under the periodic system, an Inventory account exists but is inactive until its balance is updated to the correct inventory balance at year-end. In this prob- lem, the Inventory account remains inactive but must be included to correctly complete the trial balance. 3. Complete parts 3, 4, and 5 of Problem 7-1A using the results of parts 1 and 2 of this problem.

Larson−Wild−Chiappetta: Fundamental Accounting Principles, Seventeenth Edition

7. Accounting Information Systems


The April transactions of Wise Company are described in Problem 7-1A.

Required 1. Prepare a general journal, a purchases journal like that in Exhibit 7.9, and a cash disbursements journal like that in Exhibit 7.11. Number all journal pages as page 3. Review the April transac- tions of Wise Company and enter those transactions that should be journalized in the general jour- nal, the purchases journal, or the cash disbursements journal. Ignore any transactions that should be journalized in a sales journal or cash receipts journal. 2. Open the following general ledger accounts: Cash, Inventory, Office Supplies, Store Supplies, Store Equipment, Accounts Payable, Long-Term Notes Payable, Sales Salaries Expense, and Advertising Expense. Enter the March 31 balances of Cash ($85,000), Inventory ($125,000), and Long-Term Notes Payable ($210,000). Also open accounts payable subsidiary ledger accounts for Ned’s Supply, Negi Company, Price Company, and Madison, Inc. 3. Verify that amounts that should be posted as individual amounts from the journals have been posted. (Such items are immediately posted.) Foot and crossfoot the journals and make the month- end postings. 4. Prepare a trial balance of the general ledger and a schedule of accounts payable.

Check Trial balance totals, $233,525

Refer to Problem 7-1A and assume that Wise Co. uses the periodic inventory system.

Problem 7-4AA Special journals, subsidiary Required

ledgers, and schedule of accounts 1. Prepare a general journal, a purchases journal like that in Exhibit 7A.3, and a cash disbursements

payable—periodic journal like that in Exhibit 7A.4. Number all journal pages as page 3. Review the April transac-

C4 P2 P3 tions of Wise Company (Problem 7-1A) and enter those transactions that should be journalized in the general journal, the purchases journal, or the cash disbursements journal. Ignore any transac- tion that should be journalized in a sales journal or cash receipts journal. 2. Open the following general ledger accounts: Cash, Inventory, Office Supplies, Store Supplies, Store Equipment, Accounts Payable, Long-Term Notes Payable, Purchases, Purchases Returns and Allowances, Purchases Discounts, Sales Salaries Expense, and Advertising Expense. Enter the March 31 balances of Cash ($85,000), Inventory ($125,000), and Long-Term Notes Payable ($210,000). Also open accounts payable subsidiary ledger accounts for Ned’s Supply, Negi Company, Price Company, and Madison, Inc. 3. Complete parts 3 and 4 of Problem 7-3A using the results of parts 1 and 2 of this problem. Check Trial balance totals, $234,438

(If the Working Papers that accompany this textbook are not being used, omit this problem.)

Problem 7-5A You have just taken over the accounting for Choi Enterprises, whose annual accounting period ends

Special journals, subsidiary December 31. The company’s previous accountant journalized its transactions through December 15

ledgers, trial balance—perpetual and posted all items that required posting as individual amounts (see the journals and ledgers in the Working Papers). The company’s transactions beginning on December 16 follow (terms for all its

C4 P1 P2

credit sales are 2/10, n/30): Dec. 16 Sold merchandise on credit to Hanna Seppa, Invoice No. 916, for $7,700 (cost is $4,600). 17 Received a $1,040 credit memorandum from Funk Company for the return of merchandise

received on December 15. 17 Purchased $615 of office supplies on credit from KK’s Supply Company, invoice dated

December 16, terms n/10 EOM. 18 Received a $40 credit memorandum from KK’s Supply Company for the return of office

supplies received on December 17. 20 Issued a $500 credit memorandum to Bo Brown for defective (worthless) merchandise sold

on December 15 and returned for credit. 21 Purchased $6,700 of store equipment on credit from KK’s Supply Company, invoice dated

December 21, terms n/10 EOM. 22 Received payment from Hanna Seppa for the December 12 sale less the discount. 23 Issued Check No. 623 to Crossland Company in payment of its December 15 invoice less

the discount. 24 Sold merchandise on credit to Shilo Jones, Invoice No. 917, for $1,200 (cost is $600). 24 Issued Check No. 624 to Funk Company in payment of its December 15 invoice less the

return and the discount. 25 Received payment from Bo Brown for the December 15 sale less the return and the discount.

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Problem 7-3A Special journals, subsidiary ledgers, and schedule of accounts payable—perpetual C4 P1 P2

e x

cel

mhhe.com/larson


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Problem 7-6A Special journals, subsidiary ledgers, trial balance—perpetual C4 P1 P2

26 Purchased $8,100 of merchandise from Crossland Company, invoice dated December 25,

terms 2/10, n/60. 29 Sold a neighboring merchant five boxes of file folders (office supplies) at their cost of $50

cash. 30 Ken Choi, the sole owner of Choi Enterprises, used Check No. 625 to withdraw $2,500 in

cash from the business for personal use. 31 Issued Check No. 626 to Jamie Inman, the company’s only sales employee, in payment of

her $2,020 salary for the last half of December. 31 Issued Check No. 627 to Access Electric Company in payment of its $710 December elec-

tric bill. 31 Cash sales for the last half of the month are $29,600 (cost is $11,200). (Cash sales are

recorded daily but are recorded only twice in this problem to reduce repetitive entries.)

Required 1. Record these transactions in the journals provided in the working papers. 2. Verify that amounts that should be posted as individual amounts to the general ledger accounts have been posted, including posting to the customer and creditor accounts. (Such items are im- mediately posted.) Foot and crossfoot the journals and make the month-end postings.

Check Trial balance totals, $219,408

3. Prepare a December 31 trial balance and prove the accuracy of the subsidiary ledgers by prepar-

ing schedules of both accounts receivable and accounts payable.

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Bishop Company completes these transactions and events during March of the current year (terms for all its credit sales are 2/10, n/30): Mar. 1 Purchased $42,600 of merchandise from Soy Industries, invoice dated March 1, terms 2/15, x mhhe.com/larson

n/30. 2 Sold merchandise on credit to Min Cho, Invoice No. 854, for $15,800 (cost is $7,900). 3 Purchased $1,120 of office supplies on credit from Stacy Company, invoice dated March

3, terms n/10 EOM. 3 Sold merchandise on credit to Lance Snow, Invoice No. 855, for $9,200 (cost is $4,600). 6 Borrowed $72,000 cash from Federal Bank by signing a long-term note payable. 9 Purchased $20,850 of office equipment on credit from Tells Supply, invoice dated March

9, terms n/10 EOM. 10 Sold merchandise on credit to Taylor Few, Invoice No. 856, for $4,600 (cost is $2,300). 12 Received payment from Min Cho for the March 2 sale less the discount. 13 Sent Soy Industries Check No. 416 in payment of the March 1 invoice less the discount. 13 Received payment from Lance Snow for the March 3 sale less the discount. 14 Purchased $31,625 of merchandise from the JW Company, invoice dated March 13, terms

2/10, n/30. 15 Issued Check No. 417, payable to Payroll, in payment of sales salaries expense for the first

half of the month, $15,900. Cashed the check and paid the employees. 15 Cash sales for the first half of the month are $164,680 (cost is $138,000). (Cash sales are

recorded daily, but are recorded only twice here to reduce repetitive entries.) 16 Purchased $1,670 of store supplies on credit from Stacy Company, invoice dated March 16,

terms n/10 EOM. 17 Received a $2,425 credit memorandum from JW Company for the return of unsatisfactory

merchandise purchased on March 14. 19 Received a $630 credit memorandum from Tells Supply for office equipment received on

March 9 and returned for credit. 20 Received payment from Taylor Few for the sale of March 10 less the discount. 23 Issued Check No. 418 to JW Company in payment of the invoice of March 13 less the re-

turn and the discount. 27 Sold merchandise on credit to Taylor Few, Invoice No. 857, for $13,910 (cost is $6,220). 28 Sold merchandise on credit to Lance Snow, Invoice No. 858, for $5,315 (cost is $2,280). 31 Issued Check No. 419, payable to Payroll, in payment of sales salaries expense for the last

half of the month, $15,900. Cashed the check and paid the employees. 31 Cash sales for the last half of the month are $174,590 (cost is $143,000). 31 Verify that amounts impacting customer and creditor accounts were posted and that any amounts that should have been posted as individual amounts to the general ledger accounts were posted. Foot and crossfoot the journals and make the month-end postings.


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Required 1. Open the following general ledger accounts: Cash; Accounts Receivable; Inventory (March 1 beg. bal. is $300,000); Office Supplies; Store Supplies; Office Equipment; Accounts Payable; Long- Term Notes Payable; M. Bishop, Capital (March 1 beg. bal. is $300,000); Sales; Sales Discounts; Cost of Goods Sold; and Sales Salaries Expense. Open the following accounts receivable subsidiary ledger accounts: Taylor Few, Min Cho, and Lance Snow. Open the following accounts payable sub- sidiary ledger accounts: Stacy Company, Soy Industries, Tells Supply, and JW Company. 2. Enter these transactions in a sales journal like Exhibit 7.5, a purchases journal like Exhibit 7.9, a cash receipts journal like Exhibit 7.7, a cash disbursements journal like Exhibit 7.11, or a general journal. Number all journal pages as page 2. 3. Prepare a trial balance of the general ledger and prove the accuracy of the subsidiary ledgers by

preparing schedules of both accounts receivable and accounts payable.

Alcorn Industries completes these transactions during July of the current year (the terms of all its credit sales are 2/10, n/30): July 1 Purchased $6,300 of merchandise on credit from Tahoe Company, invoice dated June 30,

terms 2/10, n/30. 3 Issued Check No. 300 to The Weekly for advertising expense, $575. 5 Sold merchandise on credit to Kim Newsom, Invoice No. 918, for $18,400 (cost is $9,700). 6 Sold merchandise on credit to Ruth Baker, Invoice No. 919, for $7,500 (cost is $4,300). 7 Purchased $1,050 of store supplies on credit from Pryor, Inc., invoice dated July 7, terms

n/10 EOM. 8 Received a $150 credit memorandum from Pryor, Inc., for the return of store supplies re-

ceived on July 7. 9 Purchased $37,710 of store equipment on credit from Caro’s Supply, invoice dated July 8,

terms n/10 EOM. 10 Issued Check No. 301 to Tahoe Company in payment of its June 30 invoice, less the dis-

count. 13 Sold merchandise on credit to Stephanie Meyer, Invoice No. 920, for $8,350 (cost is $5,030). 14 Sold merchandise on credit to Kim Newsom, Invoice No. 921, for $4,100 (cost is $2,800). 15 Received payment from Kim Newsom for the July 5 sale, less the discount. 15 Issued Check No. 302, payable to Payroll, in payment of sales salaries expense for the first

half of the month, $30,620. Cashed the check and paid employees. 15 Cash sales for the first half of the month are $121,370 (cost is $66,330). (Cash sales are recorded daily using data from the cash registers but are recorded only twice in this prob- lem to reduce repetitive entries.) 16 Received payment from Ruth Baker for the July 6 sale, less the discount. 17 Purchased $8,200 of merchandise on credit from Dixon Company, invoice dated July 17,

terms 2/10, n/30. 20 Purchased $750 of office supplies on credit from Caro’s Supply, invoice dated July 19, terms

n/10 EOM. 21 Borrowed $20,000 cash from College Bank by signing a long-term note payable.

Check Trial balance totals, $783,105

Assume that Bishop Co. in Problem 7-6A uses the periodic inventory system.

Problem 7-7AA Special journals, subsidiary Required

ledgers, trial balance—periodic 1. Open the following general ledger accounts: Cash; Accounts Receivable; Inventory (March 1 beg.

C4 P2 P3 bal. is $300,000); Office Supplies; Store Supplies; Office Equipment; Accounts Payable; Long- Term Notes Payable; M. Bishop, Capital (March 1 beg. bal. is $300,000); Sales; Sales Discounts; Purchases; Purchases Returns and Allowances; Purchases Discounts; and Sales Salaries Expense. Open the following accounts receivable subsidiary ledger accounts: Taylor Few, Min Cho, and Lance Snow. Open the following Accounts Payable subsidiary ledger accounts: Stacy Company, Soy Industries, Tells Supply, and JW Company. 2. Enter the transactions from Problem 7-6A in a sales journal like that in Exhibit 7A.1, a purchases journal like that in Exhibit 7A.3, a cash receipts journal like that in Exhibit 7A.2, a cash disburse- ments journal like that in Exhibit 7A.4, or a general journal. Number journal pages as page 2. 3. Prepare a trial balance of the general ledger and prove the accuracy of the subsidiary ledgers by

Check Trial balance totals, $786,966 preparing schedules of both accounts receivable and accounts payable.

PROBLEM SET B

Problem 7-1B Special journals, subsidiary ledgers, schedule of accounts receivable—perpetual C4 P1 P2


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23 Received payment from Stephanie Meyer for the July 13 sale, less the discount. 24 Received payment from Kim Newsom for the July 14 sale, less the discount. 24 Received a $2,400 credit memorandum from Dixon Company for the return of defective

merchandise received on July 17. 26 Purchased $9,770 of merchandise on credit from Tahoe Company, invoice dated July 26,

terms 2/10, n/30. 27 Issued Check No. 303 to Dixon Company in payment of its July 17 invoice, less the return

and the discount. 29 Sold merchandise on credit to Ruth Baker, Invoice No. 922, for $28,090 (cost is $22,850). 30 Sold merchandise on credit to Stephanie Meyer, Invoice No. 923, for $15,750 (cost is

$9,840). 31 Issued Check No. 304, payable to Payroll, in payment of the sales salaries expense for the

last half of the month, $30,620. 31 Cash sales for the last half of the month are $79,020 (cost is $51,855).

Required 1. Prepare a sales journal like that in Exhibit 7.5 and a cash receipts journal like that in Exhibit 7.7. Number both journals as page 3. Then review the transactions of Alcorn Industries and enter those transactions that should be journalized in the sales journal and those that should be journalized in the cash receipts journal. Ignore any transactions that should be journalized in a purchases jour- nal, a cash disbursements journal, or a general journal. 2. Open the following general ledger accounts: Cash, Accounts Receivable, Inventory, Long-Term Notes Payable, Cost of Goods Sold, Sales, and Sales Discounts. Enter the June 30 balances for Cash ($100,000), Inventory ($200,000), and Long-Term Notes Payable ($300,000). Also open ac- counts receivable subsidiary ledger accounts for Kim Newsom, Stephanie Meyer, and Ruth Baker. 3. Verify that amounts that should be posted as individual amounts from the journals have been posted. (Such items are immediately posted.) Foot and crossfoot the journals and make the month- end postings.

Check Trial balance totals, $602,580

4. Prepare a trial balance of the general ledger and prove the accuracy of the subsidiary ledger by

preparing a schedule of accounts receivable.

Analysis Component 5. Assume that the total for the schedule of Accounts Receivable does not equal the balance of the controlling account in the general ledger. Describe steps you would take to discover the error(s).

Problem 7-2BA Special journals, subsidiary ledgers, and schedule of accounts receivable—periodic C4 P2 P3

Problem 7-3B Special journals, subsidiary ledgers, and schedule of accounts payable—perpetual C4 P1 P2

Assume that Alcorn Industries in Problem 7-1B uses the periodic inventory system.

Required 1. Prepare headings for a sales journal like the one in Exhibit 7A.1. Prepare headings for a cash receipts journal like the one in Exhibit 7A.2. Journalize the July transactions shown in Problem 7-1B that should be recorded in the sales journal and the cash receipts journal assuming the periodic inventory system is used. 2. Open the general ledger accounts with balances as shown in Problem 7-1B (do not open a Cost of Goods Sold ledger account). Under the periodic system, an Inventory account exists but is in- active until its balance is updated to the correct inventory balance at year-end. In this problem, the Inventory account remains inactive but must be included to correctly complete the trial balance.

Check Trial balance totals, $602,580

3. Complete parts 3, 4, and 5 of Problem 7-1B using the results of parts 1 and 2 of this problem.

The July transactions of Alcorn Industries are described in Problem 7-1B.

Required 1. Prepare a general journal, a purchases journal like that in Exhibit 7.9, and a cash disbursements journal like that in Exhibit 7.11. Number all journal pages as page 3. Review the July transactions of Alcorn Industries and enter those transactions that should be journalized in the general journal, the purchases journal, or the cash disbursements journal. Ignore any transactions that should be journalized in a sales journal or cash receipts journal.


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Companies, 2004

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2. Open the following general ledger accounts: Cash, Inventory, Office Supplies, Store Supplies, Store Equipment, Accounts Payable, Long-Term Notes Payable, Sales Salaries Expense, and Advertising Expense. Enter the June 30 balances of Cash ($100,000), Inventory ($200,000), and Long-Term Notes Payable ($300,000). Also open accounts payable subsidiary ledger accounts for Caro’s Supply, Tahoe Company, Dixon Company, and Pryor, Inc. 3. Verify that amounts that should be posted as individual amounts from the journals have been posted. (Such items are immediately posted.) Foot and crossfoot the journals and make the month-end postings. 4. Prepare a trial balance of the general ledger and a schedule of accounts payable.

Check Trial balance totals, $349,130

Refer to Problem 7-1B and assume that Alcorn uses the periodic inventory system.

Problem 7-4BA Special journals, subsidiary Required

ledgers, and schedule of accounts 1. Prepare a general journal, a purchases journal like that in Exhibit 7A.3, and a cash disbursements

payable—periodic journal like that in Exhibit 7A.4. Number all journal pages as page 3. Review the July transac-

C4 P2 P3 tions of Alcorn Company (Problem 7-1B) and enter those transactions that should be journalized in the general journal, the purchases journal, or the cash disbursements journal. Ignore any trans- action that should be journalized in a sales journal or cash receipts journal. 2. Open the following general ledger accounts: Cash, Inventory, Office Supplies, Store Supplies, Store Equipment, Accounts Payable, Long-Term Notes Payable, Purchases, Purchases Returns and Allowances, Purchases Discounts, Sales Salaries Expense, and Advertising Expense. Enter the June 30 balances of Cash ($100,000), Inventory ($200,000), and Long-Term Notes Payable ($300,000). Also open accounts payable subsidiary ledger accounts for Tahoe Company, Pryor, Inc., Caro’s Supply, and Dixon Company. 3. Complete parts 3 and 4 of Problem 7-3B using the results of parts 1 and 2 of this problem.

Check Trial balance totals, $351,772

(If the Working Papers that accompany this textbook are not being used, omit this problem.)

Problem 7-5B You have just taken over the accounting for YES Products, whose annual accounting period ends

Special journals, subsidiary December 31. The company’s previous accountant journalized its transactions through December 15

ledgers, trial balance—perpetual and posted all items that required posting as individual amounts (see the journals and ledgers in the working papers). The company’s transactions beginning on December 16 follow (terms for all its

C4 P1 P2

credit sales are 2/10, n/30): Dec. 16 Purchased $765 of office supplies on credit from Black Supply Company, invoice dated

December 16, terms n/10 EOM. 16 Sold merchandise on credit to Brad Sills, Invoice No. 916, for $4,290 (cost is $2,821). 18 Issued a $200 credit memorandum to Leslie Wilson for defective (worthless) merchandise

sold on December 15 and returned for credit. 19 Received a $640 credit memorandum from Chiefs Company for the return of merchandise

received on December 15. 20 Received a $143 credit memorandum from Black Supply Company for the return of office

supplies received on December 16. 20 Purchased $7,475 of store equipment on credit from Black Supply Company, invoice dated

December 19, terms n/10 EOM. 21 Sold merchandise on credit to Mo Carp, Invoice No. 917, for $5,520 (cost is $3,210). 22 Received payment from Brad Sills for the December 12 sale less the discount. 25 Received payment from Leslie Wilson for the December 15 sale less the return and the discount. 25 Issued Check No. 623 to Chiefs Company in payment of its December 15 invoice less the

return and the discount. 25 Issued Check No. 624 to Blue Company in payment of its December 15 invoice less a 2%

discount. 28 Purchased $6,030 of merchandise from Blue Company, invoice dated December 28, terms

2/10, n/60. 28 Sold a neighboring merchant a carton of tape (store supplies) at its cost of $58 cash. 29 Sarah Morris, the sole owner of YES Products, used Check No. 625 to withdraw $4,000 in

cash from the business for personal use. 30 Issued Check No. 626 to Bush Electric Company in payment of the $990 December electric bill. 30 Issued Check No. 627 to Sue Hart, the company’s only sales employee, in payment of her

$2,620 salary for the last half of December. 31 Cash sales for the last half of the month are $66,128 (cost is $33,850). (Cash sales are

recorded daily but are recorded only twice here to reduce repetitive entries.)


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Required 1. Record these transactions in the journals provided in the working papers. 2. Verify that amounts that should be posted as individual amounts to the general ledger accounts have been posted, including posting to the customer and creditor accounts. (These amounts are immediately posted.) Foot and crossfoot the journals and make the month-end postings.

Check Trial balance totals, $255,598

3. Prepare a December 31 trial balance and prove the accuracy of the subsidiary ledgers by prepar-

ing schedules of both accounts receivable and accounts payable.

Problem 7-6B Special journals, subsidiary ledgers, trial balance—perpetual C4 P1 P2

Check Trial balance totals, $223,777

Suppan Company completes these transactions during November of the current year (terms for all its credit sales are 2/10, n/30): Nov. 1 Purchased $5,062 of office equipment on credit from Blix Supply, invoice dated November

1, terms n/10 EOM. 2 Borrowed $86,250 cash from Kansas Bank by signing a long-term note payable. 4 Purchased $11,400 of merchandise from ATM Industries, invoice dated November 3, terms

2/10, n/30. 5 Purchased $1,020 of store supplies on credit from Globe Company, invoice dated November

5, terms n/10 EOM. 8 Sold merchandise on credit to Sid Ragan, Invoice No. 439, for $6,350 (cost is $3,710). 10 Sold merchandise on credit to Carlos Mane, Invoice No. 440, for $12,500 (cost is $7,500). 11 Purchased $2,887 of merchandise from Xu Company, invoice dated November 10, terms

2/10, n/30. 12 Sent ATM Industries Check No. 633 in payment of its November 3 invoice less the discount. 15 Issued Check No. 634, payable to Payroll, in payment of sales salaries expense for the first

half of the month, $8,435. Cashed the check and paid the employees. 15 Cash sales for the first half of the month are $27,170 (cost is $17,000). (Cash sales are

recorded daily but are recorded only twice in this problem to reduce repetitive entries.) 15 Sold merchandise on credit to Tony Timmons, Invoice No. 441, for $4,250 (cost is $1,450). 16 Purchased $559 of office supplies on credit from Globe Company, invoice dated November

16, terms n/10 EOM. 17 Received a $487 credit memorandum from Xu Company for the return of unsatisfactory

merchandise purchased on November 11. 18 Received payment from Sid Ragan for the November 8 sale less the discount. 19 Received payment from Carlos Mane for the November 10 sale less the discount. 19 Issued Check No. 635 to Xu Company in payment of its invoice of November 10 less the

return and the discount. 22 Sold merchandise on credit to Carlos Mane, Invoice No. 442, for $2,595 (cost is $1,060). 24 Sold merchandise on credit to Tony Timmons, Invoice No. 443, for $3,240 (cost is $1,090). 25 Received payment from Tony Timmons for the sale of November 15 less the discount. 26 Received a $922 credit memorandum from Blix Supply for the return of office equipment

purchased on November 1. 30 Issued Check No. 636, payable to Payroll, in payment of sales salaries expense for the last

half of the month, $8,435. Cashed the check and paid the employees. 30 Cash sales for the last half of the month are $35,703 (cost is $20,400). 30 Verify that amounts impacting customer and creditor accounts were posted and that any amounts that should have been posted as individual amounts to the general ledger accounts were posted. Foot and crossfoot the journals and make the month-end postings.

Required 1. Open the following general ledger accounts: Cash; Accounts Receivable; Inventory (November 1 beg. bal. is $40,000); Office Supplies; Store Supplies; Office Equipment; Accounts Payable; Long- Term Notes Payable; J. Suppan, Capital (November 1 beg. bal. is $40,000); Sales; Sales Discounts; Cost of Goods Sold; and Sales Salaries Expense. Open the following accounts receivable subsidiary ledger accounts: Carlos Mane, Tony Timmons, and Sid Ragan. Open the following accounts payable subsidiary ledger accounts: Globe Company, ATM Industries, Blix Supply, and Xu Company. 2. Enter these transactions in a sales journal like that in Exhibit 7.5, a purchases journal like that in Exhibit 7.9, a cash receipts journal like that in Exhibit 7.7, a cash disbursements journal like that in Exhibit 7.11, or a general journal. Number all journal pages as page 2. 3. Prepare a trial balance of the general ledger and prove the accuracy of the subsidiary ledgers by

preparing schedules of both accounts receivable and accounts payable.


Assume that Suppan Company in Problem 7-6B uses the periodic inventory system.

Required 1. Open the following general ledger accounts: Cash; Accounts Receivable; Inventory (November 1 beg. bal. is $40,000); Office Supplies; Store Supplies; Office Equipment; Accounts Payable; Long- Term Notes Payable; J. Suppan, Capital (November 1 beg. bal. is $40,000); Sales; Sales Discounts; Purchases; Purchases Returns and Allowances; Purchases Discounts; and Sales Salaries Expense. Open the following accounts receivable subsidiary ledger accounts: Carlos Mane, Tony Timmons, and Sid Ragan. Open the following accounts payable subsidiary ledger accounts: Globe Company, ATM Industries, Blix Supply, and Xu Company. 2. Enter the transactions from Problem 7-6B in a sales journal like that in Exhibit 7A.1, a purchases journal like that in Exhibit 7A.3, a cash receipts journal like that in Exhibit 7A.2, a cash disburse- ments journal like that in Exhibit 7A.4, or a general journal. Number journal pages as page 2. 3. Prepare a trial balance of the general ledger and prove the accuracy of the subsidiary ledgers by

Check Trial balance totals, $224,540 preparing schedules of both accounts receivable and accounts payable.

Problem Set C is available at the book’s Website to further reinforce and assess your learning.

n

(This serial problem began in Chapter 1 and continues through most of the book. If previous chap- ter segments were not completed, the serial problem can begin at this point. It is helpful, but not nec- essary, that you use the Working Papers that accompany the book.)

Assume that Kay Breeze expands Success Systems’ accounting system to include special journals.

Required 1. Locate the transactions related to January through March 2005 for Success Systems in Chapter 5. 2. Enter the Success Systems transactions for January through March in a sales journal like that in Exhibit 7.5 (insert “n/a” in the Invoice column), a cash receipts journal like that in Exhibit 7.7, a purchases journal like that in Exhibit 7.9 (use Computer Supplies heading instead of Office Supplies), and a cash disbursements journal like that in Exhibit 7.11 (insert “n/a” in the Check Number column), or a general journal. Number journal pages as page 2. If the transaction does not specify the name of the payee, state “not specified” in the Payee column of the cash dis- bursements journal. 3. The transactions on the following dates should be journalized in the general journal: January 5, 11, 20, 24, and 29 (no entry required) and March 24. Do not record and post the adjusting entries for the end of March.

m o / l a r s

o

PROBLEM SET C .c e h

h

m

SERIAL PROBLEM

Success Systems

(If the Working Papers that accompany this book are not available, omit this comprehensive prob- lem.) Assume it is Monday, May 1, the first business day of the month, and you have just been hired as the accountant for Colo Company, which operates with monthly accounting periods. All of the company’s accounting work is completed through the end of April and its ledgers show April 30 bal- ances. During your first month on the job, the company experiences the following transactions and events (terms for all its credit sales are 2/10, n/30 unless stated differently): May 1 Issued Check No. 3410 to S&P Management Co. in payment of the May rent, $3,710. (Use two lines to record the transaction. Charge 80% of the rent to Rent Expense—Selling Space and the balance to Rent Expense—Office Space.) 2 Sold merchandise on credit to Hensel Company, Invoice No. 8785, for $6,100 (cost is $4,100). 2 Issued a $175 credit memorandum to Knox, Inc., for defective (worthless) merchandise sold

on April 28 and returned for credit. The total selling price (gross) was $4,725. 3 Received a $798 credit memorandum from Peyton Products for the return of merchandise

purchased on April 29. 4 Purchased the following on credit from Gear Supply Co.: merchandise, $37,072; store sup-

plies, $574; and office supplies, $83. Invoice dated May 4, terms n/10 EOM.

COMPREHENSIVE PROBLEM— PERPETUAL

Colo e x

Company cel

mhhe.com/larson

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5 Received payment from Knox, Inc., for the balance from the April 28 sale less the May 2

return and the discount. 8 Issued Check No. 3411 to Peyton Products to pay for the $7,098 of merchandise purchased

on April 29 less the May 3 return and a 2% discount. 9 Sold store supplies to the merchant next door at their cost of $350 cash. 10 Purchased $4,074 of office equipment on credit from Gear Supply Co., invoice dated May

10, terms n/10 EOM. 11 Received payment from Hensel Company for the May 2 sale less the discount. 11 Purchased $8,800 of merchandise from Garcia, Inc., invoice dated May 10, terms 2/10,

n/30. 12 Received an $854 credit memorandum from Gear Supply Co. for the return of defective of-

fice equipment received on May 10. 15 Issued Check No. 3412, payable to Payroll, in payment of sales salaries, $5,320, and office

salaries, $3,150. Cashed the check and paid the employees. 15 Cash sales for the first half of the month are $59,220 (cost is $38,200). (Cash sales are

recorded daily but are recorded only twice here to reduce repetitive entries.) 15 Post to the customer and creditor accounts. Also post individual items that are not included in column totals at the end of the month to the general ledger accounts. (Such items are posted daily but are posted only twice each month because they are few in number.) 16 Sold merchandise on credit to Hensel Company, Invoice No. 8786, for $3,990 (cost is

$1,890). 17 Purchased $13,650 of merchandise from Fink Corp., invoice dated May 14, terms 2/10,

n/60. 19 Issued Check No. 3413 to Garcia, Inc., in payment of its May 10 invoice less the discount. 22 Sold merchandise to Lee Services, Invoice No. 8787, for $6,850 (cost is $4,990), terms

2/10, n/60. 23 Issued Check No. 3414 to Fink Corp. in payment of its May 14 invoice less the discount. 24 Purchased the following on credit from Gear Supply Co.: merchandise, $8,120; store sup-

plies, $630; and office supplies, $280. Invoice dated May 24, terms n/10 EOM. 25 Purchased $3,080 of merchandise from Peyton Products, invoice dated May 23, terms 2/10,

n/30. 26 Sold merchandise on credit to Crane Corp., Invoice No. 8788, for $14,210 (cost is $8,230). 26 Issued Check No. 3415 to Perennial Power in payment of the May electric bill, $1,283. 29 The owner of Colo Company, Jenny Colo, used Check No. 3416 to withdraw $7,000 cash

from the business for personal use. 30 Received payment from Lee Services for the May 22 sale less the discount. 30 Issued Check No. 3417, payable to Payroll, in payment of sales salaries, $5,320, and office

salaries, $3,150. Cashed the check and paid the employees. 31 Cash sales for the last half of the month are $66,052 (cost is $42,500). 31 Post to the customer and creditor accounts. Also post individual items that are not included in column totals at the end of the month to the general ledger accounts. Foot and crossfoot the journals and make the month-end postings.

Required 1. Enter these transactions in a sales journal, a purchases journal, a cash receipts journal, a cash dis- bursements journal, or a general journal as illustrated in this chapter. Post when instructed to do so. Assume a perpetual inventory system.

Check (2) Unadjusted trial balance

2. Prepare a trial balance in the Trial Balance columns of the work sheet form provided with the work- totals, $545,020; Adjustments column

ing papers. Complete the work sheet using the following information for accounting adjustments: totals, $2,407

a. Expired insurance, $553. b. Ending store supplies inventory, $2,632. c. Ending office supplies inventory, $504. d. Depreciation of store equipment, $567. e. Depreciation of office equipment, $329. Prepare and post adjusting and closing entries.

(3) Net income, $31,647;

3. Prepare a May 2005 multiple-step income statement, a May 2005 statement of owner’s equity, Total assets, $385,791

and a May 31, 2005, classified balance sheet. 4. Prepare a post-closing trial balance. Also prove the accuracy of subsidiary ledgers by preparing

schedules of both accounts receivable and accounts payable.


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BEYOND THE NUMBERS

BTN 7-1 Refer to Krispy Kreme’s financial statements in Appendix A to answer the following:

REPORTING IN 1. Identify the note disclosing Krispy Kreme’s business segments.

ACTION 2. Describe the nature and activities of each of Krispy Kreme’s business segments.

A1

Roll On 3. Access Krispy Kreme’s annual report for fiscal years ending after February 2, 2003, from its

Website (KrispyKreme.com) or the SEC’s EDGAR database (www.

SEC

.gov). Has Krispy Kreme changed its reporting policy regarding segment information?

BTN 7-2 Key figures for Krispy Kreme follow ($ millions): COMPARATIVE

ANALYSIS Krispy Kreme

A1 Revenue by Segment Current Year One Year Prior Two Years Prior

Company Store . . . . . . . . $320 $266 $214 Franchise . . . . . . . . . . . . 19 14 9 KKM&D . . . . . . . . . . . . . 348 269 201

Required 1. Compute the percent change in revenue (rounded to whole numbers) for each segment and for

each of the most recent two years shown. Interpret and comment on your findings. 2. Identify the segment experiencing the largest growth in revenue for Krispy Kreme.

BTN 7-3 Erica Gray, CPA, is a sole practitioner. She has been practicing as an auditor for 10

ETHICS years. Recently a long-standing audit client asked Gray to design and implement an integrated com- puter-based accounting information system. The fees associated with this additional engagement with the client are very attractive. However, Gray wonders if she can remain objective on subsequent au-

CHALLENGE C5 dits in her evaluation of the client’s accounting system and its records if she was responsible for its design and implementation. Gray knows that professional auditing standards require her to remain in- dependent in fact and appearance from her auditing clients.

Required 1. What do you believe auditing standards are mainly concerned with when they require indepen-

dence in fact? In appearance? 2. Why is it important that auditors remain independent of their clients? 3. Do you think Gray can accept this engagement and remain independent? Justify your response.

BTN 7-4 Your friend, Wendy Geiger, owns a small retail store that sells candies and nuts. Geiger

COMMUNICATING acquires her goods from a few select vendors. She generally makes purchase orders by phone and on credit. Sales are primarily for cash. Geiger keeps her own manual accounting system using a general journal and a general ledger. At the end of each business day, she records one summary entry for cash

IN PRACTICE C3 C4 sales. Geiger recently began offering items in creative gift packages. This has increased sales sub- stantially, and she is now receiving orders from corporate and other clients who order large quantities and prefer to buy on credit. As a result of increased credit transactions in both purchases and sales, keeping the accounting records has become extremely time consuming. Geiger wants to continue to maintain her own manual system and calls you for advice. Write a memo to her advising how she might modify her current manual accounting system to accommodate the expanded business activities. Geiger is accustomed to checking her ledger by using a trial balance. Your memo should explain the advantages of what you propose and of any other verification techniques you recommend.


304 Chapter 7 Accounting Information Systems

BTN TEAMWORK IN

7-6 Each member of the team is to assume responsibility for one of the following tasks: ACTION

a. Journalizing in the purchases journal.

C4 P1 P2

b. Journalizing in the cash disbursements journal. c. Maintaining and verifying the Accounts Payable ledger. d. Journalizing in the sales journal and the general journal. e. Journalizing in the cash receipts journal. f. Maintaining and verifying the Accounts Receivable ledger. The team should abide by the following procedures in carrying out responsibilities.

Required 1. After tasks a–f are assigned, each team member is to quickly read the list of transactions in Problem 7-6A, identifying with initials the journal in which each transaction is to be recorded. Upon com- pletion, the team leader is to read transaction dates, and the appropriate team member is to vo- calize responsibility. Any disagreement between teammates must be resolved. 2. Journalize and continually update subsidiary ledgers. Journal recorders should alert teammates as-

signed to subsidiary ledgers when an entry must be posted to their subsidiary. 3. Team members responsible for tasks a, b, d, and e are to summarize and prove journals; members

responsible for tasks c and f are to prepare both payables and receivables schedules. 4. The team leader is to take charge of the general ledger, rotating team members to obtain amounts to be posted. The person responsible for a journal must complete posting references in that jour- nal. Other team members should verify the accuracy of account balance computations. To avoid any abnormal account balances, post in the following order: P, S, G, R, D. (Note: Posting any nec- essary individual general ledger amounts are also done at this time.) 5. The team leader is to read out general ledger account balances while another team member fills in the trial balance form. Concurrently, one member should keep a running balance of debit ac- count balance totals and another credit account balance totals. Verify the final total of the trial bal- ance and the schedules. If necessary, the team must resolve any errors. Turn in the trial balance and schedules to the instructor.

BUSINESS WEEK ACTIVITY C1 C2

BTN 7-7 Read the article, “The Battle to Streamline Business Software” in the December 4, 2002, edition of Business Week. (This book’s Website provides a free link.)

Required 1. What functions are integrated by enterprise resource planning, or ERP, software? 2. How long does Oregon Health and Sciences University in Portland think it will take for it to

earn a return on its $25 million dollar investment in Oracle software? 3. Which companies are identified in the article as the large (likely long-standing) names in the busi-

ness software market? 4. In dollar terms, what is the current size of the ERP software market? What annual growth rate is

predicted for this market through 2006?

TAKING IT TO THE NET A1

BTN 7-5 Access the May 1, 2002, filing of the fiscal 2002 10-K report for Dell Computer (ticker DELL) at www.

SEC

.gov. Read the footnote that details Dell’s segment information and answer the following: 1. Dell’s operations are divided among which three geographic segments? 2. In fiscal year 2002, which geographic area had the largest dollar amount of operating income?

Which had the largest amount of identifiable assets? 3. Compute the return on assets for each segment for fiscal year 2002. Use operating income and average total assets by segment for your calculation. Which segment has the highest return on assets? 4. For what product groups does Dell provide segment data? What percent of Dell’s net revenue is

earned by each product group?

Larson−Wild−Chiappetta: Fundamental Accounting Principles, Seventeenth Edition

7. Accounting Information Systems

Text © The McGraw−Hill

Companies, 2004


BTN 7-8 Refer to the chapter’s opening feature about Devin Lazerine and his Rap-Up magazine.

Required 1. What is the current circulation (to the nearest one hundred thousand) of Rap-Up magazine? 2. Assume that Devin charges $2.40 per issue for subscribers and $3.60 per issue to newsstands that purchase copies of Rap-Up. Also assume that Rap-Up’s circulation (refer to your answer in part 1) is equally divided between newsstand and subscription sales. a. If Devin uses one mass mailing to ship magazines to newsstands each month, what journal en- try would Devin make to record the sale upon shipment of the magazines? (You may ignore cost of goods sold and show only the revenue side of the transaction.) b. Assume that Rap-Up is a monthly publication. With the current level of subscribers, how much

annual revenue will be earned from subscription sales? c. What journal entry does Devin record when an individual subscription order with payment is

received? (Note: Subscribers pay $28.80 per year.) d. What journal entry does Devin record when an individual subscriber’s magazine is mailed out

each month? e. Construct a table to show annual revenue, cost of goods sold ($0.60 per issue), gross margin

and gross margin percentage by each business segment (newsstand and subscription). 3. Devin is thinking of adding a sales subsidiary ledger to his accounting system. What information might the sales subsidiary ledger be designed to account for beyond each customer and the amount owed?

BTN 7-9 Access and refer to the 2002 annual report for Grupo Bimbo at GrupoBimbo.com.

GLOBAL DECISION

Required

A1

1. Skim the management and discussion section until you find information relating to Grupo Bimbo’s

geographic segments. Identify those segments. 2. What three financial figures does it disclose for each geographic segment? 3. Does Grupo Bimbo have a dominant segment? Explain. 4. Does the total of sales by region match with the total amount of sales reported on Grupo Bimbo’s

consolidated statement of income?

Larson−Wild−Chiappetta: Fundamental Accounting Principles, Seventeenth Edition

7. Accounting Information Systems

Text © The McGraw−Hill

Companies, 2004

Chapter 7 Accounting Information Systems 305

ENTREPRENEURIAL DECISION P1