Week 5

Accounting information systems

Ch. 6, Carlon et al.

Learning objectives

After studying this presentation, you should be able

to:
1. Identify the basic principles of accounting information
systems.
2. Explain the major phases in the development of an
accounting system.
3. Define internal control.
4. Appreciate management’s responsibility in relation to
internal control.

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Learning objectives
5. Identify the principles and limitations of internal control.
6. Understand the accounting processes underlying the
generation of financial statements.
7. Describe the sales and receivables cycle and the
purchases and payments cycle.
8. Apply internal control principles to the sales and
receivables cycle and purchases and payments cycle for
transforming data.

Learning objectives

9. Describe the nature and purpose of control accounts and

subsidiary ledgers.
10. Explain how special journals are used in recording
transactions.
11. Understand the basic features of computerised
accounting systems including an introduction to MYOB.
12. Appreciate the role and use of non-integrated systems.

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Learning objectives
13. Identify the advantages and disadvantages of
computerised accounting systems.
14. Record transactions for sales, purchases, cash receipts
and cash payments in special journals.
15. Understand how multi-column special journals are
posted.

special

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Basic concepts of accounting information systems
Principles of accounting information systems

• Cost effectiveness:
– Cost versus benefits consideration.

• Useful output:
– Relevant, reliable, understandable, timely, comparable.

• Flexibility:
– Technological advances, increased competition, changing accounting
principles, organisational growth, government regulation and de-
regulation.

Phases in developing an accounting system

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Internal control systems
• Internal control:
– Essential part of risk management.

• Consists of all the processes used by management and

staff to:
– Provide efficient and effective operations and;
– Comply with laws, regulations and internal policies.

Internal control systems

• Two aspects of internal control:
– Administrative controls provide operational efficiency and
adherence to policy and procedures.

– Accounting controls are the methods and procedures used to

protect assets and ensure that transactions are recorded
appropriately.

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Managements responsibility for internal control

• Large companies establish objectives which encompass

the principles of the organisation.

• Management is responsible for developing practices and

policies which are consistent with these objectives.

Managements responsibility for internal control

• Corporate governance represents the framework of

rules, relationships, systems and processes within which
authority is exercised within the organisation:

– Internal audit is an element of good corporate governance that

involves monitoring the effectiveness of internal controls.

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Principles of internal control
• Establishment of responsibility.
• Segregation of duties:
– Related activities.
– Accountability for assets.

• Documentation procedures.
• Physical, mechanical and electronic controls.
• Independent internal verification.

Principles of internal control

• Limitations of internal control:
– cost versus benefits
– human imperfection
– business size

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 Transformation of financial data
• Accounting information systems involve three phases:
– Input
– Processing
– Output

• Raw transactions are transformed into financial

statements to provide information for decision making.

Sales and receivables cycle illustrated

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Purchases and payments cycles illustrated

Internal control principles applied to the sales

and receivables and purchases and payments
cycles
• Sales and receivables cycle:
– Segregation of duties – different personnel are involved in the
sales transaction to ensure independent verification at each
step.
– Documentation procedure – signatures required at certain
stages to identify responsible party.

• Purchases and payments cycle:

– Establishment of responsibility – appropriate level of skill and
knowledge to assess inventory levels.

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Control accounts, subsidiary ledgers and
special journals

• Subsidiary ledgers are groups of accounts with a

common characteristic.
• Details from subsidiary ledgers are summarised in the
general ledger control account.
• Two common subsidiary ledgers are:
– Accounts Receivable (customers) which collects transaction
data of individual customers.
– Accounts Payable (suppliers) which collects transaction data
of individual creditors.

Control accounts and subsidiary ledgers

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Advantages of subsidiary ledgers
1. Show transactions in a single account providing up to
date information.
2. Free the general ledger of excessive details.
3. Provide effective control.
4. Enable segregation of duties.

Special journals

• Special journals are used to record similar types of

transactions.
• Examples:
– sales journal
– cash receipts journal
– purchases journal
– cash payments journal

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Special journals

Special journals
• Advantages of special journals:
– Enable segregation of duties.
– Simplifies posting process to general ledger.

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Computerised accounting information systems
• Computer accounting programs that perform the
double entry steps in the accounting cycle i.e.
journalising, posting and preparation of trial balance
and reports.

• Integrated Accounting Systems:

– Use of modules: general ledger, inventory, accounts
receivable, accounts payable.
– Data entered in one module automatically updates information
in other modules.
– General ledger and accounting reports updated automatically.

Advantages and disadvantages of

computerised systems
• Advantages:
– Ability to process large number of transactions quickly.
– Automatic posting of transactions.
– Error reduction.
– Fast response time.
– Flexible and fast report production.

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Advantages and disadvantages of
computerised systems
• Disadvantages:
– Use of inappropriate and/or incompatible software and hardware.
– Need for reliable back-up procedures.
– Lack of computer system skills.
– Computer viruses and hackers.
– Fraud and embezzlement.

Decision toolkit
• Aussie Roo Ltd (page 355 – 356 from the text).
• Work through on your own and check your results with
the suggested solution provided.

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Special journals – sales journal
• Used to record sales of inventory on account.
• Cash sales recorded in cash receipts journal.
• Example:
– Karns Wholesale Supplies uses a perpetual inventory system.

Sales journal

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 General journal

Sales journal
• Posting the sales journal:
– Postings made daily to individual accounts receivable in the
subsidiary ledger.
– At the end of the month column totals of sales journal are posted
to the general ledger:
• debit to Accounts Receivable account
• credit to Sales account
• debit to Cost of Sales account
• credit to Inventory account.

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Sales journal
• Checking the ledgers:

Cash receipts journal

• Used to record all receipts of cash.

• Debit columns:
– cash
– discount allowed.
• Credit columns:
– accounts receivable
– sales
– other accounts.
• Debit and credit column:
– cost of sales and inventory.

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Cash receipts journal

Cash receipts journal

• Posting the cash receipts journal:
– All column totals (excluding other accounts) posted to account
specified.
– Individual accounts in ‘other accounts’ posted separately to
relevant individual general ledger accounts.
– Individual amounts, posted in total to Accounts Receivable
control account, posted to individual subsidiary ledger accounts.

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Cash receipts journal

Schedule of General Ledger

Accounts Receivable Debits
Abbot Sisters Ltd $15 400 Cash $ 53 769
Babson Ltd 14 570 A/Cs Receivable 51 180
Deli Ltd 21 210 Discount Allowed 781
$51 180 COGS 65 120
$170 850
Credits
Bank Loan $ 6 000
DA Karns, Capital 5 000
Sales 94 730
Inventory 65 120
$170 850

Purchases journal
• Used to record purchases of inventory on account.
• NOTE: Cash purchases of inventory are recorded in the
cash payments journal.
• Some businesses expand the purchases journal to a
multicolumn journal. This records ALL purchases on
account and is posted in the same manner as the
multicolumn cash receipts and cash payments journals.

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Purchases journal

Purchases journal
• Posting the purchases journal:
– Postings made daily to individual accounts payable in the
subsidiary ledger.
– At the end of the month column totals of purchases journal are
posted to the general ledger:
• Debit to Inventory account.
• Credit to Accounts Payable account.

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Cash payments journal
• Used to record all cash payments.
• Credit columns:
– cash paid
– discount received.

• Debit columns:
– accounts payable
– cash purchases
– other accounts paid.

Cash payments journal

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Cash payments journal
• Posting the cash payments journal:
– All column totals (excluding other accounts) posted to account
specified.
– Individual accounts in ‘other accounts’ posted separately to
relevant individual general ledger accounts.
– Individual amounts, posted in total to Accounts Payable control
account, posted to individual subsidiary ledger accounts.

Cash payments journal -Checking the ledgers

Schedule of Accounts Payable General Ledger

Eaton and Howe $12 600 Debits
Fabor and Son Ltd 8 700 Cash $ 5 824
A/Cs Receivable 51 180
$21 300 Inventory 3 280
Prepaid Insurance 1 200
DA Karns, Drawings 500
Discount Allowed 781
COGS 65 120
$127 885
Credits
Bank Loan $ 6 000
A/Cs Payable 21 300
DA Karns, Capital 5 000
Sales 94 730
Discount Received 855
$127 885

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Effects of special journals on general ledger
• Reduces number of transactions requiring recording in
the general journal.
• Where control and subsidiary ledgers used:
– Journalising: both control account and subsidiary ledger must
be identified.
– Posting: transaction posted to control account and subsidiary
account.

Demonstration problem
• Dion Designs (page 371 – 372 of the text).
• Work through on your own and check your results with
the suggested solution provided.

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Key concepts
Can you:
1. Identify the basic principles of accounting information systems.
2. Explain the major phases in the development of an accounting
system.
3. Define internal control.
4. Appreciate management’s responsibility in relation to internal
control.
5. Identify the principles and limitations of internal control.
6. Understand the accounting processes underlying the generation of
financial statements.
7. Describe the sales and receivables cycle and the purchases and
payments cycle.
8. Apply internal control principles to the sales and receivables cycle
and purchases and payments cycle for transforming data.

Key concepts
Can you:
9. Describe the nature and purpose of control accounts and
subsidiary ledgers.
10. Explain how special journals are used in recording transactions.
11. Understand the basic features of computerised accounting systems
including an introduction to MYOB.
12. Appreciate the role and use of non-integrated systems.
13. Identify the advantages and disadvantages of computerised
accounting systems.
14. Record transactions for sales, purchases, cash receipts and cash
payments in special journals.
15. Understand how multi-column special journals are posted.

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