Chapter 5

Accounting information system

MANUAL VERSUS COMPUTERIZED ACCOUNTING INFORMATION S YSTEMS

The accounting information system collects and processes transaction data and communicates
financial information to decision makers. It includes each of the steps in the accounting cycle
that you studied in earlier chapters. It also includes the documents that provide evidence of the
transactions, and the records, trial balances, worksheets, and financial statements that result.

An accounting system may be either manual or computerized. Although a few small

businesses still use a manual accounting information system that records and processes all
financial information by hand on paper, today most accounting information systems are
computerized. A computerized accounting information system uses a software program to
perform basic bookkeeping functions. The program journalizes and posts transactions, prepares
trial balances, and generates financial statements, all electronically.

Mostbusinesses these days use some sort of computerized accounting system, whether it is an
off-the-shelf system for small businesses, like QuickBooks or Peachtree, or a more complex
custom-made system. Efficient and effective accounting information systems are based on
certain basic principles. These principles, as described in Illustration 1, are: (1) cost
effectiveness, (2) usefulness, and (3) flexibility. If the accounting system is cost effective,
provides useful output, and has the flexibility to meet future needs, it can contribute to both
individual and organizational goals.

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Computerized Accounting Systems
Many small businesses eventually replace their manual accounting system with a computerized
general ledger accounting system. General ledger accounting systems are software programs
that integrate the various accounting functions related to sales, purchases, receivables, payables,
cash receipts and disbursements, and payroll. They also generate financial statements.
Computerized systems have a number of advantages over manual systems. First, the company
typically enters data only once in a computerized system. Second, because the computer does
most steps automatically, many errors resulting from human intervention in a manual system,
such as errors in posting or preparation of financial statements, are eliminated. Computerized
systems also provide information up-to-the-minute. More timely information results in better
business decisions. Many different general ledger software packages are available.

Illustration 1sfsg

Manual Accounting Systems

Manual accounting systems perform each of the steps in the accounting cycle by hand. For
example, someone manually enters each accounting transaction in the journal and manually posts
each to the ledger. Other manual computations must be made to obtain ledger account balances
and to prepare a trial balance and financial statements.
You might be wondering, ―Why cover manual accounting systems if the real world uses
computerized systems?‖ First, small businesses still abound. Most of them begin operations with
manual accounting systems and convert to computerized systems as the business grows. Youmay
work in a small business, or start your own someday, so it is useful to know how a manual
system works. Second, to understand what computerized accounting systems do, you also need
to understand manual accounting systems.

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The manual accounting system is satisfactory in a company with a low volume of transactions.
However, in most companies, it is necessary to add additional ledgers and journals to the
accounting system to record transaction data efficiently.

SUBSIDIARY LEDGERS
Imagine a business that has several thousand charge (credit) customers and shows the
transactions with these customers in only one general ledger account—Accounts Receivable. It
would be nearly impossible to determine the balance owed by an individual customer at any
specific time. Similarly, the amount payable to one creditor would be difficult to locate quickly
from a single Accounts Payable account in the general ledger.

Instead, companies use subsidiary ledgers to keep track of individual balances. A subsidiary
ledger is a group of accounts with a common characteristic (for example, all accounts
receivable). It is an addition to, and an expansion of, the general ledger. The subsidiary ledger
frees the general ledger from the details of individual balances.
Two common subsidiary ledgers are:
1. The accounts receivable (or customers’) subsidiary ledger, which collects transaction
data of individual customers.
2. The accounts payable (or creditors’) subsidiary ledger, which collects transaction data
of individual creditors.
The accounts payable subsidiary ledger looks exactly like the accounts receivable subsidiary
ledger. The only difference is that it tracks creditor transactions rather than customer
transactions.
In each of these subsidiary ledgers, companies usually arrange individual accounts in
alphabetical order.
A general ledger account summarizes the detailed data from a subsidiary ledger. For example,
the detailed data from the accounts receivable subsidiary ledger are summarized in Accounts
Receivable in the general ledger. The general ledger account that summarizes subsidiary ledger
data is called a controlaccount. Note that cash and owner’s capital in this illustration are not
control accounts because there are no subsidiary ledger accounts related to these accounts.

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At the end of an accounting period, each general ledger control account balance must equal
the composite balance of the individual accounts in the related subsidiary ledger. For
example, the balance in Accounts Payable in Illustration must equal the total of the subsidiary
balances of Creditors X +Y +Z.
S illustration

EDGERS
SUBSIDIARY LEDGER EXAMPLE
An example of a control account and subsidiary ledger for Larson Enterprises is provided in
Illustration (The explanation column in these accounts is notshown in this and subsequent
illustrations due to space considerations.)

Relationship between general and subsidiary ledgers

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The example is based on the transactions listed below.

Sales and collection transactions

The total debits ($12,000) and credits ($8,000) in Accounts Receivable in thegeneral ledger are
reconcilable to the detailed debits and credits in the subsidiaryaccounts. Also, the balance of
$4,000 in the control account agrees with the totalof the balances in the individual accounts
(Aaron Co. $2,000 + Branden Inc.$0 + Caron Co. $2,000) in the subsidiary ledger.
As shown, postings are made monthly to the control accounts in the generalledger. This practice
allows monthly financial statements to be prepared. Postingsto the individual accounts in the
subsidiary ledger are made daily. Dailyposting ensures that account information is current. This
enables the companyto monitor credit limits, bill customers, and answer inquiries from
customersabout their account balances.

Advantages of Subsidiary Ledgers

Subsidiary ledgers have several advantages:
1. They show in a single account transactions affecting one customer or one creditor, thus
providing up-to-date information on specific account balances.
2. They free the general ledger of excessive details. As a result, a trial balance of the general
ledger does not contain vast numbers of individual account balances.
3. They help locate errors in individual accounts by reducing the number of accounts in one
ledger and by using control accounts.
4. They make possible a division of labor in posting. One employee can post to the general
ledger while someone else posts to the subsidiary ledgers.

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Expanding the Journal—Special Journals
So far you have learned to journalize transactions in a two-column general journaland post each
entry to the general ledger. This procedure is satisfactory inonly the very smallest companies. To
expedite journalizing and posting, mostcompanies use special journals in addition to the
general journal.
A special journal is used to record similar types of transactions. Exampleswould be all sales of
merchandise on account, or all cash receipts. The special journal a company uses depends largely
on the types of transactions that occurfrequently. Most merchandising enterprises use the
journals shown inIllustration below to record transactions daily.
Sales journal Cash receipt Purchases Cash payments General journal
journal journal journal
Used for Used for Used for Used for Used for
All sales of all cash received All purchase of All cash paid Transaction that
merchandise on (including cash merchandise on ( including cash cannot be entered
account sales account purchases ) in a special
journal including
correcting ,
adjusting and
closing entries

If a transaction cannot be recorded in a special journal, it is recordedin the general

journal. For example, if you had special journals only for thefour types of transactions shown in
Illustration E-4, purchase returns andallowances would be recorded in the general journal. So
would sales returns andallowances. Similarly, correcting, adjusting, and closing entries are
recordedin the general journal. Other types of special journals may sometimes be usedin some
situations. For example, when sales returns and allowances are frequent,special journals may be
used to record these transactions.
Special journals permit greater division of labor because several peoplecan record entries in
different journals at the same time. For example, one employeemay journalize all cash receipts,
and another may journalize all creditsales. Also, the use of special journals reduces the time
needed to completethe posting process. With special journals, some accounts may be
postedmonthly, instead of daily, as will be illustrated later in the chapter.

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1. SALES JOURNAL
The sales journal is used to record sales of merchandise on account. Cash salesof merchandise
are entered in the cash receipts journal. Credit sales of assetsother than merchandise are entered
in the general journal.
JOURNALIZING CREDIT SALES
Karns Wholesale Supply uses a perpetual inventory system. Under this system,each entry in the
sales journal results in one entry at selling price—a debit toAccounts Receivable (a control
account) and a credit of equal amount to Sales—and another entry at cost. The entry at cost is a
debit to Cost of Goods Sold anda credit of equal amount to Merchandise Inventory (a control
account). The salesjournal for Karns Wholesale Supply is shown in Illustration. (It uses
assumedcredit sales transactions for sales invoices 101–107.) A sales journal withtwo amount
columns, like that in Illustration, shows a transaction at bothselling price and cost on a single
line. The reference (Ref.) column is not usedin journalizing. It is used in posting the sales
journal, as explained in the nextsection. Also, note that, unlike the general journal, an
explanation is not requiredfor each entry in a special journal. Finally, note that each invoice is
prenumberedto ensure that all invoices are journalized.

Illustration

POSTING THE SALES JOURNAL

Postings from the sales journal are made daily to the individual accountsreceivable in the
subsidiary ledger. Posting to the general ledger is mademonthly. Illustration E-6 shows both
the daily and monthly postings.

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A check mark (✓) is inserted in the reference posting column to indicate thatthe daily posting to the customer’s
account has been made. A check mark (✓) isused in this illustration because the subsidiary ledger accounts are not
[Link] the end of the month, the column totals of the sales journal are postedto the general ledger. Here, the
column totals are a debit of $90,230 to AccountsReceivable (account No. 112), a credit of $90,230 to Sales (account
No. 401), adebit of $62,190 to Cost of Goods Sold (account No. 505), and a credit of $62,190to Merchandise
Inventory (account No. 120). Insertion of the account numbersbelow the column total indicates that the postings

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have been made. In both thegeneral ledger and subsidiary ledger accounts, the reference S1 indicates thatthe posting
came from page 1 of the sales journal.

ADVANTAGES OF THE SALES JOURNAL

The use of a special journal to record sales on account has a number of [Link], the
one-line entry for each sales transaction saves time. In the sales journal, it is not necessary to
write out the four account titles for each transaction. Second, only totals, rather than individual
entries, are posted to the general ledger. This saves posting time and reduces the possibilities of
errors in posting. Finally, a division of labor results, because one individual can take
responsibility for the sales journal.

2. CASH RECEIPTS JOURNAL

In the cash receipts journal, companies record all receipts of cash. The most common types of
cash receipts are cash sales of merchandise and collections of accounts receivable. Many other
possibilities exist, such as receipt of money from bank loans and cash proceeds from disposal of
equipment. A one- or two-column cash receipts journal would not have space enough for all
possible cash receipt transactions. Therefore, companies use a multiple-column cash receipts
journal.
Generally, a cash receipts journal includes the following columns: debit columns for Cash and
Sales Discounts, and credit columns for Accounts Receivable, Sales, and ―Other‖ accounts.
Companies use the ―Other Accounts‖category when the cash receipt does not involve a cash sale
or a collection of accounts receivable. Under a perpetual inventory system, each sales entry is
accompanied by another entry that debits Cost of Goods Sold and credits Merchandise Inventory
for the cost of the merchandise sold. This entry may be recorded separately. A six column cash
receipts journal is shown in Illustration.

JOURNALIZING CASH RECEIPTSTRANSACTIONS

To illustrate the journalizing of cash receipts transactions, we will continue withthe May
transactions of Karns Wholesale Supply. Collections from customersrelate to the entries recorded
in the sales journal in Illustration E-5. The entriesin the cash receipts journal are based on the
following cash receipts.
May 1 Stockholders invest $5,000 in the business in common stock.
7 Cash sales of merchandise total $1,900 (cost, $1,240).
10A check for $10,388 is received from Abbot Sisters in payment of invoiceNo. 101 for
$10,600 less a 2% discount.
12Cash sales of merchandise total $2,600 (cost, $1,690).
17 A check for $11,123 is received from Babson Co. in payment of invoice
No. 102 for $11,350 less a 2% discount.
22 Cash is received by signing a note for $6,000.
23 A check for $7,644 is received from Carson Bros. in full for invoice
No. 103 for $7,800 less a 2% discount.
28 A check for $9,114 is received from Deli Co. in full for invoice No. 104
for $9,300 less a 2% discount.

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Further information about the columns in the cash receipts journal (see above Illustration) is
listed below.
Debit Columns:
1. Cash. The amount of cash actually received in each transaction is entered in this column.
The column total indicates the total cash receipts for the month.
2. Sales Discounts. Karns includes a Sales Discounts column in its cash receipts journal. By
doing so, it is not necessary to enter sales discount items in the general journal. As a
result, the collection of an account receivable within the discount period is expressed on
one line in the appropriate columns of the cash receipts journal.
Credit Columns:
3. Accounts Receivable. The Accounts Receivable column is used to record cash
collections on account. The amount entered here is the amount to be credited to the
individual customer’s account.
4. Sales. The Sales column records all cash sales of merchandise. Cash sales of other assets
(plant assets, for example) are not reported in this column.
5. Other Accounts. The Other Accounts column is used whenever the credit is other than to
Accounts Receivable or Sales. For example, in the first entry, $5,000 is entered as a
credit to Common Stock. This column is often referred to as the sundry accounts
column.
Debit and Credit Column:
6. Cost of Goods Sold and Merchandise Inventory. This column records debits to Cost of
Goods Sold and credits to Merchandise Inventory.

3. PURCHASES JOURNAL
All purchases of merchandise on account are recorded in the purchases journal. Each entry in
this journal results in a debit to Merchandise Inventory and a credit to Accounts Payable. When a
one-column purchases journal is used (as in Illustration), other types of purchases on account and
cash purchases cannot be journalized in it. For example, credit purchases of equipment or
supplies must be recorded in the general journal. Likewise, all cash purchases are entered in the

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cash payments journal. As illustrated later, where credit purchases for items other than
merchandise are numerous, the purchases journal is often expanded to a multi-column format.

JOURNALIZING CREDIT PURCHASES OF MERCHANDISE

Entries in the purchases journal are made from purchase invoices. The journalizing procedure is
similar to that for a sales journal. In contrast to the sales journal, the purchases journal may not
have an invoice number column, because invoices received from different suppliers will not be
in numerical sequence. To assure that all purchase invoices are recorded, some companies
consecutively number each invoice upon receipt and then use an internal document number
column in the purchases journal.
Karns Wholesale Supply made the assumed credit purchases shown in Illustration 1. The
purchases journal for Karns Wholesale Supply is shown in illustration2.

Illustration 1

POSTING THE PURCHASES JOURNAL

The procedures for posting the purchases journal are similar to those for the sales journal. In this
case, postings are made daily to the accounts payable ledger and monthly to Merchandise
Inventory and Accounts Payable in thegeneral ledger. In both ledgers, P1 is used in the reference
column to showthat the postings are from page 1 of the purchases journal. Proof of the equalityof
the postings from the purchases journal to both ledgers is shown asfollows.

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Illustration 2

EXPANDING THE PURCHASES JOURNAL

Some companies expand the purchases journal to include all types of purchases on account.
Instead of one column for merchandise inventory and accounts payable, they use a multiple-

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column format. The multi-column format usually - includes a credit column for accounts payable
and debit columns for purchasesof merchandise, of office supplies, of store supplies, and other
accounts.
Illustration
Illustration 3 is an example of a multi-column purchases journal for Hanover Co.
The posting procedures are similar to those illustrated earlier for posting the cash receipts
journal.

Illustration 3

4. CASH PAYMENTS JOURNAL

All disbursements of cash are entered in a cash payments journal. Entries are made from
prenumbered checks. Because cash payments are made for various purposes, the cash payments
journal has multiple columns. A four-column journal is shown in Illustration.

JOURNALIZING CASH PAYMENTS TRANSACTIONS

The procedures for journalizing transactions in this journal are similar to those described earlier
for the cash receipts journal. Each transaction is entered on one line, and for each line there must
be equal debit and credit amounts. The entries in the cash payments journal in Illustration E-15
are based on the following transactions for Karns Wholesale Supply.
May 1 Check No. 101 for $1,200 issued for the annual premium on a fire insurance
policy.
3 Check No. 102 for $100 issued in payment of freight when terms were FOB shipping
point.
8 Check No. 103 for $4,400 issued for the purchase of merchandise.
10 Check No. 104 for $10,780 sent to Jasper Manufacturing Inc. in payment of May 6
invoice for $11,000 less a 2% discount.

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 19 Check No. 105 for $6,984 mailed to Eaton and Howe Inc. in payment of
May 10 invoice for $7,200 less a 3% discount.
23 Check No. 106 for $6,831 sent to Fabor and Son in payment of May 14 invoice for
$6,900 less a 1% discount.
28 Check No. 107 for $17,150 sent to Jasper Manufacturing Inc. in payment of May 19
invoice for $17,500 less a 2% discount.
30 Check No. 108 for $500 issued to stockholders as a cash dividend.

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A cash payments journal is used for recording all transactions involving cash payments.
1. Check No. All cash payments are made with sequentially numbered checks so thatevery
check can be tracked.
2. Account Debited. This column is for the name of the creditor whose account is beingdebited
in the accounts payable subsidiary ledger or the specific general ledger accountthat is being
debited in the Other Accounts Dr. Column.
3. Other Accounts Dr. The dollar amounts recorded in this column are posted to generalledger
accounts other than Cash and Accounts Payable. These accounts are identifiedby name in the
Account Debited column.
4. Accounts Payable Dr. This is the dollar amount of those transactions that will beposted
individually to the accounts payable subsidiary ledger and in total to the AccountsPayable
general ledger account.

Effects of Special Journals on the General Journal

Special journals for sales, purchases, and cash substantially reduce the number of entries that
companies make in the general journal.
Only transactions that cannotbe entered in a special journal are recorded in the general journal.
For example, a company may use the general journal to record such transactions as granting of
credit to a customer for a sales return or allowance, granting of credit from a supplier for
purchases returned, acceptance of a note receivable from a customer, and purchase of equipment
by issuing a note payable. Also, correcting, adjusting, andclosing entries are made in the general
journal.
The general journal has columns for date, account title and explanation, reference, and debit and
credit amounts. When control and subsidiary accounts are not involved, the procedures for
journalizing and posting of transactions are the same as those described in earlier chapters.
When control and subsidiary accounts are involved, companies make two changes from the
earlier procedures:
1. In journalizing, they identify both the control and the subsidiary accounts.
2. In posting, there must be a dual posting: once to the control account and once to the subsidiary
account.

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