ACCT1006 s1 2021 Lecture Week 5 student PDF

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ACCT1006: Accounting and Financial ManagementTimothy Ganghua WangWeek 5: Accounting subsystemsFinancial AccountingIntroduction, GAAP & Business EntitiesStatement of Profit or LossStatement of Financial PositionStatement of Cash FlowsInternalControlInternalControlAccounting Concepts & Transac...

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ACCT1006: Accounting and Financial Management Week 5: Accounting subsystems

Timothy Ganghua Wang

Introduction,GAAP&BusinessEntities AccountingConcepts&TransactionAnalysis

RecordingTransactions

Merchandising AccountingSubsystems Receivables Non‐currentAssets Liabilities Equity

Statementof ProfitorLoss Statementof Financial Position Statementof CashFlows

FinancialStatementAnalysis

InternalControl

FinancialAccounting

Learning Objectives/Outcomes 1. 2. 3. 4.

Identify the basic principles of accounting information systems. Explain the major phases in the development of an accounting system. Review the principles/application of internal control (revision). Understand the accounting processes underlying the generation of financial statements. 5. Describe the sales and receivables cycle and the purchases and payments cycle. 6. Describe the nature and purpose of control accounts and subsidiary ledgers. 7. Explain how special journals are used in recording transactions and posting to ledgers. 8. Indicate how a multicolumn special journal is posted. 9. Understand the basic features of computerised accounting systems. 10.Identify the advantages and disadvantages of computerised accounting systems. The University of Sydney Readings: Chapter 6 (including appendix) Page 3

LO1 Principles of accounting information systems The objective of general purpose financial reporting is to provide financial information about the reporting entity to resource providers to make economic decisions. – Cost effectiveness: – Cost versus benefits consideration. – Useful output (Qualitative Characteristics): – Relevant, faithful representation of the economic phenomena, understandable, timely, comparable. – Flexibility: – Technological advances, increased competition, changing accounting principles, organisational growth, government regulation and de-regulation. The University of Sydney

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LO2 Phases in Developing an Accounting System

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LO3 Active Learning Opportunity - Internal Control – Revision: Based on your previous learning, explain the internal controls you can recall that enable organisations to: – safeguard assets; – ensure the financial information faithfully represents the underlying economic phenomena; and – ensure policies and procedures are followed? Actual payroll expenses were $1,000,000 on a fortnightly basis; The accountant overstated payroll expenses to $1,002,000 in the accounting books; The accountant paid $1,000,000 to staff and paid $2,000 to the accountant’s personal bank account. The University of Sydney

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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. – 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.

The University of Sydney

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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. – 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. – Limitations of internal control: – cost versus benefits – human imperfection – business size The University of Sydney

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LO4 Transformation of Financial Data – Accounting information systems involve three phases: – input – processing – output – Transactions are transformed into financial statements to provide information for decision making.

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General Journal

General Ledger Dr

AccountsReceivable Cr

Date

Dr

Cash Cr

Bal.

Date

Dr

AccountsPayable Cr

Bal.

Date

Bal.

8000

4000 Other accounts

Special Journals

The University of Sydney

Subsidiary Ledgers

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– The purpose of journals (general journal and special journals) is to record transactions/events (CHANGE) – The purpose of ledger accounts (general ledger accounts and subsidiary ledger accounts) is to calculate account balances (BALANCE)

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LO6 Control Accounts and Subsidiary Ledgers – Subsidiary ledgers are groups of accounts with a common characteristic – 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 – A control account in the general ledger provides a summary of the details in the subsidiary ledgers

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Control Accounts and Subsidiary Ledgers Control Account

$8000

$1000 $2000

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Control Account

$4000

$5000

$1000

$1000 $2000

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Schedule of Accounts Receivable/Payable Accounts Payable Control Balance

$4000

Schedule of Accounts Payable Supplier X Supplier Y

$1,000 1,000

Supplier Z

$2000 $4000

Accounts Receivable Control Balance

$8,000

Schedule of Accounts Receivable Customer A

$1,000

Customer B

2,000

Customer C

5,000 8000

The University of Sydney

Page 15

Control Accounts and Subsidiary Ledgers

– If control and subsidiary accounts are involved, two changes are required: – 1) In journalising, both the control and subsidiary ledger accounts must be identified. – 2) In posting, there must be a dual posting – once to the control account and once to the subsidiary account.

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Page 16

Advantages of Subsidiary Ledgers 1. Show transactions in a single account providing up to date information 2. Free the general ledger of excessive details –individual account details are kept in the subsidiary ledger 3. Provide effective internal control – compare the total of the individual subsidiary ledger accounts with the general ledger control account balance 4. Allows for segregation of duties

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LO7 Special Journals – Recording all transactions in a General Journal is impractical and inefficient, as many entries are of a like (similar) nature. – Special journals are used to record similar types of transactions that occur regularly. – – – –

Sales journal Purchases journal Cash receipts journal Cash payments journal

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Special Journals - Summary Journal

Details

Sales Journal (S)

All sales of inventory on account i.e., on credit

Cash Receipts Journal (CR)

All cash received (e.g. cash sales, receipts from receivables, other)

Purchases Journal (P)

All purchases of inventory on account i.e., on credit

Cash Payments Journal (CP)

All cash paid (e.g. cash purchases, payments to payables, wages etc.)

General Journal (G)

Transactions that cannot be entered in a special journal (e.g. correcting, adjusting and closing entries).

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Active Learning Opportunity Identify the journal in which each of the following transactions is recorded: a) Cash Sales

Cash Receipts Journal

b) Owner withdrawal of cash

Cash Payments Journal

c) Cash purchase of land

Cash Payments Journal

d) Credit sales

Sales Journal

e) Purchase of inventory on account

Purchases Journal

f) Receipt of cash for services performed

Cash Receipts Journal

g) Depreciation of equipment

General Journal

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Sales Journal – Used to record all credit sales of inventory – Cash sales recorded in cash receipts journal – Column – Dr Account Receivable – Cr Sales – Column – Dr Cost of Sales – Cr Inventory

The University of Sydney

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Sales Journal - Active Learning Opportunity – E.g: Karns Wholesale Supplies uses a perpetual inventory system – 3 May: Credit sale to Abbot Sisters Ltd for $10 600 with a cost of sales of $6 360, invoice 101 – Required: record sale using a general journal 3 May

Accounts Receivable – Abbot Sisters Sales Revenue Cost of Sales Inventory (To record credit sale, invoice 101)

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10 600 10 600 6 360 6 360

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Recording a Sale Using a Sales Journal – Record the previous credit sale using the sales journal 3 May

Accounts Receivable – Abbot Sisters Sales Revenue Cost of Sales Inventory

S1

10 600

10 600 6 360 6 360

(To record credit sale, invoice 101) Karns Whole Supply Sales Journal Invoice A/C Rec DR Date Account debited Sales Cr Ref. No. 10 600 3 May Abbot Sisters Ltd 101 The University of Sydney

S1 COS Dr Inventory Cr 6 360 Page 23

Active Learning Opportunity – Sales Journal – Your turn: – 7 May Credit sale to Babson Ltd for $11 350 with a cost of sales of $7 370, invoice 102. – Required: record the credit sale using the sales journal in the template below Karns Whole Supply Sales Journal Invoice A/C Rec DR Ref. No. Date Account debited Sales Cr 10 600 3 May Abbot Sisters Ltd 101 7 May Babson Ltd 102 11 350

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COS Dr Inventory Cr 6 360 7 370

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Dr Total = 152420 (90230 +62190)

Sales Journal

Cr Total = 152420 (90230 +62190)

– After transactions have been posted to the ledgers

Karns Whole Supply Sales Journal Invoice A/C Rec DR Date Account debited No. Ref. Sales Cr 10 600 3 May Abbot Sisters Ltd 101 √ 7 Babson Ltd 102 √ 11 350 14 Carson Ltd 103 √ 7 800 19 Deli Ltd 104 √ 9 300 21 Abbot Sisters Ltd 105 √ 15 400 24 Deli Ltd 106 √ 21 210 27 Babson Ltd 107 √ 14 570 90 230 112/401 The University of Sydney

S1 COS Dr Inventory Cr 6 360 7 370 5 070 6 510 10 780 15 900 10 200 62 190 505/120 Page 25

Special Journals – The use of Special Journals for ‘similar transactions:’ – increases recording efficiency – like transactions are grouped together – one line per transaction record – lowers processing and ledger posting time & costs – batch posting of totals to the ledger accounts – increases data accuracy and control – cross totalling and allows overview and total of like transactions – increases flexibility & task separation/specialisation – allows flexibility in design of documents and journal columns to meet the needs of the business and to Improve work flow The University of Sydney

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Special Journals – The use of Special Journals for ‘similar transactions:’ – increases recording efficiency – like transactions are grouped together – one line per transaction record – lowers processing and ledger posting time & costs – batch posting of totals to the ledger accounts – increases data accuracy and control – cross totalling and allows overview and total of like transactions – increases flexibility & task separation/specialisation – allows flexibility in design of documents and journal columns to meet the needs of the business and to Improve work flow The University of Sydney

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Cash Receipts Journal – Used to record all receipts of cash, including: – Cash sales of inventory, cash collected from accounts receivable, other transactions – Debit columns – Cash – Discount Allowed – Credit columns – Accounts Receivable – Sales – Other accounts – Debit and credit column – Cost of Sales and Inventory

The University of Sydney

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Cash Receipts Journal

Date 1 May 7 10 12 17 22 23 28

Account credited CA Karns. Capital Abbot Sisters Ltd Babson Ltd Bank Loan Carson Ltd Deli Ltd

The University of Sydney

Karns Whole Supply Cash Receipts Journal Disc. A/c's Cash All'd Rec Ref. Dr Dr Cr 301 5 000 1 900 212 10 600 √ 10 388 2 600 227 11 350 √ 11 122 200 6 000 7 644 156 7 800 √ 9 144 186 9 300 √ 53 798 781 39 050 (101) (504) (112)

CR1

Other Sales A/c's COS Dr Cr Cr Inventory Cr 5 000 1 900 1 240 2 600

1 690 6 000

4 500 11 000 2 930 (401) (x) (505/120)

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Purchases Journal – Used to record purchases of inventory on account – Cash purchases are recorded in the cash payments journal – Debit and credit column (under a perpetual inventory system) – Inventory account and Accounts Payable account

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Cash Payments Journal – Used to record all cash payments, including: – Cash purchase of inventory, cash payment to settle accounts payable, other transactions – Debit columns – Inventory – Accounts Payable – Other accounts – Credit columns – Cash – Discount Received

The University of Sydney

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Cash Payment Journal Karns Whole Supply CP1 Cash Payments Journal Accounts Discount Other Payable Cash received A/c's Account debited Ref. Inventory Dr Cr Cr Dr Dr Date Chq No. 1 May 101 Prepaid Insurance 130 1200 1200 100 100 3 102 4400 4400 8 103 11000 10780 220 10 104 Jasper Manu. Ltd √ 7200 6984 216 19 105 Eaton and Howe √ 6900 6831 69 23 106 Fabor & Son Ltd √ 17500 17150 350 28 107 Jasper Manu. Ltd √ 500 500 30 108 D.A. Karns, Drawing √ 4500 42600 47945 855 1700 (120) (201) (101) (405) (X) The University of Sydney

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General Journal – The General Journal is now used for transactions that are exceptions.

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– After we introduce special journals and subsidiary ledgers, we modify the accounting process as follows: – Step 1: Record a transaction in a journal. – Step 2: Post individual amounts to 1) subsidiary ledger accounts, 2) other accounts, 3) accounts dr or cr in General Journal on a daily basis plus posting references – Finish step 1 and 2 for each transaction that happens – Step 3: Post special journals’ column totals to general ledger accounts at the end of the month plus posting references

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Example – Ricky Ltd has started its operations. Selected accounts from the chart of accounts are shown below. 101 Cash

401 Sales

112 Accounts receivable 120 Inventory

416 Discount received 505 Cost of sales

127 Supplies 201 Accounts payable

726 Supplies expense

292 Share capital

– The cost of all inventory sold was 60% of the sales price. In Sept, Ricky Ltd completed the following transactions.

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Example Sept 1 Sept 13 Sept 14 Sept 14 Sept 15 Sept 18 Sept 19 Sept 21 Sept 23 Sept 30

Ricky, the only shareholder, invested $20,000 in the company. Purchased inventory on account from Best Supplies Ltd $15 000. Purchased supplies for cash $120. Sold inventory on account to Toys 4 U $10 875, invoice no. 371, terms 1/7, n/30. Returned $450 worth of damaged goods to Best Supplies Ltd. Purchased inventory on account from Crisco Ltd $6750. Sold inventory on account to Mays Ltd $8700, invoice no. 372, terms 1/7, n/30. Paid Best Supplies Ltd on account less a 2% discount. Made cash sales for the week totalling $8010. Supplies on hand were $20.

– Ricky Ltd uses special journals (sales journal, purchases journal, cash receipts journal, cash payment journal) and general journal to record transactions under a perpetual inventory system. – Required – Using the selected accounts provided: Record the Sept transactions in the appropriate journal noted and post the Sept transactions to ledger accounts. The University of Sydney

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Example – Sept 1 Ricky, the only shareholder, invested $20,000 in the company. Cash Receipts Journal

Date

Account Credited

Sept 1 Share capital

Ref

Cash Dr

292

20,000

Discount Allowed Dr

CR1

Accounts Receivabl e Cr

Sales Cr

Other Accou nts Cr

Cost of Sales Dr Inventory Cr

20,000

General Ledger Share Capital Date

Sep-01

The University of Sydney

Explanation

Ref CR1

Debit

No.292 Credit Balance

20000

20000

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Example

– Sept 13: Purchased inventory on account from Best Supplies Ltd $15 000. – Remember: – If control and subsidiary accounts are involved, two changes are required: – 1) In journalising, both the control and subsidiary ledger accounts must be identified. – 2) In posting, there must be a dual posting – once to the control account and once to the subsidiary account.

The University of Sydney

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Example

When posting a column total that includes $15000 to Accounts Payable (control account) at the end of the month, you are posting $15000 for the second time.

– Sept 13: Purchased inventory on account from Best Supplies Ltd $15 000. Purchases Journal Date

P1

Account Credited

Ref

Sept 13 Best Supplies Ltd

√

Inventory Dr Accounts Payable Cr 15,000

Accounts Payable Subsidiary Ledger

Date

Sep-13

The University of Sydney

Best Supplies Ltd Explanation Ref Debit

P1

Credit

15000

Balance

15000

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Example – Sept. 14: Purchased supplies for cash $120.

Date

Account Debited

Sept. 14

Supplies

Cash Payments Journal Other Accounts Accounts Payable Ref Dr Dr

CP1 Inventory Dr

Discount Received Cr

120

127

Cash Cr

120

General Ledger Supplies Date

Sep-14

The University of Sydney

Explanation

Ref CP1

127 Debit

120

Credit

Balance

120

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Example...