Accounting Systems and Internal Controls

Chapter 5
Accounting Systems and

Internal Controls
Accounting, 21st Edition
Warren Reeve Fess
© Copyright 2004 South-Western, a division

PowerPoint Presentation by Douglas Cloud of Thomson Learning. All rights reserved.
Professor Emeritus of Accounting
Pepperdine University Task Force Image Gallery clip art included in this
electronic presentation is used with the permission of
NVTech Inc.
Some of the action has been automated,
so click the mouse when you see this
lightning bolt in the lower right-hand
corner of the screen. You can point and
click anywhere on the screen.
Objectives
1. Define an accounting system and
After studying this
describe its implementation.
chapter, you should
2. List the three objectives of
be able to: internal
control, and define and give examples of
the five elements of internal control.
3. Journalize and post transactions in a
manual accounting system that uses
subsidiary ledgers and special journals.
Objectives
4. Describe and give examples of additional
subsidiary ledgers and modified special
journals.
5. Apply computerized accounting to the
revenue and collection cycle.
6. Describe the basic features of e-
commerce.
Basic
Accounting
System
Analysis
Design
Implementation
Objectives of Internal
Control
To provide reasonable assurance that:
1. assets are safeguarded and used
for business purposes.
2. business information is accurate.
3. employees comply with laws and
regulations.
Elements of Internal Control
1. Control environment
2. Risk assessment
3. Control procedures
4. Monitoring
5. Information and communication
2. Risk assessment
4. Monitoring
Management philosophy and
operating style influences the
control environment.
2. Risk assessment
4. Monitoring
Once risks are identified, they can be
analyzed to estimate their significance, to
assess their likelihood of occurring, and to
determine actions that will minimize them.
2. Risk assessment
4. Monitoring
Control Procedures
 Competent Personnel
 Rotating Duties
 Mandatory Vacations
 Separating Responsibilities for
Related Operations
 Separating Operations,
Custody of Assets, and
Accounting
 Proofs and Security Measures
Control Procedures
 Rotating Duties
Related Operations
Accounting
Otherwise,Separating
the following
Responsibilities
abuses are possible: for
Related
1. Orders Operations
may be placed on the basis of
friendship with a supplier, rather than on
price, quality, and other objective factors.
2. The quantity and quality of supplies received
may not be verified, thus causing payment
for supplies not received or poor-quality
supplies.
3. Supplies may be stolen by the employee.
4. The validity and accuracy of invoices may be
verified carelessly.
Control Procedures
 Rotating Duties
Related Operations
Accounting
Custody of
Assets Independent
check
Independent
check
Operations Accounting
Independent
check
2. Risk assessment
4. Monitoring
Clues to Potential Problems
Warning signs with regard to people:
1. Abrupt changes in lifestyle.
2. Close social relationships with suppliers.
3. Refusing to take a vacation.
4. Frequent borrowing from other employees.
5. Excessive use of alcohol or drugs.
Clues to Potential Problems
Warning signs from the accounting system:
1. Missing documents or gaps in
transaction numbers.
2. An unusual increase in customer
refunds.
3. Differences between daily cash receipts
and bank deposits.
4. Sudden increase in slow payments.
5. Backlog in recording transactions.
Manual Accounting
Systems
General Ledger and Subsidiary Ledgers
General Ledger
Cash 11 Accounts Receivable

Subsidiary Ledger
Accts. Rec. 12 Customer Accounts
A B C D
Supplies 14 Accounts Payable

Subsidiary Ledger
Accts. Pay. 21 Creditor Accounts
A B C D
Special Journals
SELLING
Providing services on account
recorded in Revenue journal
Receipt of cash from any source
recorded in Cash receipts journal
BUYING
Purchase of items on account
recorded in Purchases journal
Payment of cash for any purpose
recorded in Cash payments journal
The Revenue Journal
Revenue Journal Page 35
Invoice Post Accts. Rec. – Debit
Date No. Account Debited Ref. Fees Earned – Credit
1 1
2 2
3 3
4 4
5 5
6 6
All sales on account are recorded in

this journal. Each sales invoice is
listed in numerical order.
The Revenue Journal
2006
1 Mar. 2 615 MyMusicClub.com 2 2 0 0 00 1
2 2
3 3
4 4
5 5
6 6
Performed services on credit to

MyMusic.com, $2,200.
The Revenue Journal
2006
2 2
3 3
4 4
5 5
6 6
Notice that only one line is

required to make the entry.
Posting from the Revenue Journal
2006
2 2
3 3
4 4
5 5
6 6
To update the MyMusicClub.com account,

the $2,200 debit is posted to the accounts
receivable subsidiary ledger.
2006
2 2
3 3
4 4
Accounts Receivable Subsidiary Ledger
5 5
MyMusicClub.com
6 6
Date Item P.R. Debit Credit Balance
2006
Mar. 2 R35 2,200 2,200
2006
2 2
3 3
4 4
5 5
MyMusicClub.com
6 6
2006
Mar. 2 R35 2,200 2,200
This procedure is repeated for each posting

to the accounts receivable subsidiary ledger.
2003
2006
2 6 616 RapZone.com 1 7 5 0 00 2
3 18 617 Web Cantina 2 6 5 0 00 3
4 27 618 MyMusicClub.com 3 0 0 0 00 4
5 5
6 6
Assume that similar entries were

journalized and posted during the
month of March.
2006
2 6 616 RapZone.com 1 7 5 0 00 2
3 18 617 Web Cantina 2 6 5 0 00 3
4 27 618 MyMusicClub.com 3 0 0 0 00 4
5 5
31 9 6 0 0 00
6 6
On March 31, the revenue journal is

totaled and ruled.
Posting the Revenue Journal Total
2006
2 6 616 RapZone.com 1 7 5 0 00 2
3 18 617 Web Cantina 2 6 5 0 00 3
4 27 618 MyMusicClub.com 3 0 0 0 00 4
5 5
31 9 6 0 0 00
6 6
Next, the revenue journal’s total

($9,600) is posted to the general ledger.
GENERAL LEDGER
ACCOUNT Accounts Receivable Account No. 12
Post. Balance
Date Item Ref. Dr. Cr.
Dr. Cr.
2006
Mar. 1 Balance 3 400 00
31 R35 9 600 00 13 000 00
Revenue Journal, page 35

2006
2 6 616 RapZone.com 1 7 5 0 00 2
3 18 617 Web Cantina 2 6 5 0 00 3
4 27 618 MyMusicClub.com 3 0 0 0 00 4
5 5
31 9 6 0 0 00
6 (12)(41) 6
By placing the account number here, we

indicate that $9,600 has been debited to
Accounts Receivable in the general ledger.
GENERAL LEDGER
ACCOUNT Fees Earned Account No. 41
Post. Balance
Date Item Ref. Dr. Cr.
Dr. Cr.
2006
Mar. 31 R35 9 600 00 9 600 00
2006
2 6 616 RapZone.com 1 7 5 0 00 2
3 18 617 Web Cantina 2 6 5 0 00 3
4 27 618 MyMusicClub.com 3 0 0 0 00 4
5 5
31 9 6 0 0 00
6 (12)(41) 6
Placing “41” here indicates that $9,600 has

been posted to the credit side of Fees
Earned in the general ledger.
The Cash Receipts Journal
All transactions that involve
the receipt of cash are
recorded in the cash receipts
journal.
CASH RECEIPTS JOURNAL Page 14

Other Accounts
Post Accounts Receivable Cash
Date Account Credited Ref. Cr. Cr. Dr.
2006
Mar. 1 Rent Revenue 400 400
NetSolutions received $400 cash

on March 1 for the month’s rent.

Other Accounts
2006
19 Web Cantina 3,400 3,400
28 MyMusicClub.com 2,200 2,200
30 RapZone.com 1,750 1,750
During March, NetSolutions collected

cash from three customers.
Posting the Cash Receipts Journal

Other Accounts
2006
19 Web Cantina 3,400 3,400
30 RapZone.com 1,750 1,750
Each account under “Accounts

Receivable Cr.” is posted to the accounts
receivable subsidiary ledger.

Other Accounts
2006
19 Web Cantina 3,400 3,400
30 RapZone.com 1,750 1,750

Web Cantina
2006
Mar. 1 Bal. 3,400
18 R35 2,650 6,050
19 3,400 2,650

Other Accounts
2006
19 Web Cantina  3,400 3,400
30 RapZone.com 1,750 1,750

Web Cantina
2006
Mar. 1 Bal. 3,400
18 R35 2,650 6,050
19 CR14 3,400 2,650
After all journalizing and
posting to the accounts
receivable subsidiary ledger for
the month is complete, the
columns are totaled.
Other Accounts
2006
19 Web Cantina  3,400 3,400
28 MyMusicClub.com  2,200 2,200
30 RapZone.com  1,750 1,750
31 400 7,350 7,750
The total “Cash Dr.” column

equals the total of the two
credit columns.
Other Accounts
2006
19 Web Cantina  3,400 3,400
30 RapZone.com  1,750 1,750
31 400 7,350 7,750
GENERAL LEDGER
Account: Accounts Receivable No. 12
The three circled
Date Item P.R. items are Balance
Debit Credit
2006
posted to1 the
Mar. Bal general
 ledger. 3,400
Let’s post 31Accounts
R35 9,600
Receivable.13,000
Other Accounts
2006
19 Web Cantina  3,400 3,400
30 RapZone.com  1,750 1,750
31 400 7,350 7,750
GENERAL LEDGER
Account: Accounts Receivable No. 12
2006
Mar. 1 Bal  3,400
31 R35 9,600 13,000
31 CR14 7,350 5,650
Other Accounts
2006
19 Web Cantina  3,400 3,400
30 RapZone.com  1,750 1,750
31 400 7,350 7,750
( ) (12)
The $7,750 total in the Cash

Debit column is posted to
Cash in a similar manner.
The $400 credit to Rent Revenue
could have been posted earlier, but
posting it at the same time as other
general ledger accounts is proper.
A completely posted cash

receipts journal is shown in
the next slide.
Posted Cash Receipts Journal
Other Accounts
2006
Mar. 1 Rent Revenue 42 400 400
19 Web Cantina  3,400 3,400
30 RapZone.com  1,750 1,750
31 400 7,350 7,750
( ) (12) (11)
GENERAL LEDGER
Accounts ACCOUNT Accounts Receivable No. 12
Receivable Date Item P.R. Debit Credit Balance
Control Mar. 1 Bal  3,400
31 R35 9,600 13,000
Account 31 CR14 7,350 5,650
If the accounts receivable

account in the general ledger
only shows summary totals,
where are the individual
customer balances?
GENERAL LEDGER
Accounts ACCOUNT Accounts Receivable No. 12
Control Mar. 1 Bal  3,400
31 R35 9,600 13,000
Account 31 CR14 7,350 5,650
MyMusicClub.com
3/2 R35 2,200 2,200
3/27 R35 3,000 5,200
3/28 CR14 2,200 3,000
Accounts
RapZone.com
Subsidiary 3/6
3/30
R35 1,750
CR14 1,750
1,750
--
Ledger Web Cantina
3/1 Bal.  3,400
3/18 R35 2,650 6,050
3/19 CR14 3,400 2,650
The purchases journal is
designed for recording all
purchases on account.
Journalizing in the Purchases Journal
PURCHASES JOURNAL Page 11
Accts. Other
Post Payable Supplies Accounts Post
Date Account Credited Ref. Cr. Dr. Dr. Ref. Amount
2006
Mar. 3 Howard Supplies 600 600
On March 3, 2003, NetSolutions

purchased supplies from Howard
Supplies, $600.
Posting the Purchases Journal
Accts. Other
2006
Accounts Payable Subsidiary Ledger

Howard Supplies
Date Item P.R. Dr. Cr. Balance
2006
Mar 3 the accounts payable
To keep 600 600
subsidiary ledger current, this entry

is posted on March 3.
Accts. Other
2006
Accounts Payable and Supplies will

be posted as totals.
Accts. Other
2006
7 Donnelly Supplies 420 420
On March 7, NetSolutions
purchased supplies from Donnelly
Supplies, $420.
Accts. Other
2006
Accts. Other
2006
12 Jewett Bus. Sys. 2,800 Off. Equip. 2,800
Because
On March there
12, isn’t a special purchased
NetSolutions column for
office
Office
equipment
Equipment,from
thisJewett
purchase
Business
was
recorded under “Other
Systems, Accounts Dr.”
$2,800.
Accts. Other
2006
19 Donnelly Supplies 1,450 1,450
27 Howard Supplies 960 960
Now, let’s look at the rest of March’s entries

(assume that all postings to the accounts payable
subsidiary ledger have been made).
Totaling the Purchases Journal
Accts. Other
2006
31 6,230 3,430 2,800
At the end of March, all columns are totaled

$6,230 = $3,430 + $ 2,800
and equality of debits and credits is verified.
Accts. Other
2006
31 6,230 3,430 2,800
The next step is to post to the

general journal.
Accts. Other
2006
31 6,230 3,430 2,800
GENERAL LEDGER
ACCOUNT Accounts Payable No. 21
Mar. 1 Bal 1,230
31 P11 6,230 7,460
Accts. Other
2003
31 6,230 3,430 2,800
(21)
GENERAL LEDGER
ACCOUNT Accounts Payable No. 21
Mar. 1 Bal 1,230
31 P11 6,230 7,460
Accts. Other
2003
12 Jewett Bus. Sys. 2,800 Off. Equip. 18 2,800
31 6,230 3,430 2,800
(21) (14)
Supplies is posted as a total of $3,430

to general ledger account 21. Office
Equipment is posted individually.
Accts. Other
2006
12 Jewett Bus. Sys. 2,800 Off. Equip. 18 2,800
31 6,230 3,430 2,800
(21) (14) ( )
NetSolutions had only one entry in the

“Other Accounts Dr.” column. If there were
others, they would be posted individually.
Therefore, the total is not posted. A check
mark indicates that the total was not posted.
The Cash Payments
Journal
All payments are
recorded in the cash
payments journal.
NetSolutions makes all
payments by check.
Let’s make all of the
cash payment journal
entries for March.
CASH PAYMENTS JOURNAL PAGE 7
Other Accounts
Ck. Post Accounts Payable Cash
Date No. Account Debited Ref. Dr. Dr. Cr
2006
Mar. 2 150 Rent Expense 1,600 1,600
On March 2, NetSolutions paid

the rent for March by issuing
Check No. 150 for $1,600.
Other Accounts
2006
15 151 Grayco Supplies 1,230 1,230
On March 15, issued Check No. 151 to

Grayco Supplies on account, $1,230.
Other Accounts
2006
15 151 Grayco Supplies  1,230 1,230
Accounts Payable Subsidiary Ledger

Let’s postGrayco
to the accounts payable
Supplies
Date Item P.R. Dr. Cr. Balance
subsidiary Mar.
ledger
3 Bal.
at this time to keep1,230
the creditor’s
15 account current.
CP7 1,230 ---
Other Accounts
2006
15 151 Grayco Supplies  1,230 1,230
21 152 Jewett Business Sys. 2,800 2,800
On March 21, issued Check No.

152 as payment on account to
Jewett Business Systems, $2,800.
Other Accounts
2006
15 151 Grayco Supplies  1,230 1,230
21 152 Jewett Business Sys.  2,800 2,800
22 153 Donnelly Supplies. 420 420
On March 22, issued Check No.

153 as payment on account to
Donnelly Supplies, $420.
Other Accounts
2006
15 151 Grayco Supplies  1,230 1,230
22 153 Donnelly Supplies.  420 420
30 154 Utilities Expense 1,050 1,050
On March 30, issued Check No. 154 as

payment for utility bill, $1,050.
Other Accounts
2006
15 151 Grayco Supplies  1,230 1,230
31 155 Howard Supplies 600 600
On March 31, issued Check

No. 155 on account to Howard
Supplies, $600
Other Accounts
2006
15 151 Grayco Supplies  1,230 1,230
31 155 Howard Supplies  600 600
31 2,650 5,050 7,700
The journal is ruled, summed, and

verified for equality of debits and
the “Cash Cr.” column.
Other Accounts
2006
Mar. 2 150 Rent Expense 52 1,600 1,600
15 151 Grayco Supplies  1,230 1,230
30 154 Utilities Expense 54 1,050 1,050
31 155 Howard Supplies  600 600
31 2,650 5,050 7,700
( ) (21) (11)
Individual items in the “Other Accounts Dr.”

column are posted. Then the totals for “Accounts
Payable Dr.” and “Cash Cr.” are posted.
Accounts Payable
Control
Accounts Payable
GENERAL LEDGER
Accounts Payable ACCOUNT Accounts Payable No. 12
(Controlling) Mar. 1 Bal 1,230
31 P11 6,230 7,460
31 CP7 5,050 2,410
Donnelly Supplies
Mar 2 P11 420 420
19 P11 1,450 1,870
22 CP7 420 1,450
Accounts
Jewett Business
Payable Grayco Supplies
SystemsSubsidiary
also has Mar 1 Bal. 1,230
15  CP7 1,230 0
a zero balance, so
Ledger --
Howard Supplies
that account was Date Item P.R. Debit Credit Balance
Mar 3 P11 600 600
omitted for space 27 P11 960 1,560
31 CP7 600 960
reasons.
Advantages of a Computerized
Accounting System Over a
Manual Accounting System
1. Computerized systems simplify the record-
keeping process.
2. Computerized systems are generally more
accurate.
3. Computerized systems provide management
current account balance information to
support decision making.
The Revenue and Collection
Cycle in QuickBooks
From Exhibit 10, page 203 of textbook
Mail invoice to
customer
Cycle in QuickBooks Continued
Cycle in QuickBooks Continued
Advanced Areas Where the
Internet is Being Used for
Business Purposes
Supply chain management (SCM)
Customer relationship management (CRM)
Product life-cycle management (PLM)
Chapter 5
The End

Accounting Systems and Internal Controls

Uploaded by

Document Informationclick to expand document information

Document Informationclick to expand document information

Copyright:

Available Formats

Accounting Systems and Internal Controls

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Accounting Systems and Internal Controls

Uploaded by

Copyright:

Available Formats

Chapter 5

Accounting Systems and

© Copyright 2004 South-Western, a division

Cash 11 Accounts Receivable

Accts. Rec. 12 Customer Accounts

Supplies 14 Accounts Payable

Accts. Pay. 21 Creditor Accounts

All sales on account are recorded in

Performed services on credit to

Notice that only one line is

To update the MyMusicClub.com account,

This procedure is repeated for each posting

Assume that similar entries were

On March 31, the revenue journal is

Next, the revenue journal’s total

ACCOUNT Accounts Receivable Account No. 12

31 R35 9 600 00 13 000 00

Revenue Journal, page 35

By placing the account number here, we

ACCOUNT Fees Earned Account No. 41

Placing “41” here indicates that $9,600 has

CASH RECEIPTS JOURNAL Page 14

NetSolutions received $400 cash

CASH RECEIPTS JOURNAL Page 14

During March, NetSolutions collected

CASH RECEIPTS JOURNAL Page 14

Each account under “Accounts

CASH RECEIPTS JOURNAL Page 14

Accounts Receivable Subsidiary Ledger

CASH RECEIPTS JOURNAL Page 14

Accounts Receivable Subsidiary Ledger

The total “Cash Dr.” column

The $7,750 total in the Cash

A completely posted cash

If the accounts receivable

On March 3, 2003, NetSolutions

Accounts Payable Subsidiary Ledger

subsidiary ledger current, this entry

Accounts Payable and Supplies will

Now, let’s look at the rest of March’s entries

At the end of March, all columns are totaled

The next step is to post to the

Supplies is posted as a total of $3,430

NetSolutions had only one entry in the

On March 2, NetSolutions paid

On March 15, issued Check No. 151 to

Accounts Payable Subsidiary Ledger

On March 21, issued Check No.

On March 22, issued Check No.

On March 30, issued Check No. 154 as

On March 31, issued Check

The journal is ruled, summed, and

Individual items in the “Other Accounts Dr.”

You might also like