Acct 474 Fall15 SUA - Ron

Systems Understanding AID

Accounting 474: Accounting Information Systems (AIS)Fall 2015

University of Illinois-ChicagoCollege of Business Administration

Everything you ever wanted to know about...The Accounting Cycle

Todays AgendaReview of the manual Accounting Cycle6 Major SubcyclesBegin the SUAInternal Controls in the SUA

The Accounting CycleSUA Reference p.10TransactionsOccurPrepareDocumentsRecord inJournalsPost to Ledgers PrepareUnadjustedTrial BalancePrepare and Post AdjustingEntriesPrepare Adjusted TrialBalancePrepareFinancialStatementsPrepareClosingEntries

The Accounting CycleSubcycle (transaction cycle): Group of related business activities that result in repetitive patterns of transactions

6 Major SubcyclesRevenueCycleExpenditureCycleHumanResourcesCycleGeneralLedger andReportingCycleProductionCycleFinancingCycle

Revenue Cycle in SUAInstructions pp. 18-21Consists of:Credit SalesCash SalesBad Debt Write-offsSales ReturnsCash ReceiptsRevenueCycle

Revenue Cycle in SUACredit Sale1. Customer Purchase Order2. Approve Credit3. Bill of Lading 4. Sales Invoice5. Pack and ship order6. Review and approve documents7. Mail invoice to customer8. Make the entry in the Sales Journal and then update the A/R Subsidiary Ledger

Introduction to SUAWaren Sports SupplySUA package materialsSupplemental materialsWorksheet

Introduction to SUASUA package materialsReference bookDocuments FolderOther file tabsJournal bookInstructions/Flowcharts/Ledgers book

Introduction to SUASupplemental materialsAssignment ScheduleFile System pageCheck Figures Grading SheetTransaction List (Alternate)Document No.1Price Lists (Alternate) Document No. 3

Introduction to SUAWorksheetWorksheet is already prepared as Excel spreadsheetDownload this spreadsheet from the 474 Blackboard (you dont need the spreadsheet worksheet until SUA 3)

Alter the SUA package!!!From your Documents File, throw away:

the blue Transaction List A the green Transactions List B(we will be using the Transaction List in the course packet handout)

Alter the SUA package!!!Also, from your Documents File, throw away: 1 green Worksheet 1 green Post-closing Trial BalancePrice Lists Document 3 (we will be using Price list in the packet)We will use the Excel spreadsheet worksheet instead (in SUA 3).

Warens SubcyclesRevenue cycle (Waren: Sales and cash receipts cycle)Expenditure cycle (Waren: Purchases and cash disbursements cycle)Human resources cycle (Waren: Payroll cycle)General Ledger and Reporting cycle (Waren: not specifically mentioned)Production cycle (doesnt apply to Waren)Financing cycle (Waren doesnt have much external financing)

SUA AssignmentsSUA 1 - Sales and cash receipts cycleSUA 2 - Purchases and cash disbursements cycleSUA 3 - Payroll cycle and G/L cycle

Waren PersonnelRay Kramer Salaried managerJim Adams Hourly accounting clerkNancy Ford Hourly production and billing

Use this semesters transaction set and your own numbers

Lets get started...Label the transactions9 S&CR, 8 P&CD, 2 PayrollSUA 1SUA reference - chapter 3Flowcharts - pp. 18-21Review all S&CR transactionsDo December 19 S&CR transaction credit sale to Clayborn University

Pull out the documents involvedGO TO THE FLOWCHART TO FIND WHERE TO BEGINFollow all the legs of the flowchart to their ends

Not every item involves a journal entryEvery journal entry goes in ONE journal ONCE. Update subsidiary ledgers as necessary. NEVER enter anything in the General Ledger.How to do the SUA

Working with flowchartsFlowcharts are written in a compact form, to cover multiple possibilities. You have to mentally edit them to fit each particular case.

Notes on Revenue CycleCash receiptsCash is always handled the same way. Endorse checkWrite on prelistPut on deposit slip Make an entry in the Cash Receipts Journal Update the A/R subsidiary ledger, IF NECESSARY!

All checks for the day are put together on a deposit slip and taken to the bank at the end of the day. You have 3 deposit slips.

Notes on Revenue CycleA/R Write-offs

2 methods:Direct Write-off MethodAllowance Method (Warens method)

Notes on Revenue CycleDirect Write-off MethodNo Allowance is made for write-offs ahead of time. GAAP permits this when write-offs are INFREQUENT & IMMATERIAL.

When write-off occurs:

??? XXX

??? XXX

Notes on Revenue CycleDirect Write-off MethodNo Allowance is made for write-offs ahead of time. GAAP permits this when write-offs are INFREQUENT & IMMATERIAL.

When write-off occurs:

A/R XXX

Bad Debts Expense XXX

Notes on Revenue CycleAllowance Method (Warens Method)

Notes on Revenue CycleSales Returns on credit saleApprove sales returnReceive goods, fill out receiving report, process credit memo to credit customer acct.

On to controls

Todays AgendaFinish SUA 1Begin SUA 2 Review Expenditure CycleInventory SystemsInternal Controls & AIS (Ch. 6)

Pull out the documents involvedGO TO THE FLOWCHART TO FIND WHERE TO BEGINFollow all the legs of the flowchart to their ends

Not every item involves a journal entryEvery journal entry goes in ONE journal ONCE. Update subsidiary ledgers as necessary. NEVER enter anything in the General Ledger.How to do the SUA

Working with flowchartsFlowcharts are written in a compact form, to cover multiple possibilities. You have to mentally edit them to fit each particular case.

At the end of SUA 1...All documents in S&CR are properly processed and filedAll necessary entries are made in journals and Subsidiary LedgersMonthly statement for customer is completeA/R aged trial balance (p. 45) is complete (Exclude zero balances!)

A/R Aged Trial Balance (Reference Manual p.45 )2013

How to make good schedulesType up in ExcelLine up numbers in columnsShow pennies, even when .00Use Accounting number formatUnderline columns, double underline totals

Hard Work Often Pays Off Over Time, But Laziness Always Pays Off Now

Expenditure Cycle in SUAInstructions pp. 22-24Consists of:Credit PurchasesCash PurchasesPurchase ReturnsCash DisbursementsExpenditureCycle

Expenditure Cycle in SUACredit Purchase1. Prepare purchase order (p.o.)2. Approve purchase order3. Send p.o. to vendor4. Receive goods, prepare receiving report5. Receive vendor invoice6. Match documents and approve for payment7. Make the entry in the Purchases Journal and then update the A/P Subsidiary Ledger

Inventory SystemsThere are two basic types of inventory systems:1) Perpetual Inventory2) Periodic Inventory

Which one is becoming more common? Perpetual

Inventory SystemsPerpetual InventoryIn Perpetual Inventory:1) Use an Inventory Subsidiary Ledger2) No Purchases account 3) Count inventory to determine shrinkage (not necessarily every period)

Inventory SystemsPerpetual Inventory - EntriesSales Entries:

A/R xxx Sales xxx

COGS xx Inventory xxPurchases Entry:

Inventory xx A/P xx

A/P xx Purchase Returns xx

A/P xxx Cash xx Purchase Discounts xx

Inventory SystemsPerpetual InventoryAdvantages:1) Better control over inventory2) Essential for JIT3) Becoming essential to be competitive

Disadvantages:More costly than periodic, though costs are decreasing with better technology.

Inventory SystemsPeriodic InventoryIn Periodic Inventory (Warens method):1) No Inventory Subsidiary Ledger2) Use Purchases account 3) At end of period count inventory to determine COGS at end of every period (shrinkage will be included)

Inventory SystemsPeriodic Inventory - EntriesPurchases Entry:

Purchases xx A/P xx

A/P xx Purchase Returns xx

A/P xxx Cash xx Purchase Discounts xxSales Entries:

A/R xxx Sales xxx

Inventory SystemsPeriodic Inventory - Calculating Ending Inventory1) Count the inventory items (# of units)2) Calculate ending inventory: (# of units)(cost per unit) = Ending Inv. Value3) In an adjusting entry, replace old inventory balance with new balance, close out purchases accounts and Freight-In, and record (plug) COGS (You do this in SUA 3 , an example entry is in the Reference book p. 79)

Inventory SystemsPeriodic InventoryAdvantages:1) Cheaper recordkeeping

Disadvantages:1) Less control over inventory2) Cant be used with JIT3) Less competitive strategy in high tech environment

Warens SystemNotes:Waren uses the periodic system, they have a Purchases accountThe Purchases journal is used for any kind of purchase, (fixed assets, small expenses, inventory), but only inventory purchases are debited to the Purchases accountIn the purchase of laptop computers on 12/31/13, only process the purchase, do not pay the invoice, even though the payment terms state: Due on receipt of invoice.

Waren Sports SupplyAccounts Payable Trial BalanceDecember 31, 2013Vendor No. Name Amount Payable 503 Sears $ 356.30 510 Brown & Root 3,496.00 545 Lapland & Co. 2,450.00

TOTAL $ 6,302.30

A/P Trial Balance (Reference Manual p.61 )

Todays AgendaFinish SUA 2Review SUA 3Internal Controls, Financial Statements and Auditing

At the end of SUA 2...All documents in P&CD are properly processed and filed

All necessary entries are made in journals and Subsidiary Ledgers

A/P trial balance is complete

Waren Sports SupplyAccounts Payable Trial BalanceDecember 31, 2013Vendor No. Name Amount Payable 503 Sears $ 356.30 510 Brown & Root 3,496.00 545 Lapland & Co. 2,450.00

TOTAL $ 6,302.30

A/P Trial Balance (Reference Manual p.61 )

SUA 3Payroll Cycle - 2 transactions

General Ledger and Reporting CycleDo end of period proceduresAJEsFinancial StatementsClosing entries

Prepare SUA for submission

Payroll Cycle in SUAInstructions p. 24Consists of:TimekeepingPaymentsPayrollCycle

Payroll Cycle in SUA1. Hourly Employees work and fill in time cards2. Approve hours on time cards and give to accounting department3. Calculate payroll amounts4. Record in Payroll Journal and Employee Earnings Subsidiary Ledger5. Generate paychecks6. Review and sign paychecks7. Distribute paychecks to employees8. Make the entry in the Cash Disbursements Journal

Lets do a Payroll ClinicThere are 2 entries made for payroll

Federal Income Tax Withholding Payable XX State Income Tax Withholding Payable XX FICA Payable XX

Salaries Expense Entry Cash XXSalaries & Wages Expense XXX This entry looks different in the Payroll Journal, but it is the same entry

FUTA Payable XX SUTA Payable XX FICA Payable XX

Payroll Tax Expense Entry Payroll Tax Expense XXX Make this entry in the General Journal

EmployeeIndependent Contractor

Employment Arrangements

http://www.irs.gov/pub/irs-pdf/p15.pdf

self-employedSchedule C on 1040 tax formSelf employment taxFICA x 2Self employment tax > 13%

Independent Contractor

Notes on Payroll CycleBe careful with Time Card calculationHours are calculated in hundredths (1/100) of an hour, not minutes (1/60).

Nancy Fords time card for December 2616.86 - 7.50 9.36 hours

Notes on Payroll CycleThe pay increase on Dec. 20th applies to the whole pay period, ie. from Dec. 16th

The withholding amounts for employees income taxes are given to you in the Dec. 20th transaction; you dont have to calculate them.

Notes on Payroll CycleSUTA & FUTA percentages (2.7%, 0.8%) are given in instruction manual page 13. Apply to only first $7000 of annual income.

How much have employees already earned?

Calculate SUTA & FUTA only on Nancy Fords pay!

Notes on Payroll CycleFICA tax is 6.2% + 1.45% = 7.65%. (p. 8 of Instructions book)6.2% Social Security wages up to $102,0001.45% Medicare - all wages

So, per employee:For first $102,000 x 7.65%For amounts over $102,000 x 1.45%

No Waren employee has earned over $102,000, so use combined rate of 7.65%

Notes on Payroll CycleThe payroll check numbers can be in any order as long as you have all of them.

Ray Kramer signs all the checks, including his own paycheck!

End of Period ProceduresFollow instructions in project - do all procedures not done in previous parts of SUA (follow the Assignment Schedule)Month-end procedures 1-7Bank reconciliation, unemployment taxes, etc.Note: These are not adjusting entries, they are normal entries of the periodYear-end procedures 1-7worksheetAdjusting entries 5 AJEs (4 + 1)Closing entries 3 Closing entries (no Dividends)

Adjusting Journal Entry NotesDepreciation policy is the half-year convention.

Bad Debts method is given on last page of Transaction List

Ending Inventory figure given on last page of Transaction List

The form of Inventory AJE is shown on p. 79 of the Reference book. (next slide)

DR CRInventory xx or xxPurchase Discounts xxPurchase Returns xxCost of Goods SoldPLUG Purchases xx Freight-In xx

AJE for Inventory

AJE for Inventory DR CRInventory xx or xx

DR CRInventory xx or xxPurchase Discounts xxPurchase Returns xx

Purchases xx Freight-In xx

DR CRInventory xx or xxPurchase Discounts xxPurchase Returns xxCost of Goods SoldPLUG Purchases xx Freight-In xx

End of Period ProceduresClosing Entries Close Revenues & Gains to Income Summary Close Expenses & Losses to Income SummaryClose Income Summary to Retained EarningsClose Dividends to Retained Earnings

(Sample Entries: p. 23 Reference Book)

End of Period ProceduresNotes:Use worksheet spreadsheet on web siteAJE for income tax accrual: Use worksheet Financial Statements automatically prepared on spreadsheetThe only columns you need to fill in on the worksheet are the Unadjusted Trial Balance and the Adjustments (green columns)

End of Period ProceduresFinding Errors in the worksheet

Calculate the difference between DR and CR and:Look for that number in your entries and posting (you may have forgotten to post the number)Look for an amount that is exactly half of that difference (you may have posted a debit as a credit or vice versa)Divide the difference by 9 and see if it divides with no remainder (indicates a transposition error)

Postings include: Cash 25 A/R 25

Resulting Post-Closing Trial Balance: DR CR Cash 50 A/R 100 A/P 75 Common Stock 75 150 150

If you mispost: Cash 25 A/R 25

Resulting Post-Closing Trial Balance: DR CR Cash 50 A/R 125 A/P 100 Common Stock 75 150 150As: Cash 25 A/P 25 No Difference!!!


Resulting Post-Closing Trial Balance: DR CR Cash 50 A/R 150 A/P 75 Common Stock 75 200 150As: Cash 25 A/R 25 200 150 = 50 / 2 = $25 error


Resulting Post-Closing Trial Balance: DR CR Cash 50 A/R 73 A/P 75 Common Stock 75 123 150As: Cash 25 A/R 52 150 123 = 27 / 9 = 3.000 no remainder must be a TRANSPOSITION ERROR

Fixed Asset Trial Balance (Reference Manual p.61 )Do after depreciation AJE is made and postedWaren Sports Supply Fixed Asset Trial BalanceDecember 31, 2013ASSET Cost Accumulated Net Depreciation Book ValueComputers $ 15,000.00 $12,000.00 $ 3,000.00Furniture 10,000.00 10,000.00 0.00Equipment 25,000.00 8,000.00 17,000.00 TOTALS $ 50,000.00 $ 30,000.00 $ 20,000.00

SUA 3 - Completing the projectNotes:All AJEs and Closing entries are made in General Journal and are posted to G/LFoot all journals and ledgers From the spreadsheet, print off the Worksheet, the Income Statement, and the Balance Sheet and put in SUA envelopeTotal manual G/L balances and make sure they agree with the worksheet balancesDO NOT DO A STATEMENT OF CASH FLOWS

SUA 3 - Completing the projectA/R Trial BalanceA/P Trial BalanceFixed Asset Trial BalanceBank Reconciliation

MUST BE PRINTED OUT AND IN GOOD FORMHANDWRITTEN WORK WILL NOT RECEIVE CREDIT

How to make good schedulesType up in ExcelLine up numbers in columnsShow pennies, even when .00Use Accounting number formatUnderline columns, double underline totals

Use this semesters transaction set and your own numbers

Prepare project for submissionTape grading sheet to front of envelope and fill in name and section dayMake sure that your documents are all filed according to the File System page Remove the Reference ManualTape envelope shut Hand in Have a beer

Internal Controls & Auditing

What is Internal Control?Internal Control is a process implemented by the BOD and management that gives reasonable assurance that these objectives are achieved:Safeguard assetsEnsure accurate and reliable accounting (and other) informationImprove operational efficiencyPromote adherence to managerial policiesFinancial statements are prepared using GAAPComply with laws and regulations

Financial Statement AssertionsWho owns the financial statements of a company?

Financial Statement AssertionsWho owns the financial statements of a company? ManagementEvery number on the financialstatements represents a set ofclaims being made bymanagement known as:Assertions

Financial Statement AssertionsSales $ 1,500,000.00This statement asserts:

1. All sales are properly included, you have left none out2. All sales actually occurred, number represents actual sales made 3. Sales are properly valued, net of returns, allowances, discounts4. You have proper claim to revenue generated, sales belong to you


1. All sales are properly included, you have left none out2. All sales actually occurred, number represents actual sales made 3. Sales are properly valued, net of returns, allowances, discounts4. You have proper claim to revenue generated, sales belong to you COMPLETENESS


1. All sales are properly included, you have left none out2. All sales actually occurred, number represents actual sales made 3. Sales are properly valued, net of returns, allowances, discounts4. You have proper claim to revenue generated, sales belong to you COMPLETENESSEXISTENCE


1. All sales are properly included, you have left none out2. All sales actually occurred, number represents actual sales made 3. Sales are properly valued, net of returns, allowances, discounts4. You have proper claim to revenue generated, sales belong to you COMPLETENESSEXISTENCEVALUATION


1. All sales are properly included, you have left none out2. All sales actually occurred, number represents actual sales made 3. Sales are properly valued, net of returns, allowances, discounts4. You have proper claim to revenue generated, sales belong to you COMPLETENESSEXISTENCEVALUATIONRIGHTS/ OBLIGATIONS

Computerization does not change the assertions!!!

What changes in a computerized system is the design of the internal controls.

Auditing and RiskAuditors must give an opinion about the fairness of the financial statements.

To do this they use their knowledge of transaction cycles, assertions and the audit trail

Auditors cannot review every transaction, they must focus their audit work with an assessment of risk

Auditing and RiskTo audit Sales:

1. What is the risk of misstatement with Sales?

2. Which assertions may be false?

3. Use the Sales audit trail to design audit testing of SalesSales $ 1,500,000.00

Internal ControlsThe Audit Trail

The Audit Trail is the documentary evidence that links the source documents to the final numbers on the financial statements.

1. Customer Purchase Order2. Approve Credit3. Bill of Lading4. Sales Invoice5. Pack and ship order6. Review and approve documents7. Mail invoice to customer8. Make the entry in the Sales Journal and then update the A/R Subsidiary Ledger

Auditing Sales Credit Sale


G/LF/SAuditing Sales Credit Sale


G/LF/S


G/LF/SAuditing Sales Credit Sale

Auditing SalesCredit SaleOverstatement risk Existence assertion must be investigatedTest by vouching back up the audit trail ie. Sample entries in sales journal and look for matching customer p.o.s and sales invoicesUnderstatement risk Completeness assertion must be investigatedTest by tracing forward down the audit trail ie. Sample customer p.o.s and sales invoices and look for matching entries in sales journal

Very Common Audit TestsSales - ExistenceA/P - CompletenessFixed Assets - ValuationA/R - Existence and Valuation

For next class do the Auditing Questions in the course packet

Internal Controls & AuditingEND

Expenditure CycleAuditing QuestionsPopulation to sample? Examine what?

Were all goods billed by vendor properly authorized for purchase?Sample Vendor Invoices, vouch back to approved pos.Were all authorized pos properly received? Sample approved pos, trace forward to receiving reports

Payroll CycleAuditing QuestionsPopulation to sample? Examine what?

Were all paychecks issued for authorized hours worked?Sample Paychecks, vouch back to approved timecardsWere Salaries payable accruals understated? Sample timecards, trace forward to AJEs for salaries

ENDInternal Controls & Auditing

1. Customer Purchase Order2. Approve Credit3. Bill of Lading 4. Sales Invoice5. Pack and ship order6. Review and approve documents7. Mail invoice to customer8. Make the entry in the Sales Journal and then update the A/R Subsidiary Ledger

Audit Trail in the SUACredit Sale

Hard Work Often Pays Off After Time, But Laziness Always Pays Off Now

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