MGA 311 Ch3

What is a Paper-Based Accounting System (manual accounting system)

• is when the accounting records are maintained on paper, and there is a significant amount of human processing that occurs

Paper Documents include:

• source documents

• accounts

• chart of accounts

• journals (special and general)

• ledgers (subsidiary and general)

• outputs

What is Step 1 of 4 of Paper- Based Accounting Systems?

Source Documents

What is Step 2 of 4 of Paper- Based Accounting Systems?

Record Journal Entry & Subsidiary Ledger

What is Step 3 of 4 of Paper- Based Accounting Systems?

Record to the General Ledger (GL)

What is Step 4 of 4 of Paper- Based Accounting Systems?

Prepare or generate outputs

What are source documents?

• Paper documents that are used to capture details related to the transaction being processed

• Can be referred to as input documents.

• Source documents need to be completed prior to the transaction being processed further.

• These can be prepared internally (by the company) or externally (by a customer, vendor, etc.).

• Contain key pieces of information that will later on support the accounting entry being made (if applicable).

Examples of Internal Source Documents:

sales invoice, purchase order, receiving report, cash receipts prelist

Examples of External Source Documents:

vendor invoice, customer purchase order, customer check, straight bill of lading

What are chart of accounts and how can they be useful? (Step #2)

• An organized list of every financial account in a company’s general ledger, acting as a master index to categorize all business transactions

What are specialized journals? (Step #2)

• journals used to record transactions that are of a particular nature

• Ex: a sales transaction being recorded in a sales journal

What are General Journals? (Step #2)

• a journal that is used to record all transactions that do not fit into one of the specialized journals.

• will need to post all of the journal entries recorded here separetely

• ex: write offs, dividends declared, reversal write off

What is a subsidiary ledger?

• detail of individual accounts that support and total to the control account

• commonly used for accounts receivable, accounts payable, fixed assets, employee earnings

• Ex: if a sale is made to a customer on credit, then the journal entry would be recorded in the Sales Journal (Debit to AR, Credit to Sales Revenue). However, the Debit to AR doesn’t tell you which customer purchased on credit, so the individual customer’s account would also need to be updated. Therefore, the AR Subsidiary Ledger would also be updated at this time.

What is the General Ledger used for? (Step #3)

• At the end of a period (month, quarter, year, etc.) the transactions recorded to both the special journals and general journal would be posted to the general ledger to update the ending account balance.

How do you post specialized journals to the General Ledger?

• For specialized journals, you can total all of the transactions made to a specific account and post the total (e.g., on the Cash Receipts Journal, total all Debit to Cash activity for the period and post the total to the G/L).

The General Ledger is a permanent ongoing document, meaning

you will see prior year balances of assets, liability, and equity accounts

What is used to prepare the financial statements?

The General Ledger

Once all previous steps are completed, generate output documents by which decisions can be made or analysis can be performed. Examples of outputs:

reports, basic financial statements, Aged A/R, Aged A/P, Payroll, and other internally generated reports

What is a computerized accounting system? (automated accounting system)

• is when the accounting records are maintained on computer files and there is less human processing that occurs compared to manual systems

Examples of Computerized Accounting System Include:

source documents (ex. invoice, purchase order, shipping confirmation), reference files, G/L Master files, Subsidiary ledger Master files, open files, transaction files, scratch files. backup file, archive files, and program file.

Examples of Direct Computer input:

• Making a purchase online (completing order info on computer vs. paper form)

• Processing a transaction at an ATM machine

• Purchasing items at a retailer using a Point-of-Sale (POS) machine

• Processing transactions using an Optical Character Recognition Scanner (OCR) (e.g., ATMs scanning checks to read dollar amounts)

What is source document automation?

the electronic capture of data

What are reference files?

files used for processing transactions repeatedly, such as product price lists, sales tax tables, etc. Also referred to as tables.

What are Open Files?

Files that contain data on transactions that have been started, but not yet fully processed

What are transaction files?

Files that store records containing transactions that have occurred of a particular type. These replace special journals or general journals in a paper-based system.

What are master files?

Files that store account balances at a particular point in time by which reports (outputs) can be generated.

What is a scratch file?

Temporary file created during the processing of a transaction and later discarded.

What is a backup file?

Duplicate copy of the files in the event of corruption, security concerns, or other issues.

What is an archive file?

Permanent record of the transactions that occurred during a particular time period, usually "read only".

What is the program file?

Details over how the computer program works, instructions for the computer on how to process

How do computerized and paper based systems differ in terms of processing transactions?

• In a paper-based system, a human processes transactions; in a computerized system, the computer performs processing based upon program code.

• Once the transaction is input, the computer program takes over.

• The computer determines dollar amounts and/or performs other calculations.

• The computer records the entry in applicable files (transaction, master, open files) while referencing necessary files.

• Outputs are automatically updated to reflect processed transactions.

What is Batch Processing?

• In a computerized accounting system, transactions can be processed and recorded at different frequencies.

• Transactions are grouped together and processed at one time to achieve efficiencies.

• Example: Transactions received up to 12:00 PM process at 12:15 PM daily; transactions received after 12:00 PM until 5:00 PM process at 5:15 PM daily.

• Occurs at a certain time per day, frequency, or quantity threshold.

What common industry uses batch processing?

banks

What is Real-Time processing?

• Each transaction is processed individually and immediately.

• Example (Grocery store purchase):

  • Sale is recorded for the full amount, including payment method (cash, check, credit card, gift card, etc.)

  • Inventory is removed from perpetual records.

  • Cost of goods sold is recorded.

  • All store records update within seconds of completing the purchase.

  • Other examples: Using "check availability" options for online retailers.

Due to paper used, there is an audit trail of each transaction.: Paper or Computerized?

Paper

Can follow transaction flow easily. Paper or Computerized?

paper

If a mistake is made in one section, it will flow through.Paper or Computerized?

paper

Due to reliance on humans, more subject to errors.: Paper or Computerized?

Paper

Can be more cumbersome to prepare reports and outputs.: Paper or Computerized?

Paper

Can still process in the event of a power outage.: Paper or Computerized?

Paper

If not on site, cannot access records.: Paper or Computerized?

Paper

Due to electronic files retained, it is not as easy to follow a transaction (lose some "audit trail").: Paper or Computerized?

Computerized

As processing occurs by computer, if programmed correctly, it will process consistently.: Paper or Computerized?

Computerized

Easy to generate reports and other outputs.: Paper or Computerized?

Computerized

Heavily reliant on technology and electricity. : Paper or Computerized?

Computerized

Can access records off-site.: Paper or Computerized?

Computerized

Can sync up to other technologies.: Paper or Computerized?

Computerized