ACCT341, Ch. 7 NotesBusiness Process Fundamentals

• The accounting cycle begins when an accounting event occurs. Accounting personnel document the event with some sort of a source document.

• A source document is a piece of paper or electronic form that records a business activity such as the purchase or sale of goods.

When to Record

The Accounting Cycle

1.1. AnalyzeAnalyze

2.2. JournalizeJournalize

3.3. Post to LedgerPost to Ledger

4.4. Prepare Trial BalancePrepare Trial Balance

5.5. Prepare Financial Prepare Financial StatementsStatements

6.6. Closing EntriesClosing Entries

7.7. Reversing EntriesReversing Entries

The accounting cycle is not what the teacher rides to school each dayThe accounting cycle is not what the accounting prof rides to school each day

Journals

• Accounting personnel record transactions in a journal, the book of original entry.

• The journal is a chronological record of business events by account.

Types of Journals

• Sales – all credit sales• Purchases – all credit purchases• Cash Receipts – all incoming cash• Cash Disbursements – all outgoing cash• General – any transactions that don’t fit above

Newer accounting software often uses different modules or navigators in place of these journals (e.g. QuickBooks)

Traditional Journals

Traditional Accounting Software: Checkmark Multiledger

Journals

QuickBooks Journals

Ledgers

• A ledger may be a general ledger or a subsidiary ledger.– A general ledger is a book of T-accounts, listing all

transactions that affect each account.

– A subsidiary ledger contains detailed records pertaining to a particular control account in the general ledger (e.g. A/R, A/P, PP&E)

• Posting to ledgers can be done in batches or in real-time.

General Ledger

The general ledger is a book of T-accounts

General Ledger is not a war hero

Dr Cr Dr CrDr Cr

Origins of Double Entry Acctg

• 15th century Franciscan monk and mathematician, Luca Pacioli, made famous the concept of double-entry accounting in his book Summa de Arithmetica, printed in 1494 (he did not claim to invent double-entry accounting)

• Double-entry accounting is derived from a basic premise in algebra, that what happens to one side of the equal sign must happen to the other.

• Pacioli first used the terms Debit and Credit (from Latin word Debitore and Creditore which means "shall give" and "shall have", respectively) simply to reflect the left and right sides of his ledger

• Bookkeeping today have changed little since Pacioli, who said that you first start with an inventory of assets and liabilities, listed in order of decreasing liquidity. His trial balance was to ensure that dr = cr and thus reduce transpositional and other mistakes, “which mistake you will have to look for diligently with the industry and intelligence God gave you.”

Trial Balances

• Once an AIS records journal entries and posts them to the general ledger, the system can create a trial balance.

• Three end of period trial balances are needed:– A preadjusting trial balance after all entries have

been posted;– An adjusted trial balance after adjustments have

been recorded and posted;– A postclosing trial balance after temporary

accounts have closing entries have been recorded and posted.

Financial Statements

• Financial statements are the primary output of a financial accounting system.

• These statements include:– Income Statement/Comprehensive Income– Statement of Owners Equity– Balance Sheet– Statement of Cash Flows

Types of Codes

• Mnemonic Codes give visible clues concerning the objects they represent (e.g. S, M, L XL, XXL).

• Sequence Codes assign numbers or letters in consecutive order (e.g. Check numbers).

• Block Codes are sequential codes in which specific blocks of numbers are reserved for particular uses (e.g. Chart of accounts).

• Group Codes reveal two or more dimensions or facets pertaining to an object (e.g. fund/asset/cur. asset/acct no.= 1-1-1-10)

Block Code Example

Sales Process Summary

Inputs to the Sales Process

• Sales Order - prenumbered and usually prepared in multiple copies; used to prepare sales invoice

• Sales Invoice - prepared after shipment of goods or providing of a service

• Remittance Advice - serve as source document for credits to accounts receivable

• Shipping Notice - warehouse prepares after goods are released for shipment, lets A/R know when to bill

• Debit/Credit memo – debit memos increase customer A/R for additional charges, (change in order, rework, etc.). Credit memos decrease A/R for sales returns and allowances

Sample Sales Invoice

Purchasing Process Summary

Outputs of the Sales Process

• Financial Statement Information • Customer Billing Statement - includes

customer account activity such invoices & payments for a period of time

• Accounts Receivable Aging Report - contains data concerning the status of open balances of all active credit customers arranging the overdue amounts by time periods

Inputs to thePurchasing Process

• Purchase Requisition - shows items requested by original department needing purchased goods/services

• Purchase Order - based on purchase requisition, sent to vendor

• Purchase or Vendor Invoice – bill for purchase• Receiving Report - reflects the count and condition of

received goods• Bill of lading – receipt to vendor from common carrier,

accompanies the goods sent• Packing slip – included in the merchandise package

Sample Purchase Order

IT in Sales and Purchasing

• Electronic input– Voice, touch-tone telephones, bar codes,

magnetic ink (MICR), wireless shopping (your own mobile check-out device)

• Inventory Management Systems– RFID Tags

Business Processes Outsourcing

• Business processes outsourcing – focusing on your core competencies

• E.g. WWU• See next slide. Many companies outsource

many of their backoffice functions: HR, billing/collecting, tech support, printing, info services, training, payroll, accounting, etc.)

• Outsourcing to other countries is not all bad – offshoring ($1 offshored to India generates $1.13 net value to U.S.)

BPO Examples

Business Processes Management

• Business process management (BPM) software are add-ons to the main database that enable management to have better data to make decisions.

• E.g. Hundreds of add-ons for QuickBooksSee http://marketplace.intuit.com/