Introduction to Systems Design

One element of AIS would be Cash Receipts. Actions required for Cash Receipts: Receive Check Deposit in Bank Record receipt in Books Receive Check

Recor d Recei pt

CR Jrl

AR Ldg

Deposit Slip

Deposit in Bank

What could go wrong? Someone could steal checks/cash Errors could occur check for $100 deposited but recorded as $10 Internal Controls: To control (can never completely eliminate) fraud and errors, we add internal controls to basic AIS. A fundamental Internal Control concept is: No one person should have control of a transaction from beginning to end. In internal controls we call this Segregation of Duties. Page 21 of Instructions Flowcharts Ledgers shows how the basic steps of receiving and recording cash receipts are divided among three employees. Adequate Documents and Records is a second Internal Control concept. Notice in the flowchart that a Cash Receipts Prelist is prepared by Jim Adams. The Prelist helps accomplish the 1

Segregation of Duties and a third Internal Control concept of Independent Checks on Performance. Review the following abbreviated version of the flowchart on page 21. Jim Adams Receive Cks Endorse & Enter on Prelist Ray Kramer 1

Nancy Ford Receive deposit slip from bank

Checks

Checks Prelist

Prepa re depo sit slip & depo sit CRJ

Agree to Prelist & CRJ

Recor d in CRJ & AR Sub File Preli st

AR Sub

Prelist Deposit receipt Fil e

To Bank

Have we achieved adequate internal controls over Cash Receipts? We divided the task among three employees so we have segregation of duties. Nancy Ford checks on the performance of both Adams and Kramer by comparing the bank validated deposit slip to the Cash Receipts Prelist and Cash Receipts Journal. Is there, however, a weak link?

Another Internal Control concept is there should be Safeguarding of Assets. Ideally, a fourth person (someone who has no accounting duties) should receive the checks, restrictively endorse them, prepare the Cash Receipts Prelist, and then give the Prelist to Adams and the checks to Kramer. We appear to have an internal control weakness in Waren Distributing. Jim Adams receives the checks and also has access to the Cash Receipts Journal and Accounts Receivable Subsidiary Ledger. It is possible that Adams could steal the check and record the transaction as a debit to Sales Discounts and credit either Accounts Receivable or Sales. Clearly, we have an audit issue where the auditor would want to test entries in the Sales Discount account. Now that we understand how the system works, lets trace a transaction through the AIS. First, remember that every transaction requires the following: Create, complete, or file documentation Record in books While we will document and record every transaction, we will not necessarily perform both tasks at the same time. For example, look at the transaction of December 20 on page 2 of the Blue A Transaction List. Here, we approve the return and mail an acknowledgement copy to the customer. At this time we would not record a Sales Return because the merchandise has not yet been returned by the customer. Look at the December 24 transaction on page 3. We have now received the returned goods and would now record the transaction in the Sales Journal and Accounts Receivable Subsidiary Ledger. Now lets trace a cash receipt through the system. Well use the December 22 cash receipt from Hanover Hardware. In your packet there is a check from Hanover for $1,681.68. Also get the Cash Receipts Prelist and a blank Deposit Ticket. Open the Instructions Flowcharts Ledgers book to page 38. Notice Hanover has a balance due Waren of $1,716.00 as shown by the Accounts Receivable Subsidiary Ledger account (408) for Hanover. I have reproduced part of the account below. Accounts Receivable Subsidiary Ledger 408 Hanover Hardware Date Description Debit Dec Invoice # 729 1,716.00 13

Credit

Balance 1,716.00

There is a difference of $34.32 between the invoice amount and the cash receipt. We know that Waren offers a 2% discount if invoices are paid within 10 days (see Instructions Flowcharts Ledgers, page 7). Now lets follow the transaction through the flowchart on page 21. Jim Adams would restrictively endorse the back of Hanovers check with For Deposit Only Waren Distributing Company. Adams would next enter the check on the Prelist and send the check to Ray Kramer who would prepare the Deposit Ticket and make the deposit. Jim Adams would use the Prelist to record the transaction in the Cash Receipts Journal and the Accounts Receivable Subsidiary Ledger. I have reproduced both these items below with the entries recorded along with the Prelist. Cash Receipts Prelist A/R Chec Inv Inv Colle Othe k Num Amt c r Num b b 6401 729 1,716. 00

Date 12/2 2

Desc Hano v

Cas h Sale

Amt Recv 1,681. 68

Ban k Ctrl

Cash Receipts Journal Debit Dat e 12/2 2 Des c Han Ini t Cash 1,681. 68 Sls Disc 34.3 2 Sub Acc Acc Rec t Amt 408 1,716. 00 Credit Oth Pos Sale er t s Acct Oth er Am t Pos t

Accounts Receivable Subsidiary Ledger 408 Hanover Hardware Date Description Debit Dec Invoice # 729 1,716.00 13 Dec Paid Invoice # 729 22

Credit 1,716.00

Balance 1,716.00 -0-

The authors of the case tried to keep the number of transactions to a minimum. You will note that the first transaction, December 17, is the receipt of a validated deposit receipt. According to the flowchart on page 21, Nancy Ford would receive the validated deposit receipt, agree the amounts to the Prelist and Cash Receipts Journal and then file the documents. The December 17 validated deposit receipt is the only one we have in the packet. We will assume that all remaining validated receipts are received. Therefore, assuming Nancy Ford received the validated receipt for the Hanover deposit, she would compare the receipt to the Prelist and the Cash Receipts Journal. I have reproduced both items below to show how Nancy Ford would indicate that these steps have been performed. Cas h Sale Cash Receipts Prelist A/R Chec Inv Inv Colle Othe k Num Amt c r Num b b 6401 729 1,716. 00 Amt Recv 1,681. 68 Ban k Ctrl

Date 12/2 2

Desc Hano v

Cash Receipts Journal Debit Dat e 12/2 2 Des c Ini t Cash Sls Disc 34.3 2 Sub Acc Acc Rec t Amt 408 1,716. 00 Credit Oth Pos Sale er t s Acct Oth er Am t Pos t

Han NF 1,681. 68

Once all the transactions have been posted, the next step is to total all the special journals and post their totals to the General Ledger. Use the November totals as a guide to this task. For November Waren had $24,693.80 total for the debit Cash column. This amount is posted in the General Ledger account 10100. Look at page 25 of Instructions Flowcharts Ledgers and note the debit to the General Ledger account for Cash. You would post the other totals from the Cash Receipts Journal to the appropriate General Ledger Accounts. To indicate you had posted the journal columns, place a check mark below the amount. In November Waren had no Cash Sales. You will have four entries to this column in December. Also, Waren had no entries to the Other G/L

column in November. There will be, however, two entries in this column for December. An entry for $275 is already posted and you will post a $70,000 credit to Notes Payable, account 21000. For December, therefore, this column will total $70,275.00. You cannot, however, post $70,275 to the General Ledger as one amount because the total represents entries for two accounts, 31200 and 21000. You would place a check mark under the column total to indicate the items have been posted to the General Ledger and also place a check mark in the Post Ref column next to each dollar amount to indicate you posted the item individually to the General Ledger. The basic steps to record all of the transactions are: Does the transaction require creating/completing documentation Does the transaction require an entry in the journals o Every transaction must go first in a journal o You have five special journals for Sales, Cash Receipts, Purchases, Cash Disbursements, Payroll, and General Journal o Remember to post individual transactions to the subsidiary ledgers of Accounts Payable, Accounts Receivable, Payroll, and Fixed Assets o If a transaction does not fit in one of the special journals then it goes in the General Journal. You will have three December General Journal entries, five year-end General Journal entries, and three Income Summary entries for a total of eleven General Journal entries. Total the Special Journals and post the amounts, along with amounts from the General Journal to the General Ledger: o You have three types of transactions: December or monthly, Month End, and Year End. After you have recorded all the monthly transactions, post the journals to the General Ledger and balance each General Ledger account. Using the Worksheet, create an unadjusted trial balance and make sure the General Ledger is in balance. Now record the month-end transactions as described on page 12 of Instruction Flowcharts Ledger in the General Journal. Note some of these items are not required as described in my instructions for Project 1. Now record the year-end transactions as described on page 13 of Instruction Flowcharts Ledger in the General Journal. Note some of these items are not required as described in my instructions for Project 1. Post the month-end and year-end adjustment to the General Ledger and to the Worksheet in the Adjustment columns.

Make the closing entries in the General Journal and post to General Ledger. Use the balanced General Ledger to prepare a Post-Closing Trial Balance. Complete the Worksheet and other items as describe in my instructions for Project 1.