CHAPTER 7

Computerized Accounting Systems

THINKING BEYOND THE QUESTION How do we implement a computerized accounting system? Computer systems are useful for summarizing and analyzing large amounts of data. Though decisions are made by people, computers can prepare information and summary descriptions to make the decision making more efficient and more accurate. Computers are useful for processing large amounts of data in a short period so that information is available on a timely basis. Statistical and other analytical tools can convert data into summary information that is important for the decision models of various users of the information. Transforming data into usable information and having that information available when needed improve decision making. Computers are useful for both purposes. QUESTIONS Q7-1 Integrated systems like ERPs are designed to function as a unit. Each module interacts with each of the other modules. They rely on a common database that provides a means for sharing data among modules. They rely on a common management system to coordinate and protect the overall system. Each module has a common look and feel that makes it easier to maintain. Q7-2 The sales module should provide a means for customers to select products and to place orders. Credit card information would be retrieved and validated at the time the order is placed. The module would then transmit order data to the shipping department. Q7-3 Data about hours worked and pay rates must be obtained. These data would provide a basis for determining amounts owed and paid to employees each period. Costs typically would be selling or administrative expenses in the period in which they are incurred. In the case of a service company, the wages might be tracked to particular jobs or customers. In some cases, these amounts are used in determining the amount the customer is billed. For example, accountants and lawyers often track the amount of time they work for a particular client as a basis for billing the client.

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Q7-4 A computer network is a group of computers and related devices that are linked so they can interact with each other. A network consists of workstations that allow users to connect to database management systems, databases, and peripheral devices, such as printers. In many networks, the workstations use client programs that request data from servers that provide services to a large number of clients. This clientserver relation permits many users to share data and programs. Accordingly, various divisions and functions in the organization can use a common database without having to maintain their own systems. Accounting data can be collected from locations throughout a company and transferred to a common database maintained on a server. Users of this information can then access the data from the server. Q7-5 Database management systems are programs that users rely on to keep track of where data are located and to control access to those data. These systems control who has authority to access certain data and they manage the use of the data by multiple users to prevent conflicts and to maintain data integrity. Database management systems are server programs because they respond to requests for services by client programs. Q7-6 Irmos management would find this information useful for a variety of reasons. The date of purchase, cost, and equipment life is useful information for calculating depreciation expense. Recording the location will enable management to conduct periodic inspection of assets owned by the company. Periodic counts are important internal control procedures over fixed assets. Q7-7 Kreels management uses this type of information to calculate outstanding loan balances after making monthly payments. Loan payments and loan balances must be included in some external and internal company reports. Details of these calculations are illustrated in Chapter 8. Q7-8 The purchasing and inventory management functions are responsible for the acquisition of merchandise and supplies. Accounts involved include merchandise and supplies inventory, accounts payable, and cash. Transactions include placing orders with vendors, receiving inventory, verifying receipts against orders, approval of payment, and payment of cash to vendors. Q7-9 The human resources module helps track hours and pay rates, and it can be used in conjunction with the production module. It also helps generate payroll tax information. Within the human resources module, the payroll function uses the following accounts: wages expense, cash, wages payable, and taxes payable. Transactions involve paying wages and withholding taxes.

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Q7-10 The financial management module contains information useful for paying dividends and communicating with stockholders. The company needs to know who owns the shares, how many shares are owned, and the shareholders address in order to pay annual dividends. Q7-11 Burger King does not retain customer information as part of the sales process. However, managers at Lands End maintain a data file for each customer that includes sizes, past purchases (to determine the customers taste in clothing), annual purchases (to determine whether the customer traditionally has been a high-volume, or low-volume customer), and credit card information. Q7-12 Companies often record a sale when goods are shipped. Thus, the accounting department needs shipping information to verify that goods were shipped and to update accounts receivable. In addition, the accounting department should match purchase orders with goods shipped to ensure the proper merchandise and quantities are shipped. Q7-13 The accounting department must receive data from purchasing and receiving to ensure purchased inventory is properly recorded as an asset. Receiving reports are matched against purchase orders to ensure the goods received are the quantity and quality of goods identified on the purchase order. EXERCISES E7-1 Definitions for all terms are listed in the Glossary. E7-2 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. enterprise resource planning (ERP) systems subsidiary accounts control accounts general ledger E-business application software database database management system supply-chain management relational database d h g c a i b f j e

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E7-4 Subsidiary accounts contain detailed information, while the general ledger control accounts report only summary information. For example, the subsidiary Accounts Receivable contains a listing for each customer and the amount owed. Managers need to know who owes the company money. However, detailed Accounts Receivable information is not necessary when analyzing financial relationships overall. The Accounts Receivable control account is the sum of the individual listings in the subsidiary accounts. Transactions are first recorded in the subsidiary accounts; these transactions are later posted to the control account. One of the conveniences of a computerized accounting system is that the computer automatically updates the control account whenever an entry is made to one of its subsidiary accounts. Before the advent of computers this had to be done manually. E7-5 Most of the business activities would be handled by computer. Even while the customer is online at the web site, several business activities are likely to be occurring. First, the credit card number is electronically submitted for approval and authorized for the price of the purchase. Second, Lands Ends inventory records are checked by computer to verify that the requested items are on hand in the desired quantity. At the completion of these steps, a computer downloads the sales order from the web site and transmits it to Lands Ends distribution center. The sales order includes the customer name, address, specific items ordered, and quantity. At the distribution center, a computer prepares and prints out the sales order, a packing slip, and bill of lading. A clerk reads the sales order, selects the items, packages them with the sales order and bill of lading, and contacts the transportation company. Upon pickup by the transportation company, the clerk notifies the accounting system (by a computer entry) of the sale and shipment. The computer updates the inventory records regarding the sale, and records cost of goods sold, sales revenue, and the receivable due from the credit card company. E7-6 Upon receipt of the goods, a receiving clerk will verify that these specific goods were ordered by matching them to a purchase order (most likely stored electronically). Next, a receiving report will be completed (probably electronically) noting the specific items received and the quantity of each. About this same time, the accounting department will receive a sales invoice directly from the supplier. Upon matching the receiving report with the sales invoice, entries will be made in the accounting system to increase accounts payable and to increase each of the affected inventory accounts. All of these accounts are subsidiary accounts. After the entries are made to the specific subsidiary accounts,

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the computer automatically updates the general ledger, which contains the control accounts for both accounts payable and inventory. E7-7 A relational database is a set of related files that are linked so that files can be updated and information can be retrieved efficiently from the files. An advantage of relational databases is that data are shared by various functions and divisions of an organization without each division having to maintain its own data. In this way, data are not duplicated and fewer opportunities for data error exist. Also, relational databases are relatively easy to modify. A company can add new customers, products, and other components without having to do a lot of reprogramming. Consequently, new systems do not have to be developed each time a company changes its operations. E7-8 a. b. Use of passwords to access terminals and programs prevents unauthorized persons from accessing terminals and programs. Limits placed on amounts that the computer will accept for various transactions helps prevent fraud and unintentional errors. For example, a $5,000 check could not be issued for $500,000 as a result of an operator entry error. Backing up of data and programs regularly helps protect companies from data loss due to fire, flood, or acts of terror. Separation of design from operation of systems helps prevent fraud by segregating duties. Customer table to obtain customer ID and shipping address Inventory table to obtain product ID and quantity on hand Sales order table to create sales order number, order date, and order quantity Sales order table to get sales order number Customer shipments table to enter shipping date Sales invoice table to create sales invoice number and invoice date Inventory table to update quantity on hand Sales invoice table to check sales invoice number and get sales order number Sales order table to get customer ID Cash receipts table to record cash receipt amount and date Customer shipments table for data on when goods were shipped and quantity shipped Sales order table for data on who purchased goods that were shipped in November Customer table for identity of customers who purchased goods in November

c. d. E7-9 1.

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Inventory table for unit price data to determine (along with quantity purchased) the dollar amount of sales (continued) 2. Cash receipts table for data on sales invoice numbers, cash receipts amounts, and receipt dates Sales invoice table for sales order numbers Sales order table for customer ID, product ID, and order quantity Customer shipments table for shipping dates and quantity shipped Inventory table for unit price (along with quantity purchased) to determine the dollar amount of sales Customer table to obtain customer names The request comes from the users client workstation. It is sent across network connections to the server that runs the database management system. Access privileges are controlled by a database management system. The actual updating of records takes place in the database in which data are stored. Transfer of data is made through connections between the client and server. Data are entered by users on client software. One purpose of a database management system is to control simultaneous access to data to make sure that all authorized users can access data and that data are not corrupted when more than one user is accessing the data. A report requires that data be transferred from a database to client software. The database management system takes care of locating the requested data and checking authorization to ensure the user is entitled to access the data. Data are transmitted to the user through connections between client and servers. Client software produces the report using the data.

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E7-12 One apparent internal control problem is that One Star did not have its computer located in a secure area. Computers used to store data should be kept in locations that are not readily available to those who are unauthorized to access them. Keeping the computer in a separate facility or locked room is a useful control. Another problem is that the company apparently did not maintain backup copies of its data. Data should be copied to tape, disk, or other backup device on a regular basis. Copies should be kept in a location different from the primary computer site. The loss of data is an accounting problem because the company does not have reliable accounting information. The accounting system cannot provide the information needed by decision makers.

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PROBLEMS P7-1 A relational database is a set of related files that are linked so the files can be updated and information can be retrieved from the files efficiently. An objective of relational databases is to avoid data redundancy by permitting each part of an information system to interact with other parts. Thus, all of Barburys regional offices can access the same data to determine part availability, price information, and customer account information. Data in a relational database are maintained in tables. Columns in the tables identify specific attributes about a specific type of object or entity. Barburys customer table maintains data about customers. Columns in the customer table identify customer identification numbers, names, addresses, and other information about each customer. The rows in tables are the individual entities. Accordingly, the rows in a customer table identify each customer. Other tables needed for sales purposes would include a product table that identifies product attributes, prices, and quantities on hand, and a sales order table that identifies the customer placing an order and the products and quantity of goods ordered. Data are entered into a database through forms. Each form provides a template to enter data on a computer for a particular purpose. A sales representative for Barbury enters data about the customer and the products ordered by that customer into the computer using a form. Alternatively, the customer can enter the order data directly into a form through an Internet connection. The database management system links data from the form to the individual tables in which data about customers and products are stored. Queries allow a companys personnel to retrieve data from the companys database. A query identifies the particular tables and fields where needed data are stored. Thus, Barburys employees could query the companys database to obtain information about orders placed by specific customers or for specific products. These data can then be written in tables or summarized in reports. Barbury could produce a report that would summarize sales by customer or product for a particular period. It could also produce a report to identify the quantity of goods on hand for each product to determine which products need to be restocked. Reports could be produced to bill customers and to produce financial statements. P7-2 A table in a relational database provides data about a specific type of entity. Separate tables are maintained for different types of entities (customers, products, etc.). Data for each entity appear in separate rows in a table. Thus, each row in a customer table identifies a different customer.

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Columns in a table identify specific attributes for each entity, such as name, address, description, or price. One column in each table uniquely identifies each separate entity in that table. Thus, each customer has a unique customer ID. This identifier may be used in other parts of a database to link data in a different table. Thus, a sales order table can identify the customer that placed an order by recording the customer ID. Data about the customer then can be found by referring to the customer table. A form provides a means for entering data into a table. Fields in the form are connected to the fields (attributes) in specific tables. When data are entered in a form and the data are saved, they are transferred to a table. When a new sales order is entered in the sales order form, a new row is added to the sales order table. The form may also retrieve data from tables. Thus, when a customer name or ID is entered on a form, other data about that customer can be retrieved from the customer table and displayed on the form to provide information for the sales representative. Data do not have to be reentered that already exist in the system. P7-3 A computer network consists of client workstations that request data and program services from servers. The clients and servers are connected through cables or phone lines. A database is a program that contains data in a central repository so that it can be accessed and updated by users throughout the network. The database is maintained on a server. Users access data by running applications on their client workstations. Requests from these applications are managed by a database management system on a server that controls who can access data and when different users can access specific data or programs that are being requested by several users. Data and programs are transferred to the client workstation where a particular user can read and update data as needed for a particular task. A computer network permits many users to use the same data. Also, it provides a means of protecting the data so that only authorized users have access. Accounting systems rely on computer networks because accounting data are obtained from events occurring throughout an organization and because accounting information is needed by users throughout the organization. Maintaining accounting data in a database helps ensure that data are kept up-to-date and that the same data are available to all users. Data can be updated frequently. Users can obtain these data without long delays for different parts of the company to record data in different locations and combine their data to produce summary reports for the company.

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P7-4 Threats to the accounting system include: unauthorized access to data by employees or outsiders, errors (intentional or unintentional) in recording data, destruction or corruption of data, and destruction of hardware components of the network system. Internal controls for these threats include: Unauthorized accessuse of passwords to access systems, use of database management systems that control rights to access data, use of hardware and software to protect systems from intrusion and to detect intrusion if it occurs. Errors in recording datause of computer checks to verify accuracy and reasonableness of data entered in a system and use of prenumbered forms and data items to assure that all transactions are accounted for. Destruction or corruption of dataregular backups of data and storage of data in separate locations so that destroyed data can be reconstructed. Destruction of hardwareuse of security and fire control systems to prevent unauthorized access to facilities and to protect facilities from theft or damage. P7-5 Name Street Address City State Zip code Telephone Billing address (if different from above) Item number Quantity ordered Credit card number Amazon may store information in tables and fields as follows: Table: Customer ID Table Fields Customer ID Name Street Address City State Zip code Telephone Credit card type Credit card number

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Sales Order Table Fields Sales Order Customer ID Sales Order Inventory Table Fields Sales Order Number Inventory ID Quantity Ordered Inventory Table Fields Inventory ID Description Unit Price Unit Cost Quantity Available P7-6 Purchasing module for relational database: TableProduct Receipt Product receipt number Product ID Product receipt date Quantity received Inventory updated TableProduct Product ID Vendor ID Type Unit price Unit cost Quantity on hand Primary Foreign

Primary Foreign

TableVendor Amount owed Address Phone Contacts Payment terms

P7-7 Application software includes computer programs that permit data to be recorded and processed. Examples of data processing in a spreadsheet include mathematical functions such as addition, subtraction, multiplication, and division. Databases differ from application software. A database is a set of computerized files in which company data are stored in a form that facilitates retrieval and updating of the data. Application software permits the processing of data stored in the database. P7-8 Database management functions Office linksMerge with Word, Analyze with Excel Database utilitiesCompact and repair database

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SecuritySet passwords and permissions ReplicationCreate a replica of the database P7-9 Trainors network must include a web server that provides software to permit customers to interact across the Internet. Trainors network also must include an application server connected to a database server. The database server would store and manage data resulting from Internet transactions with customers. Trainor would also need firewall software to prevent outside hackers from gaining access to the database. P7-10 Fields ID numberidentifies the type, size, and material composition Costidentifies the price paid to vendor Quantity on handenables management to determine whether sufficient inventory is on hand to fill an order and when inventory should be replenished Locationhelps direct customers to the desired product on the sales floor or warehouse Vendor IDIdentifies the vendor who supplies the item P7-11

Product Table Product ID Size Quantity available

Order Table Customer ID Product ID Order date Quantity ordered

Customer Table Customer ID Name Shipping Address City State Zip E-mail Credit card number

The primary key in the Product Table is the Product ID; Product ID is a foreign key in the Order Table. Customer ID is the primary key in the Customer Table and a foreign key in the Order Table. P7-12 Product Table Product ID Size Price Quantity available Order Table Customer ID Product ID Order Date Quantity ordered Customer Table Customer ID Name Address City State Zip E-mail

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P7-13 Using a database such as Access, management would query sales for a given period (weekly, monthly, quarterly, or annually). Since sales are recorded and stored by date, the query would report all sales that occurred on dates included in the query period. P7-14 1 b CASE C7-1 2 a 3 d 4 a 5 c 6 d 7 b 8 b 9 a 10 c