The Accounting Cycle. Cycle. The Accounting Cycle SUA Reference p.10. Overview. The Accounting Cycle. 6 Major Subcycles. Subcycle (transaction cycle):

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1 Everything you ever wanted to know about... The Accounting Overview Review of the manual Accounting 6 Major Subcycles Begin the SUA Transactions Occur Prepare Closing Entries The Accounting SUA Reference p.10 Prepare Documents Prepare Financial Statements Record in Journals Prepare Adjusted Trial Balance Post to Ledgers Prepare Unadjusted Trial Balance Prepare and Post Adjusting Entries The Accounting 6 Major Subcycles Subcycle (transaction cycle): Group of related business activities that result in repetitive patterns of transactions Revenue Expenditure Human Resources General Ledger and Reporting Production Financing

2 Revenue in SUA Instructions pp Consists of: Credit Sales Cash Sales Bad Debt Write-offs Sales Returns Cash Receipts Revenue Revenue in SUA Credit Sale 1. Customer Purchase Order 2. Approve Credit 3. Bill of Lading 4. Sales Invoice 5. Pack and ship order 6. Review and approve documents 7. Mail invoice to customer 8. Make the entry in the Sales Journal and then update the A/R Subsidiary Ledger Introduction to SUA Waren Sports Supply SUA package materials Course packet supplemental materials Worksheet Introduction to SUA SUA package materials Reference book Documents Folder Other file tabs Journal book Instructions/Flowcharts/Ledgers book Introduction to SUA Course packet supplemental materials Introduction to SUA Worksheet Assigment Schedule Check Figures File System page Grade sheet Transactions list Price lists Worksheet is already prepared as Excel spreadsheet Download this spreadsheet from the 474 web site under Homework (you don t need the spreadsheet worksheet until SUA 3)

3 Alter the SUA package!!! Alter the SUA package!!! From your Documents File, throw away: the blue Transactions List the green Transactions List the 1 blue Price List page Also, from your Documents File, throw away: 1 green Worksheet 1 green Post-closing Trial Balance Replace them with Transactions List and Price List pages from your course packet!!! We will use the Excel spreadsheet worksheet instead (in SUA 3). Waren s Subcycles Revenue 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 (doesn t apply to Waren) Financing cycle (Waren doesn t have much external financing) Waren s Subcycles Revenue 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 (doesn t apply to Waren) Financing cycle (Waren doesn t have much external financing) SUA Assignments Waren Personnel SUA 1 - Sales and cash receipts cycle SUA 2 - Purchases and cash disbursements cycle SUA 3 - Payroll cycle and G/L cycle Ray Kramer Salaried manager Jim Adams Hourly accounting clerk Nancy Ford Hourly production and billing

4 Let s get started... Use this semester s transaction set and your own numbers Label the transactions 9 S&CR, 8 P&CD, 2 Payroll SUA 1 SUA reference - chapter 3 Flowcharts - pp Review all S&CR transactions Do December 19 S&CR transaction credit sale to University of Southern Iowa December 19 th transaction Working with flowcharts How do you know how far to go when following the flowchart? A flowchart may have one or several branches. Follow the chart until all of the branches come to an end. A flowchart branch comes to an end (or a temporary end) when you reach a file symbol. A branch comes to a permanent end when you come to a terminal symbol. At the end of SUA 1... All documents in S&CR are properly processed and filed All necessary entries are made in journals and Subsidiary Ledgers A/R aged trial balance (p. 45) is complete (Exclude zero balances!) Monthly statement for customer is complete A/R Aged Trial Balance (Reference Manual p.45 )

5 Review SUA 1 Overview Review Expenditure Inventory Systems Begin SUA 2 Internal Controls & Auditing At the end of SUA 1... A/R Aged Trial Balance (Reference Manual p.45 ) All documents in S&CR are properly processed and filed All necessary entries are made in Journals and Subsidiary Ledgers A/R aged trial balance (p. 45) is complete Monthly statement for customer is complete Expenditure in SUA Instructions pp Consists of: Credit Purchases Cash Purchases Purchase Returns Cash Disbursements Expenditure Expenditure in SUA Credit Purchase 1. Prepare purchase order (p.o.) 2. Approve purchase order 3. Send p.o. to vendor 4. Receive goods, prepare receiving report 5. Receive vendor invoice 6. Match documents and approve for payment 7. Make the entry in the Purchases Journal and then update the A/P Subsidiary Ledger

6 Inventory Systems There are two basic types of inventory systems: 1) Perpetual Inventory 2) Periodic Inventory Which one is becoming more common? Perpetual Inventory Systems Perpetual Inventory In Perpetual Inventory: 1) Use an Inventory Subsidiary Ledger 2) No Purchases account 3) Count inventory to determine shrinkage (not necessarily every period) Purchases Entry: Inventory A/P Inventory Systems Perpetual Inventory - Entries Sales Entries: A/R Sales x x Inventory Systems Perpetual Inventory Advantages: 1) Better control over inventory 2) Essential for JIT 3) Becoming essential to be competitive A/P Purchase Returns A/P x Cash Purchase Discounts COGS Inventory Disadvantages: More costly than periodic, though costs are decreasing with better technology. Inventory Systems Periodic Inventory In Periodic Inventory (Waren s method): 1) No Inventory Subsidiary Ledger 2) Use Purchases account 3) At end of period count inventory to determine COGS at end of every period (shrinkage will be included) Purchases Entry: Purchases A/P A/P Purchase Returns Inventory Systems Periodic Inventory - Entries A/P x Cash Purchase Discounts Sales Entries: A/R Sales x x

7 Inventory Systems Periodic Inventory - Calculating Ending Inventory 1) Count the inventory items (# of units) 2) Calculate ending inventory: (# of units)(cost per unit) = Ending Inv. Value 3) 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. 75) Inventory Systems Periodic Inventory Advantages: 1) Cheaper recordkeeping Disadvantages: 1) Less control over inventory 2) Can t be used with JIT 3) Less competitive strategy in high tech environment Notes: Waren s System Waren uses the periodic system, they have a Purchases account The Purchases journal is used for any kind of purchase, (fixed assets, small expenses, inventory), but only inventory purchases are debited to the Purchases account In the purchase of laptop computers on 12/31/09, only process the purchase, do not pay the invoice, even though the payment terms state: Due on receipt of invoice. Accounts Payable Trial Balance Waren Sports Supply Accounts Payable Trial Balance December 31, 2005 Vendor No. Name Amount Payable 503 Sears $ Brown & Root 3, Lapland & Co. 2, TOTAL $ 6, 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

8 SUA 3 Payroll in SUA Instructions p. 24 Payroll - 2 transactions General Ledger and Reporting Do end of period procedures AJE s Financial Statements Closing entries Prepare SUA for submission Consists of: Timekeeping Payments Payroll Payroll in SUA 1. Hourly Employees work and fill in time cards 2. Approve hours on time cards and give to accounting department 3. Calculate payroll amounts 4. Record in Payroll Journal and Employee Earnings Subsidiary Ledger 5. Generate paychecks 6. Review and sign paychecks 7. Distribute paychecks to employees 8. Make the entry in the Cash Disbursements Journal Let s do a Payroll Clinic Notes on Payroll The pay increase on Dec. 20 th applies to the whole pay period, ie. from Dec. 16 th Be careful with Time Card calculation Hours are calculated in hundredths (1/100) of an hour, not minutes (1/60). SUTA & FUTA percentages (2.7%, 0.8%) are given in instruction manual page 13. Apply to only first $7000 of annual income. (NF only Employee Subsidiary Ledger) Notes on Payroll The withholding amounts for employees income taxes are given to you in the Dec. 20 th transaction; you don t have to calculate them. The 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.

9 Notes on Payroll FICA tax is 6.2% % = 7.65%. (p. 8 of Instructions book) 6.2% Social Security wages up to $102, % 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% End of Period Procedures Follow instructions in project - do all procedures not done in previous parts of SUA (follow the Assignment Schedule) Month-end procedures 1-7 Bank reconciliation, unemployment taxes, etc. Note: These are not adjusting entries, they are normal entries of the period Year-end procedures 1-7 worksheet Adjusting entries 5 AJE s (4 + 1) Closing entries 3 Closing entries (no Dividends) Adjusting Journal Entry Notes AJE for Inventory Depreciation 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. 75 of the Reference book. (next slide) Inventory Purchase Discounts Purchase Returns Cost of Goods Sold Purchases Freight-In DR CR or PLUG AJE for Inventory End of Period Procedures Inventory Purchase Discounts Purchase Returns Cost of Goods Sold Purchases Freight-In DR CR or PLUG Closing Entries 1. Close Revenues & Gains to Income Summary 2. Close Expenses & Losses to Income Summary 3. Close Income Summary to Retained Earnings 4. Close Dividends to Retained Earnings (Sample Entries: p. 23 Reference Book)

10 Notes: End of Period Procedures Use worksheet spreadsheet on web site AJE for income tax accrual: Use worksheet Financial Statements automatically prepared on spreadsheet The only columns you need to fill in on the worksheet are the Unadjusted Trial Balance and the Adjustments (green columns) End of Period Procedures Finding Errors in the worksheet Calculate the difference between DR and CR and: 1. Look for that number in your entries and posting (you may have forgotten to post the number) 2. Look for an amount that is exactly half of that difference (you may have posted a debit as a credit or vice versa) 3. Divide the difference by 9 and see if it divides with no remainder (indicates a transposition error) Postings include: Cash 25 A/R 25 If you mispost: Cash 25 A/R 25 As: Cash 25 A/P 25 Resulting Post-Closing Trial Balance: DR CR Cash 50 A/R 100 A/P 75 Common Stock Resulting Post-Closing Trial Balance: DR CR Cash 50 A/R 125 A/P 100 Common Stock No Difference!!! If you mispost: Cash 25 A/R 25 As: Cash 25 A/R 25 If you mispost: Cash 25 A/R 25 As: Cash 25 A/R 52 Resulting Post-Closing Trial Balance: DR CR Cash 50 A/R 150 A/P 75 Common Stock = 50 / 2 = $25 error Resulting Post-Closing Trial Balance: DR CR Cash 50 A/R 73 A/P 75 Common Stock = 27 / 9 = no remainder must be a TRANSPOSITION ERROR

11 Fixed Asset Trial Balance (Do after depreciation AJE is made and posted) Waren Sports Supply Fixed Asset Trial Balance December 31, 2005 ASSET Cost Accumulated Net Depreciation Book Value Computers $ 15, $12, $ 3, Furniture 10, , Equipment 25, , , TOTALS $ 50, $ 30, $ 20, SUA 3 - Completing the project Notes: All AJE s and Closing entries are made in General Journal and are posted to G/L Foot all journals and ledgers From the spreadsheet, print off the Worksheet, the Income Statement, and the Balance Sheet and put in SUA envelope Total manual G/L balances and make sure they agree with the worksheet balances DO NOT DO A STATEMENT OF CASH FLOWS SUA 3 - Completing the project A/R Trial Balance A/P Trial Balance Fixed Asset Trial Balance Bank Reconciliation MUST BE TYPED AND IN GOOD FORM HANDWRITTEN WORK WILL NOT RECEIVE CREDIT Creating the schedules Type up in Excel Line up numbers in columns Show pennies, even when.00 Use Accounting number format Underline columns, double underline totals Prepare project for submission Use this semester s transaction set and your own numbers Tape grading sheet to front of envelope and fill in name and section time Make sure that your documents are all filed according to the File System page Remove the Reference Manual Tape envelope shut Hand in Have a beer

12 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 assets Ensure accurate and reliable accounting (and other) information Improve operational efficiency Promote adherence to managerial policies Financial statements are prepared using GAAP Comply with laws and regulations 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 assets Ensure accurate and reliable accounting (and other) information Improve operational efficiency Promote adherence to managerial policies Financial statements are prepared using GAAP Comply with laws and regulations Financial Statement Assertions Financial Statement Assertions Who owns the financial statements of a company? Who owns the financial statements of a company? Management Every number on the financial statements represents a set of claims being made by management known as: Assertions

13 Financial Statement Assertions Sales $ 1,500, This statement asserts: Financial Statement Assertions Sales $ 1,500, This statement asserts: 1. All sales are properly included, you have left none out 2. All sales actually occurred, number represents actual sales made 3. Sales are properly valued, net of returns, allowances, discounts 4. You have proper claim to revenue generated, sales belong to you 1. All sales are properly included, you have left none out 2. All sales actually occurred, number represents actual sales made 3. Sales are properly valued, net of returns, allowances, discounts 4. You have proper claim to revenue generated, sales belong to you COMPLETENESS Financial Statement Assertions Sales $ 1,500, This statement asserts: Financial Statement Assertions Sales $ 1,500, This statement asserts: 1. All sales are properly included, you have left none out 2. All sales actually occurred, number represents actual sales made 3. Sales are properly valued, net of returns, allowances, discounts 4. You have proper claim to revenue generated, sales belong to you COMPLETENESS EXISTENCE 1. All sales are properly included, you have left none out 2. All sales actually occurred, number represents actual sales made 3. Sales are properly valued, net of returns, allowances, discounts 4. You have proper claim to revenue generated, sales belong to you COMPLETENESS EXISTENCE VALUATION Financial Statement Assertions Sales $ 1,500, This statement asserts: Computerization does not change the assertions!!! 1. All sales are properly included, you have left none out 2. All sales actually occurred, number represents actual sales made 3. Sales are properly valued, net of returns, allowances, discounts 4. You have proper claim to revenue generated, sales belong to you COMPLETENESS EXISTENCE VALUATION RIGHTS/ OBLIGATIONS What changes in a computerized system is the design of the internal controls.

14 Auditing and Risk Auditors 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 Risk Sales $ 1,500, To 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 Sales Auditing Sales Credit Sale 1. Customer Purchase Order 2. Approve Credit 3. Bill of Lading 4. Sales Invoice G/L 5. Pack and ship order 6. Review and approve documents 7. Mail invoice to customer 8. Make the entry in the Sales Journal and then update the A/R Subsidiary Ledger F/S Auditing Sales Credit Sale Overstatement risk Existence assertion must be investigated Test by vouching back up the audit trail ie. Sample entries in sales journal and look for matching customer p.o.s and sales invoices Understatement risk Completeness assertion must be investigated Test 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 Tests Sales - Existence A/P - Completeness Fixed assets - Valuation A/R - Existence and Valuation