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Link download full: Solution Manual for Accounting Information
Systems 11th Edition by Romney
http://testbankcollection.com/download/solution-manual-foraccounting-
information-systems-11th-edition-by-romney CHAPTER 2
OVERVIEW OF BUSINESS PROCESSES Instructors Manual
Learning Objectives:
1. Explain the basic activities companies engage in, the types of
decisions they must make and the types of information they need
to make those decisions.
2. Identify the major internal and external parties that an AIS
interacts with and they type of information it provides each
user.
3. Describe the major transaction cycles present in most companies.
4. Describe the four major steps in the data processing cycle and
the major activities in each.
5. Describe the documents and procedures used in an AIS to collect
and process transaction data.
6. Describe the ways information is stored in computer-based
information systems.
7. Discuss the types of information that an AIS can provide.
Questions to be addressed in this chapter include:
[Refer to power point slide #2]
1. What are the basic business processes in which an organization
engages?
– What decisions must be made to undertake
these processes?
– What information is required to make those
decisions?
2. What role does the data processing cycle play in organizing business processes and providing information to users?
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3. What is the role of the information system and enterprise
resource planning in modern organizations?
OUTLINE
Introduction
This chapter is divided into two major sections.
Full file
The first major section discusses the basic business activities
an organization engages in.
The second major section discusses the data processing cycle and
its role in organizing business activities and providing
information to users.
Learning Objective One
Explain the basic activities companies engage
in, the types of decisions they must make and
the types of information they need to make those
decisions.
Information Needs and Business Activities
Table 2-1 on Page 29 provides businesses processes, key
decisions and information needs.
Business Processes
1. Acquires capital 6. Sell merchandise
2. Acquire building and equipment 7. Collect payments from customers
3. Hire and train employees 8. Pay employees
4. Acquire inventory 9. Pay taxes
5. Advertising and marketing 10. Pay vendors
Multiple Choice #1
S&S has ten business processes which require information to make
key decisions. Which S&S business process requires a market
analyses?
a. Sell merchandise
b. Advertising and marketing
c. Acquire inventory
d. A and B
e. All of the above
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Multiple Choice #2
S&S has ten business processes which require information to make
key decisions. What is one or more of the key decisions made to
sell merchandise?
a. Which credit cards to accept?
b. What models to carry?
c. How to handle cash receipts?
d. A and B
e. None of the above
http://testbankcollection.com/Learning Objective Two
Identify the major internal and external parties
that an AIS interacts with and the type of
information it provides each user.
Interaction Between External and Internal Parties
Figure 2-1 on Page 30 provides important interactions between external
and internal parties.
Multiple Choice #3
The AIS at S&S interacts with many external parties. Which
external party or parties receive financial statements?
a. Government agencies
b. Investors
c. Customers
d. Banks
e. A and B
Multiple Choice #4
The AIS at S&S interacts with many external parties. Which
external party receives an invoice from S&S?
a. Vendor
b. Customers
c. Creditors
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Business Processes
Figure 2-2 on Page 32 provides an overview of the business processes.
A transaction is an agreement between two entities to exchange
goods or services or any other event that can be measured in
economic terms by an organization.
Another definition that is not in this book: In order to operate
from day to day, a firm conducts a number of business events
called transactions.
The process that begins with capturing transaction data and
ends with an informational output such as the financial
statements is called transaction processing.
d. None of the above
Learning Objective Three
Identify the major transaction cycles present in
most companies.
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Business activities are pairs of events involved in a give-get
exchange.
Table 2-2 on Page 33 provides the major activities in the
transaction cycles.
Student Exercise One
Note to Instructor: Students need to become familiar with the various
activities included in the different transaction cycles. To do this the
following matching exercise should be useful.
Matching Exercise. Match the below listed activities in the
following transaction cycles:
1. Revenue cycle (R)
2. Expenditure cycle (E)
3. Human Resources/Payroll (H)
4. Production (P)
5. Financing (F)
Student Exercise One
Transaction
Cycle Activities
1. Check inventory availability
2. Store goods
3. Pay vendors for goods and services
4. Bill customers for goods shipped or services
performed
5. Prepare management reports
6. Prepare and disburse payroll
7. Retire debt
8. Request raw materials for production
9. Prepare management reports
10. Receive customer payments and deposit them in the
bank
Match the above ten activities with the five transaction cycles by
choosing either R for revenue, E for Expenditure, H for Human
Resources/Payroll, P for Production and F for Financing. The answers
are provided at the end of this outline.
These basic exchanges can be grouped into five major
transaction cycles:
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The revenue cycle, where goods and services are sold
for cash or a future promise to pay cash.
The expenditure cycle, where companies purchase
inventory for resale or raw materials to use in
producing products in exchange for cash or a future
promise to pay cash.
The production cycle, where raw materials are
transformed into finished goods.
The human resources/payroll cycle, where employees
are hired, trained, compensated, evaluated, promoted
and terminated.
The financing cycle, where companies sell shares in
the company to investors and borrow money and where
investors are paid dividends and interest is paid on
loans
Figure 2-2 on Page 32 gives a good overview of the give-get
exchange and the general ledger and reporting system.
The general ledger and reporting system is used to
generate information for both management and external
parties.
Table 2-2 on Page 33 gives a great listing of activities within
the Revenue, Expenditure, Human Resources/Payroll, Production
and Financing Cycles.
Notice that the last activity listed in Table 2-2 for each
transaction cycle is “send appropriate information to the other
cycles.”
Multiple Choice #5
Give cash and get raw materials is an event in the _______
cycle, and give labor and get finished goods is an event
in the _______ cycle.
a. Expenditure, production
b. Financing, human resources
c. Revenue, production
d. Expenditure, production
Multiple Choice #6
Which business cycle does not involve cash?
a. Revenue
b. Production
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c. Human resources
d. Expenditure
Transaction Processing: The Data Processing Cycle
Four Major Steps in The Data Processing Cycle [Figure 2-3 on Page
35]:
1) Data Input
2) Data Storage
3) Data Processing
4) Information Output
The first step in processing transaction is to capture the
data for each transaction that takes place and enter them into
the system.
Data Inputs
Data must be collected about three facets of each business
activity:
1. Each activity of interest
2. The resource(s) affected by each activity
3. The people who participate in each activity
For example, collect the following data about a sales
transaction:
o Date and time of day the sale occurred
e. Financing
Learning Objective Four
Describe the four major steps in the data
processing cycle and the major activities in
each.
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o Employee who made the sale and the checkout clerk who
processed the sale
o Checkout register where the sale was processed
o Item(s) sold
o Quantity of each item sold
o List price and actual price of each item sold
o Total amount of the sale
o For credit sales: delivery instructions, customer bill-to and
ship-to addresses, customer name
Multiple Choice #7
Accountants have a significant role in the data processing
cycle. Accountants interact with system analyst to answer
questions that include:
a. What report should be used to portray the goals in
financial terms?
b. What data should be entered and stored by the
organization?
c. How should the information be organized, updated,
stored, accessed and retrieved?
d. B and C
e. None of the above
Multiple Choice #8
The most frequent transaction in the revenue cycle is a
a. purchase of inventory
b. sale
c. credit approval
d. customer payments
Learning Objective Five
Describe the documents and procedures used in an
AIS to collect and process transaction data.
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Source Documents – documents used to collect data about their
business activities. Source documents are also used to support
the validity of the business activities.
If paper documents are exchanged with customers or suppliers,
data input accuracy and efficiency is improved by using
turnaround documents, which are records of company data sent to
an external party and then returned to the system as input.
Table 2-3 on Page 36 provides an excellent listing of Common
Business Activities and Source Documents for the revenue,
expenditure and human resources cycles that students should
become familiar with.
Source Data Automation is yet another means to improve the
accuracy and efficiency of data input. An example would be once
the sale of merchandise is rung up on the cash register it would
be interfaced with accounting to automatically record the sale
and also interfaced with the warehouse to automatically reduce
the level of inventory for the item that was sold. This would
also be interfaced with purchasing in which the purchase order
would automatically be printed out for delivery to the vendor.
The second step in processing transactions is to make sure
captured data are accurate and complete.
One way to increase accuracy and completeness is to use
well-designed turnaround documents and data entry screens,
as well as source data automation.
Multiple Choice #9
The source document used to request that items be purchased
is a
a. purchase order
b. purchase budget
c. purchase requisition
d. A and C
e. all of the above
Multiple Choice #10
A customer returns merchandise to a company. The source
document that should be used is:
a. credit memo
b. adjustment memo
c. remittance advice
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Data Storage
A company’s data are one of its most important resources.
Accountants need to know how to manage data for maximum corporate
use.
Ledgers
General Ledger contains summary-level data for every
asset, liability, equity, revenue and expense
account of the organization.
Subsidiary Ledger. Records all the detailed data for
any general ledger account that has many individual
subaccounts.
These subsidiary ledgers would be used for accounts
receivable and accounts payable.
Accounts receivable subsidiary ledger would
record detailed data for customers whom buy
products or services on credit.
The accounts receivable subsidiary ledger would
support the accounts receivable general ledger
controlling account.
Accounts payable subsidiary ledger would record
detailed data for the individual vendor credit
purchases of merchandise/supplies made by the
company.
The accounts payable subsidiary ledger would
support the accounts payable general ledger
controlling account.
Coding Techniques
Coding is the systematic assignment of numbers or letters
to items to classify and organize them
d. none of the above
Learning Ob jective Six
Describe the ways information is stored in
computer - based information systems.
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With sequence codes, items are numbered
consecutively to ensure that there will be no gaps
in the sequence.
With a block code, blocks of numbers within a
numerical sequence are reserved for categories
having meaning to the user
S&S had the specific range of code numbers for their
following major product categories:
Product Code Product Type
1000000-1999999 Electric range
2000000-2999999 Refrigerator
3000000-3999999 Washer
4000000-4999999 Dryer
Group codes are often used in conjunction with the
block code. S&S uses a seven-digit product code
number, for example, the group coding technique
might be applied as follows
Digit Position Meaning
1-2 Product line, size, style
3 Color
4-5 Year of manufacture
6-7 Operational features
In designing a coding system, the following guidelines will
result in a better coding system:
o The code should be consistent with its intended use, which
requires the code designer to determine the types of
system outputs desired by users prior to selecting the
code.
o Make sure the code allows for growth in the number of
items to be coded.
o Make the coding system as simple as possible in order to minimize
costs, facilitate memorization and interpretation of coding
categories, and ensure employee acceptance
o Make sure the coding system is consistent (1) with the company’s
organizational structure and (2) across the different
divisions of an organization
Note to Instructor: The following is optional additional information that could be included in the chapter two outline that does not come
from the AIS 11e book.
The data collection function (performed during the input stage)
involves steps such as capturing the transaction data, recording
the data onto forms, and validating and editing the data to
ensure their accuracy and completeness. This is not in the book.
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Also, this is not in the book. The data maintenance function
(performed during the processing stage) involves steps like the
following:
Classifying, or assigning collected data to pre-established
categories
Transcribing, or copying/reproducing the data onto another
document or medium
Sorting, or arranging data elements according to one or more
characteristics
Batching, or gathering together groups of transactions of a
similar nature
Merging, or combining two or more batches or files of data.
Multiple Choice #11
Purchase orders would use _______ codes, while coding for major
product categories would use a _______ code.
a. account and ledger
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b. block and sequence
c. group and sequence
d. sequence and block
Multiple Choice #12
In designing a coding system, the following guidelines will
results in a better coding system:
a. The second digit in each account code should represent
the primary financial subaccounts within each category.
b. The code should be consistent with its intended use,
which requires the code designer to determine the types
of system outputs desired by users after selecting the
code.
c. Make sure the coding system is consistent (1) with the
company’s organizational structure and (2) across the
different divisions of an organization.
d. A and C
Chart of Accounts
A chart of accounts is a list of all general ledger accounts an
organization uses with each general ledger account being
assigned a specific number.
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Student Exercise Two
Note to the Instructor: To familiarize the students with completing a
chart of accounts, especially if you are going to assign problem 2.2
on pages 51 and 52 as part of the homework assignment; the following
exercise would be helpful.
Tom Jones is a sole proprietor that owns and manages a music store
that sells music CDs and DVD music videos.
Use the following information to design and complete a chart of
accounts:
1. Customers cannot use commercial credit cards, but Tom has
in-house credit.
2. Cash in the bank includes a checking account, savings
account, change fund and petty cash fund.
3. Tom pays for rent and insurance in advance.
4. When Tom started the business he purchased land, a building
used for the store, furniture and fixtures, and computer
equipment. There have been no additional purchases.
5. The are no short-term or long-term investments
6. Tom issued a 90 day note to a customer that could not pay
the amount owed that was recorded in accounts receivable.
There are no notes payable.
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Table 2-4 on Page 39 provides the chart of accounts for S&S
Note that the various categories of accounts all start with the
same first number. For example, current assets all start with
the number 1. The 2nd and 3rd number identifies the specific
account. For example, cash 101, where the first number 1
identifies the category of current assets and the 2nd & 3rd
numbers 0 and 1 identifies the checking account.
7. Toms earns interest on boPage 11 of
th the checking account
and the 19
savings account.
8. Tom has two employees that are paid hourly wages. The
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employees do not receive any benefits.
Journals
Sales Journal (SJ) – Credit Sales
Cash Receipts Journal (CR) – Cash Sales & Cash Collected
From Customers’ Accounts Receivable
Purchase Journal (PJ) – Credit Purchases
Cash Payments Journal (CP) – All Cash Payments
General Journal (GJ) – Adjusting Entries and Closing
Entries
Table 2-5 at the bottom of Page 40 provides an example of
the Sales Journal. Students should remember that the
column on the far right in this journal represents the
debits to accounts receivable and credit to sales.
Students should also remember that credit sales are
recorded daily in the Sales Journal and also recorded in
the Accounts Receivable Subsidiary Ledger. Then at the end
of the month the column total in the Sales Journal is then
posted to the general ledger accounts for accounts
receivable and sales.
Figure 2-4 on Page 41 provides the flow of Recording and
Posting Credit Sales.
Students should note that transactions are recorded daily
in the sales journal and accounts receivable subsidiary
ledger. Students should also remember that SJ1 means Sales
Journal Page 1, CR4 means Cash Receipts Journal Page 4 and
SJ5 means Sales Journal Page 5.
Audit Trail The accounting data and records should provide a
trail starting with the source document that supports the
transaction (for example, lets use credit sales) all the way
through to the final posting in the general ledger accounts
to the financial statements. An audit trail provides a means
to check the accuracy and validity of ledger postings.
In auditing, this technique would be called Tracing. In the
opposite direction; from the general ledger to the journals &
subsidiary ledgers to the source document; this is called
Vouching for auditors. This is covered in more detail in
Auditing Theory and Practice courses.
Multiple Choice #13
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The journal that records cash collections from customers
is the:
a. Sales journal
b. Cash receipts journal
c. General journal
d. A and B
e. None of the above
Multiple Choice #14
Posting references and _______ numbers provides what is
known as a(n) _______.
a. Document and general ledger control account
b. Account and Audit trail balance
c. Transaction and subsidiary ledger
d. Document and audit trail
Computer-Based Storage concepts
An entity is something about which information is stored.
For example, employees, inventory items and customers.
Each entity has attributes, or characteristics of
interest, which need to be stored. For example an
employee’s hourly rate of pay, unit cost of an inventory
item and a customer’s address.
Figure 2-5 on Page 42 provides examples of data storage
elements:
Data values are stored in a physical space called a
field. In the figure the fields are Customer number,
Customer name, Address, Credit limit and Balance
The sect of fields that contain data about various
attributes of the same entity forms a record. In the
figure that records are represented by each of the
three rows; so there are three records.
The contents of each field within a record are
called a data value. Sometimes, not mentioned in
this book, the contents of each field are called a
specific data element which contains value the data.
In turn, data elements/data value is composed of
characters such as letters, numbers and symbols.
Related records are grouped to form a file.
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Two basic types of files exist:
o A master file is conceptually similar to a
ledger in a manual AIS
o The second basic type of file is called a
transaction file, which is conceptually similar
to a journal in a manual AIS
Data Processing
Once data bout a business activity have been collected and
entered into the system they must be processed.
Data processing implies the execution of a certain procedures,
usually involving a series of tasks.
There are four different types of file processing:
1. Updating data previously stored about the activity, the
resources affected by the activity , or the people who
performed the activity
Figure 2-6 on Page 41 provide The Accounts Receivable
File Update Process
2. Changing data, such as changing a customer’s address
when they move or their credit limit when their
financial situation changes
3. Adding data, such as adding a new employee to the
payroll master file or data-base after they have been
hired
4. Deleting data, such as purging the vendor master file
of all vendors that the company no longer does business
with
Periodic updating of data is referred to as batch processing.
This approach may be combined with either the off-line or on-
line entry of data.
Under the on-line entry/batch processing method of processing,
individual transactions are entered directly into the computer
via a terminal as they occur.
Updating as each transaction occurs is referred to as on-line,
real-time processing.
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The on-line entry/on-line processing method differs from on-
line entry/batch processing in the following two respects: (1)
master files are updated concurrently with data entry and (2) a
transaction log is produced that consists of a chronological
record of all transactions.
Figure 2-7 on Page 45 summarizes the three different types of
processing data.
Multiple Choice #15
The file that is similar to a journal in an manual AIS is
a. Journal file
b. Transaction file
c. Data file
d. Master file
This is the final step in the data processing cycle.
Forms of Information Output
Documents are records of transaction or other
company data. For example, checks and invoices.
Documents generated at the end of transaction
processing activities are called operational
documents to distinguish them from source documents,
which are used at the beginning of the process.
Reports are prepared for both internal and external
users. We are all familiar with the external reports
called financial statements.
Information needs cannot always be satisfied
strictly by documents or periodic reports. Instead,
problems and questions constantly arise that need
rapid action or answers. To respond to this problem,
personal computers or terminals are used to query
the system.
When the queried information is displayed on the
computer monitor, the output is referred to as a
“soft copy.” When it is printed out on paper, it is
referred to as a “hard copy.”
Information Output
Learning Objective Seven
Discuss the types of information that an AIS can
provide.
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Purpose of Output
There are four main types of financial reports that were
covered in Principles of Accounting I & II courses, the
balance sheet, income statement, statement of owner’s
equity or statement of stockholder’s equity and the
statement of cash flows. Sometimes a statement of retained
earnings is used instead of the statement of stockholder’s
equity. These financial statements are used by both
external and internal users.
Budgets are used by management of the firm. Budgets
require estimating future revenue/sales, cost and
expenses. This is the operational budget. There are also
cash budgets and capital expenditure budgets.
Behavioral Implications of Managerial Reports
Employees focus their efforts primarily on those tasks that are
measured and evaluated.
This can be either good or bad.
For example, the task of customer complaint resolution.
The organization wants to satisfy its customers to the
greatest extent possible, at the lowest possible cost.
If customer service representatives are evaluated solely
based on the number of complaints resolved.
Then there two possible problems that could arise:
The customer service representatives may be focused on
quickly resolving each complaint in the store’s favor
that may alienate some customers, or
Customer service representatives may “give away the
store” just to keep the customer happy.
Role of the AIS
Traditionally, the AIS has been referred to as a transaction
processing system because its only concern was financial data
and accounting transactions. Consequently, many organizations
developed additional information systems to collect, process,
store and report information not contained in the AIS.
Enterprise resource planning (ERP) systems are designed to
overcome these problems as they integrate all aspects of a
company’s operations with its traditional AIS.
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A key feature of ERP systems is the integration of financial
with other nonfinancial operating data.
ANSWERS to Multiple Choice Questions:
Multiple
Choice
Number
Multiple
Choice
Answer
Multiple
Choice
Number
Multiple
Choice
Answer
1 C 9 C
2 A 10 A
3 B 11 D
4 B 12 C
5 D 13 B
6 B 14 D
7 B 15 B
8 B
References Used:
1 The idea of modeling an AIS as a set of “Give and Take” exchanges
was developed in Cheryl L. Dunn and
William E. McCarthy, “Conceptual Models of Economic Exchange
Phenomena:
History’s Third Wave of
Accounting Systems,” Collected Papers of the Sixth World Congress of
Accounting Historians, Vol. 1, Kyoto,
Japan. pp. 133–164; and in Guido Geerts and William E. McCarthy,
“Modeling Business Enterprises as Value-Added
Process Hierarchies with Resource-Event-Agent Object Templates,”
Business Object Design and
Implementation: OOPSLA 1995 Workshop Proceedings (October 16, 1995),
Austin, TX: Springer.
Figure 2-2 The AIS and Its Subsystems Source :Adapted from classroom
materials originally developed by Julie Smith David at Arizona State
University and based on ideas developed in the sources listed in
footnote 1.
Answers To Student Exercise One
Transaction
Cycle Activities
1. R Check inventory availability
2. E Store goods
3. E Pay vendors for goods and services
4. R Bill customers for goods shipped or services performed
5. R Prepare management reports
6. H Prepare and disburse payroll
7. F Retire debt
8. P Request raw materials for production
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9. E Prepare management reports
10. R Receive customer payments and deposit them in the bank
Match the above ten activities with the five transaction cycles by
entering either R for revenue, E for Expenditure, H for Human
Resources/Payroll, P for Production and F for Financing. The answers
are provided at the end of this outline.
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Student Exercise Two Answers
Account
Code Account Name
100-199 Current Assets
101 Checking Account
102 Savings Account
103 Change Fund
104 Petty Cash
110 Accounts Receivable
115 Allowance for Doubtful Accounts
120 Interest Receivable
130 Notes Receivable
150 Inventory
160 Supplies
170 Prepaid Rent
180 Prepaid Insurance 200-299
Noncurrent Assets
200 Land
210 Buildings
215 Accumulated Depreciation – Buildings
220 Furniture and Fixtures
225 Accumulated Depreciation
- Furniture and Fixtures
230 Computer Equipment
235 Accumulated Depreciation
- Computer Equipment
Student Exercise Two Answers Concluded
300-399 Liabilities
300 Accounts Payable
310 Wages Payable
321 FWT Taxes Payable
322 FICA Tax Payable
323 Federal Unemployment Tax Payable
324 State Unemployment Tax Payable
330 Current Portion of Mortgage Payable
350 Long-Term Mortgage Payable
400-499 Equity Accounts
400 Tom Jones, Capital
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410 Tom Jones, Withdrawals
500-599 Revenues
500 Cash Sales – Music CDs
501 Cash Sales – DVD Music Videos
502 Credit Sales – Music CDs
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503
510
511
520
530
Credit Sales – DVD Music Videos
Sales Returns & Allowances
Sales Discounts
Interest Revenue
Miscellaneous Revenue
600 - 799 Expenses
600
611
612
613
620
630
701
702
703
710
720
Cost of Goods Sold
Wages Expen ses
Payroll Tax Expense
Rent Expense
Supplies Expense
Bad Debt Expense
Depreciation Expense – Buildings
Depreciation Expense – Furniture and Fixtures
Depreciation Expense – Computer Equipment
Income Tax Expense
Miscellaneous Expense
900 - 999 Summary Accoun ts
910 Income Summary
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