Fa I Chapter 4 Accounting System

Chapter Four: Accounting Systems
Introduction to Accounting System

 An accounting system is the methods and procedures
for collecting, classifying, summarizing, and reporting
a business’s financial and operating information.
 As a business grows and changes, its accounting system
also changes in a three-step process. This three-step
process is as follows:
Step 1: Analyze user information needs.
Step 2: Design the system to meet the user needs.
Step 3: Implement the system.
Internal controls and information processing
methods
 Internal controls and information processing
methods are essential in an accounting system.
a) Internal controls are the policies and
procedures that protect assets from misuse,
ensure that business information is accurate,
and ensure that laws and regulations are being
followed.
b) Processing methods are the means by which
the system collects, summarizes, and reports
accounting information. These methods may be
either manual or computerized.
Computerized and Manual Accounting System
a) Computerized Accounting Systems
Computerized accounting systems have the following three
main advantages over manual systems:
b) Computerized systems simplify the record-keeping
process in that transactions are recorded in electronic
forms and, at the same time, posted electronically to
general and subsidiary ledger accounts.
c) Computerized systems are generally more accurate
than manual systems.
d) Computerized systems provide management with
current account balance information to support decision
making, since account balances are posted as the
transactions occur.
b) Manual Accounting Systems
 Accounting systems are manual or
computerized. Understanding a manual
accounting system is useful in identifying
relationships between accounting data and
reports. Also, most computerized systems use
principles from manual systems.
 Journalize and post transactions in a manual
accounting system that uses subsidiary ledgers
and special journals.
Subsidiary ledgers and controlling accounts
 An accounting system should be designed to provide information on
the amounts due from various customers (accounts receivable) and
amounts owed to various creditors (accounts payable). A separate
account for each customer and creditor could be added to the
ledger.
 A large number of individual accounts with a common characteristic
can be grouped together in a separate ledger called a subsidiary
ledger.
 The primary ledger, which contains all of the balance sheet and
income statement accounts, is then called the general ledger.
 Each subsidiary ledger is represented in the general ledger by a
summarizing account, called a controlling account.
 The sum of the balances of the accounts in a subsidiary ledger
must equal the balance of the related controlling account. Thus, a
subsidiary ledger is a secondary ledger that supports a controlling
account in the general ledger.
Two of the most common subsidiary ledgers are as
follows:
i. Accounts receivable subsidiary ledger or

customer - it is lists the individual customer
accounts in alphabetical order. The controlling
account in the general ledger that summarizes
the debits and credits to the individual customer
accounts is Accounts Receivable.
ii. Accounts payable subsidiary ledger or creditors
ledger - it is lists individual creditor accounts in
alphabetical order. The related controlling
account in the general ledger is Accounts Payable.
Special journals and vouchers
 Special Journals (also known as subsidiary journals) are
chronological records of frequently occurring
transactions such as sales, purchases and cash
receipts/payments.
 A general journal is an all-purpose journal where we can
record any transaction. However, as the transactions of
a company increase, it is better to use special journals
along with the general journal to record transactions of
similar type in one, such as sales on account or cash
payments. Special journals record transactions of a
similar nature.
 Repetitive transactions such as sales and purchases are
recorded in special journals and the totals of these
journals are transferred to general ledger on a regular
basis such as daily, weekly or monthly as if a single
transaction has occurred in this interval.
Con’t…
 The number and format of special journals used by a

company depends on the nature and size of the
company’s business transactions.
The following are some of the typical examples of special
journals used by most merchandising businesses.
1) Revenue Journals - For recording credit sales
2) Cash Receipt journal - For recording cash receipts
3) Purchase journal - For recording credit purchases
4) Cash payment journal - For recording cash payments
5) General journal - For transactions not recorded in
any of the special journal

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Chapter Four: Accounting Systems

Introduction to Accounting System

i. Accounts receivable subsidiary ledger or

 The number and format of special journals used by a

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