CHAPTER FOUR

ACCOUNTING SYSTEM
Unit Description
Accounting systems used by large and small businesses employ the basic principles of the
accounting cycle discussed in the previous chapters. However, these accounting systems include
features that simplify the recording and summary process. In this chapter, we will discuss these
simplifying procedures as they apply to both manual and computerized environments.
Unit Objective
At the end of this unit, students will be able to:-

 Define accounting system

 Describe Manual & Computerized accounting system
 Prepare Subsidiary ledger & controlling accounts
 Show Special journal
1.1. Basic Accounting Systems

Objective1:- Define Accounting system

An accounting system is the methods and procedures for collecting, classifying, summarizing,
and reporting a business’s financial and operating information. The accounting system for most
businesses, however, is more complex. Accounting systems for large businesses must be able to
collect, accumulate, and report many types of transactions. Accounting systems evolve through a
three-step process as a business grows and changes. This system included a chart of accounts, a
two column journal, and a general ledger. Finally, the system is implemented and used. The
system was used to record transactions and prepare financial statements.
Many large businesses continually review their accounting system & may constantly be involved
in changing same part of it. The job of installing or changing an accounting system, either in its
entirety or only in part, is made up of three phases

1. System analysis: - The goal of system analysis is to determine information needs, the source
of such information, & the deficiencies in procedures & data processing method presently
used. The analysis usually begins with a review of the organization stricture & the job
description of the personnel affected. This review is followed by a study of the forms,
records, procedures, processing methods & reports used by the enterprise. The source of such
information is usually the firms systems manual.

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2. System design: - accounting system are changed as a result of the kind of the analysis
previously described. The design of the new system may involve only minor changes from
the existing system. System implementation: - the final phase of the creation or revision of
an accounting system is to carry out or implement the proposals.

1.2. Manual Vs Computerized accounting system

Objective2:- Describe Manual & Computerized accounting system

1.2.1. Manual Accounting Systems

Accounting systems may be either manual or computerized. Understanding a manual accounting

system assists in recognizing the relationships between accounting data and accounting reports.
In addition, most computerized systems use principles used in a manual system. In manual
system first. All transactions were manually recorded in all-purpose (two-column) journal. The
journal entries were then posted individually to the accounts in the ledger. Computerized
Accounting Systems

Computerized accounting systems have become more widely used as the cost of hardware and
software has declined. In addition, computerized accounting systems have three main advantages
over manual systems. First, computerized systems simplify the record-keeping process.
Transactions are recorded in electronic forms and, at the same time, posted electronically to
general and subsidiary ledger accounts. Second, computerized systems are generally more
accurate than manual systems. Third, computerized systems provide management current
account balance information to support decision making, since account balances are posted as the
transactions occur.

1.3. Subsidiary ledger & controlling accounts

Objective3:- Prepare Subsidiary ledger & 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.
However, as the number of customers and creditors increases, the ledger becomes awkward to
use when it includes many customers and creditors. 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, you may think

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of a subsidiary ledger as a secondary ledger that supports a controlling account in the general
ledger.

1.4. SPECIAL JOURNALS

Objective4:- Show Special journal

One method of processing data more efficiently in a manual accounting system is to expand the
all-purpose two-column journal to a multicolumn journal. Each column in a multicolumn journal
is used only for recording transactions that affect a certain account. For example, a special
column could be used only for recording debits to the cash account, and another special column
could be used only for recording credits to the cash account. The transactions that occur most
often in a small- to medium-size service business and the special journals in which they are
recorded are as follows:
 Providing services on account recorded in Revenue journal
 Receipt of cash from any source recorded in Cash receipts journal
 Purchase of items on account recorded in Purchases journal
 Payment of cash for any purpose recorded in Cash payments journal
Revenue (Sales) Journal: - The revenue journal is used only for recording fees earned on
account. Cash fees earned would be recorded in the cash receipts journal. The sale of products is
recorded in a sales journal, which is similar to a revenue journal.
Revenue (Sales) journal
Date Invoice Account debited Post Account receivable
no reference debited sales credited

Cash Receipts Journal: - All transactions that involve the receipt of cash are recorded in a cash
receipts journal. Thus, the cash receipts journal has a column entitled Cash. All transactions
recorded in the cash receipts journal will involve an entry in the Cash Dr. Column. The kinds of
transactions in which cash is received and how often they occur determine the titles of the other
columns.
Cash receipt journal
Date Account P Accounts Sales Account Sales Cash
/ credited credited receivable discount debited
credited R credited debited

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Purchases Journal: - The purchases journal is designed for recording all purchases on account.
Cash purchases would be recorded in the cash payments journal. The purchases journal has a
column entitled Accounts Payable Cr. The purchases journal also has special columns for
recording debits to the accounts most often affected.
Purchase Journal
Date Account P/ Accounts Purchase Supplies Other Accounts debited
credited R payable debited debited
credit Account P Amount
/
R

Cash Payments Journal: - The special columns for the cash payments journal are determined in
the same manner as for the revenue, cash receipts, and purchases journals. The determining
factors are the kinds of transactions to be recorded and how often they occur. The cash payments
journal has a Cash Cr. column; all transactions recorded in the cash payments journal will
involve an entry in this column. Payments to creditors on account happen often enough to require
an Accounts Payable Dr. column. Debits to creditor accounts for invoices paid, often called bills,
are recorded in the Accounts Payable Dr. column.
Cash payment journal
Date CK. Account P/ Other accounts Account Purchase Cash
NO debited R debited payable discounts debited
debited credited

Assessment

1. The initial step in the process of developing an accounting system is called:

A. Analysis C. implementation
B. Design. D. Feedback.

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2. The policies and procedures used by management to protect assets from misuse, ensure
accurate business information, and ensure compliance with laws and regulations are called:
A. Internal controls. C. Systems design.
B. Systems analysis. D. Systems implementation.
3. A payment of cash for the purchase of services should be recorded in the:
A. Purchases journal. C. Revenue journal.
B. Cash payments journal. D. cash receipts journal
4. When there are a large number of individual accounts with a common characteristic, it is
common to place them in a separate ledger called a(n):
A. Subsidiary ledger. C. Accounts payable ledger.
B. Creditor’s ledger. D. Accounts receivable ledger.
5. Which of the following would be used in a computerized accounting system?
A. Special journals
B. Accounts receivable control accounts
C. Electronic invoice form
D. Month-end postings to the general ledger
Answer

1. A
2. A
3. B
4. A
5. C

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