CHAPTER

5 Accounting Systems

Accounting
27e

human/iStock/360/Getty Images
Warren
Reeve
Duchac
Basic Accounting Systems
(slide 1 of 2)

• 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 the
following three-step process.
o Step 1: Analyze user information needs.
o Step 2: Design the system to meet the user
needs.
o Step 3: Implement the system.

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Basic Accounting Systems
(slide 2 of 2)

• 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.
• Processing methods are the means by
which the accounting system collects,
summarizes, and reports accounting
information. These methods may be either
manual or computerized.

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Manual Accounting Systems

• Understanding a manual accounting

system is useful in identifying relationships
between accounting data and reports.
• When a business has a large number of
similar transactions, using an all-purpose
(two-column) journal is inefficient and
impractical. In such cases, subsidiary
ledgers and special journals are useful.

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Subsidiary Ledgers
(slide 1 of 2)

• 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 called the general ledger.
• Each subsidiary ledger is represented in
the general ledger by a summarizing
account, called a controlling account.
o Subsidiary ledgers provide detail of individual
accounts that are summarized in a controlling
account in the general ledger.
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Subsidiary Ledgers
(slide 2 of 2)

• Two of the most common subsidiary

ledgers are the accounts receivable
subsidiary ledger and the accounts
payable subsidiary ledger.
o The accounts receivable subsidiary ledger,
or customers ledger, 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.
o The accounts payable subsidiary ledger, or
creditors ledger, lists individual creditor
accounts in alphabetical order. The related
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Special Journals
(slide 1 of 2)

• One method of processing transactions

more efficiently in a manual system is to
use special journals.
• Special journals are designed to be used
for recording a single kind of transaction
that occurs frequently.
o Special journals summarize common
transactions that are used frequently.
• The all-purpose two-column journal, called
the general journal or simply the journal,
can be used for entries that do not fit into
any of the special journals.
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Special Journals
(slide 2 of 2)

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Revenue Journal

• The revenue journal is used for recording

fees earned on account.
• Revenues are normally recorded in the
revenue journal when the company sends
a bill, or invoice, to the customer.
• Each invoice is normally numbered in
sequence for future reference.

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Cash Receipts Journal

• All transactions that involve the receipt of

cash are recorded in a cash receipts
journal.
• Every entry recorded in the cash receipts
journal will involve a debit to the Cash Dr.
column.
• The types of cash receipt transactions and
their frequency determine the titles of the
other columns. For example, if a business
frequently receives cash from customers
on account, an Accounts Receivable Cr.
column is set up.
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Accounts Receivable Control Account
and Subsidiary Ledger

• After all posting has been completed for

the month, the total of the accounts in the
accounts receivable subsidiary ledger
should equal the balance of the accounts
receivable controlling account in the
general ledger.
o The balance of the accounts receivable
controlling account equals the sum of the
customer account balances.

©2018 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Purchases Journal

• The purchases journal is designed for

recording all purchases on account.
• Every entry recorded in the purchases
journal will involve a credit to the Accounts
Payable Cr. column.
• The items most often purchased on
account will determine the titles of the
other columns. For example, if the
purchase of supplies on account occurs
frequently, then a Supplies Dr. column is
set up.
• The items purchased on account
infrequently will be listed individually in
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Cash Payments Journal

• All transactions that involve the payment

of cash are recorded in the cash
payments journal.
• Every entry recorded in the cash payments
journal will involve a credit to the Cash Cr.
column.
• The kinds of transactions in which cash is
paid and how often they occur determine
the titles of the other columns. For
example, if the payment of cash to
creditors on account occurs frequently,
then a Accounts Payable Dr. column is set
up.
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Accounts Payable Control Account
and Subsidiary Ledger

• After all posting has been completed for

the month, the total of the accounts in the
accounts payable subsidiary ledger should
equal the balance of the accounts payable
controlling account in the general ledger.
o The balance of the accounts payable
controlling account equals the sum of the
creditor account balances.

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Computerized Accounting Systems

• Computerized accounting systems have

the following three main advantages over
manual systems:
o Computerized systems simplify the record-
keeping process by recording transactions in
electronic journals or forms and, at the same
time, posting them electronically to general
and subsidiary ledger accounts.
o Computerized systems are generally more
accurate than manual systems.
o Computerized systems provide management
with current account balance information to
support decision making, since account
balances are posted as the transactions occur.
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E-Commerce

• Using the Internet to perform business

transactions is termed e-commerce.
• When transactions are between a company and a
consumer, it is termed B2C (business-to-
consumer)
e-commerce.
• When transactions are between two companies, it
is termed B2B (business-to-business) e-
commerce.
• Three additional areas where the Internet is being
used for business purposes are:
o Supply chain management (SCM)
o Customer relationship management (CRM)
o Product life-cycle management (PLM)
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Financial Analysis and Interpretation:
Segment Analysis

• One way to report revenue is by different

segments. Businesses may be segmented
by region, by product or service, or by
type of customer.
• The segment information can be used to
perform horizontal analysis using the prior
year as the base year.
• In addition, vertical analysis can be
performed on the segment disclosures.

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