CHAPTER 2

ACCOUNTING SYSTEM

Dr. BALAMURUGAN MUTHURAMAN12015-2016

Learning Objectives

1. Define and describe an accounting system.2. Journalize and post transactions in a manual

accounting system that uses subsidiary ledgers and special journals.

3. Describe and illustrate the use of a computerized accounting system.

4. Describe the basic features of e-commerce.5. Use segment analysis in evaluating the

operating performance of a company.22015-2016

Basic Accounting Systems

• An accounting system is the methods and procedures for collecting, classifying, summarizing, and reporting a business’s financial and operating information.

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BASIC ACCOUNTING SYSTEMS

As a business grows and changes, accounting systems also change in the following three-step process.

Analyze user information needs.

Design the system to meet the user needs.

Implement the system.

Basic Accounting Systems

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Basic Accounting Systems

• 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.

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Processing Methods

• 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.

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Subsidiary Ledgers

• A large number of individual accounts with a common characteristic can be grouped together in a separate ledger called a subsidiary ledger.

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Subsidiary Ledgers

• The primary ledger, which contains all of the balance sheet and income statement accounts, is called a general ledger.

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Subsidiary Ledgers

• Each subsidiary ledger is represented in the general ledger by a summarizing account, called a controlling account.

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Subsidiary Ledgers

• The individual customer accounts are arranged in alphabetical order in a subsidiary ledger called the accounts receivable subsidiary ledger, or customers ledger.

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Subsidiary Ledgers

• The individual creditor accounts are arranged in alphabetical order in a subsidiary ledger called the accounts payable subsidiary ledger, or creditors ledger.

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Subsidiary Ledgers

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Special Journal

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.

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Special Journals

BUYING

SELLING

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Special Journals

• 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

• The revenue journal is used for recording fees earned on account.

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Special Journals

Cash fees earned would be recorded in the cash receipts journal.

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Special Journals

Purchases made on account (on credit) are recorded in the purchases journal.

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Special Journals

All cash payments are recorded in the cash payments journal.

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Special Journals

• NetSolutions had the following selected general ledger balances as of March 1, 2014:

Account Number Account Balance

11 Cash $6,20012 Accounts Receivable 3,40014 Supplies 2,50018 Office Equipment 2,50021 Accounts Payable 1,230

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Revenue Journal

• If NetSolutions recorded its revenue transactions in the general journal, the following entries would have to be made:

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Revenue Journal

• Revenues are normally recorded to the revenue journal when the company sends a bill, referred to as an 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.

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Cash Receipts Journal

• After all journalizing and posting to individual accounts for the month is complete, the columns are totaled.

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Accounts Receivable Account

• The total of the accounts in the accounts receivable subsidiary ledger should match the balance in the general ledger’s Accounts Receivable account.

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Purchases Journal

• The purchases journal is designed for recording all purchases on account.

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Purchases Journal

• At the end of March, all columns are totaled and the equality of debits and credits is verified. Then the total amounts in the “Accounts Payable Cr.” and “Supplies Dr.” columns are posted. Because Office Equipment was posted earlier, the $2,800 total is not posted.

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Cash Payments Journal

• All transactions involving a credit to Cash are recorded in the cash payments journal.

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Cash Payments Journal

• The amounts listed in the “Other Accounts Dr.” column are posted on a regular basis. The $1,600 for Rent Expense is posted to Account No. 52.

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Cash Payments Journal

• Let’s post to the accounts payable subsidiary ledger at this time to keep the creditors’ accounts current.

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Cash Payments Journal

• Now, let’s journalize the remainder of March’s cash disbursements. Following that, let’s post to the individual creditors’ accounts.

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Cash Payments Journal

• The journal is ruled, summed, and verified for the equality of the debits and the “Cash Cr.” column.

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Accounts Payable Account• After all posting has been completed, the

balances in the accounts payable subsidiary ledger should equal the balance of the accounts payable controlling account in the general ledger.

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Computerized Accounting System

• Computerized accounting systems have the following three main advantages over manual systems:– Computerized systems simplify the record-

keeping process by recording transactions in electronic forms and, at the same time, posting them electronically to general and subsidiary ledger accounts.

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Computerized Accounting System

– Computerized systems are generally more accurate than manual systems.

– 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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