CHAPTER 2
ACCOUNTING SYSTEM
Dr. BALAMURUGAN MUTHURAMAN
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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.
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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
SELLING
BUYING
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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
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12
14
18
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Cash
Accounts Receivable
Supplies
Office Equipment
Accounts Payable
$6,200
3,400
2,500
2,500
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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