Lecture #6: Accounting Systems

An accounting system consists of the business papers, records, reports, and procedures that a business uses to record transactions and report their effects. This system has three important steps.

  1. The dollar amounts, quantities, and other information must be recorded on the source documents.
  2. You must classify and record the information from the source documents into the accounting records.
  3. Then you must summarize the information contained in the accounting records to periodic reports to management.

FEven for a small business, the quantity of data that is processed through the accounting system is large. The accounting system must be designed to process the data efficiently.

Using Special Journals to Save Labor

If every transaction is recorded in the General Journal, then it would take much time and labor to record all the debits and credits. To save time, divide the transactions of the business into groups of similar transactions. For each group, there is a special journal.

For example, a store can have four special journals and the General Journal.

  1. A Sales Journal for recording credit sales.
  2. A Purchases Journal for recording credit purchases.
  3. A Cash Receipts Journal for recording cash receipts.
  4. A Cash Disbursements Journal for recording cash payments.

You have to have the General Journal for the miscellaneous transactions that you cannot record in the special journals and also for adjusting, closing, and correcting entries.

Sales Journal
Date Account Debited Invoice Number PR Amount
Feb. 2 James Henry 307 405.00
7 Albert Smith 308 350.00
13 Sam Moore 309 350.00
15 Paul Roth 310 200.00
22 James Henry 311 225.00
25 Frank Booth 312 175.00
28 Albert Smith 313 250.00
28 Total - Accounts Receivable (Debit), Sales (Credit) 112/411


Accounts Receivable Ledger
Frank Booth
Date PR Debit Credit Balance
Feb. 25 S3 175.00 175.00
James Henry
Date PR Debit Credit Balance
Feb. 2 S3 450.00 450.00
22 S3 225.00 675.00
Sam Moore
Date PR Debit Credit Balance
Feb. 13 S3 350.00 350.00
Paul Roth
Date PR Debit Credit Balance
Feb. 15 S3 200.00 200.00
Albert Smith
Date PR Debit Credit Balance
Feb. 7 S3 500.00 500.00
28 S3 250.00 750.00


General Ledger

Accounts Receivable No. 112

Date PR Debit Credit Balance
Feb. 28 S3 2,150.00 2,150.00
Sales No. 411
Date PR Debit Credit Balance
Feb. 28 S3 2,150.00 2,150.00


There are only 7 credit sales transactions. If you had 700 credit sales, then you can really appreciate the labor saved by posting 1 credit and 1 debit to the General Ledger once a month.

Maintaining a Separate Account for Each Customer

In previous lectures, we recorded all credit sale transactions into a single account called accounts receivable. When a business has more than 1 credit customer, the business has to have an account for each customer. The account shows:

  • How much each customer purchased.
  • How much each customer paid.
  • How much the business has to collect from the customer.

All these accounts are recorded in an Accounts Receivable Ledger. This ledger is separate from the General Ledger. This ledger can be a book or on a computer disk.

Posting the Sales Journal

The individual sales recorded in the Sales Journal are posted each day to the proper customer accounts in the accounts receivable ledger. These daily postings keep the customer accounts up-to-date. This is important in granting credit. You must know the amount owed by each customer. If you don’t, you can let a customer have too much credit and you made the wrong decision. In the Accounts Receivable Ledger, the accounts either have numbers or you sort the accounts alphabetically, using their last name. Therefore each account can be easily found.

At the end of the month, you total up the credit sales for the month. Then you debit this amount to Accounts Receivable and credit this amount to the Sales account in the General Ledger. You still have the Accounts Receivable in the General Ledger. This is the total of all credit sales. You keep this account for three reasons.

  1. It shows the total amount owed by all customers.
  2. It allows total credits to equal total debits in the General Ledger.
  3. You can test the accuracy of the customer accounts in the subsidiary Accounts Receivable Ledger.

Identifying Posted Amounts

When several journals are posted to ledger accounts, you must indicate from which journal the credit or debit came from. You have a letter that symbolizes which journal and its page number.

  • “D” - Cash Disbursements Journal.“P” - The Purchases Journal.
  • “R” - Cash Receipts Journal.“G” - The General Journal.
  • “S” - The Sales Journal.

Controlling Accounts

You posted credit accounts from the Sales Journal to the Accounts Receivable Ledger for each customer’s account and the General account. You made two debits. This does not invalidate the total credits equal the total debits. This concept only applies to the General Ledger. The Accounts Receivable Ledger is simply a supplementary record that provides detailed information concerning each customer.

The Accounts Receivable account in the General Ledger is called the controlling account. This balance must equal the total of all customer credits in the Accounts Receivable. If it doesn’t equal, then you know that a mistake occurred.

Cash Receipts Journal

A Cash Receipts Journal is designed to save labor through posting column totals for cash received from different sources.

The Three sources of cash.

1. Cash from charge customers. When customers pay their credits to the business, it entered on the Accounts Receivable column as a credit. Remember, the balance is a debit, so the credit reduces it. Then you debit this amount to the cash debit column. You enter the customer’s name and the amount he paid in cash.

At the end of the day, you transfer the customer’s payment to his account in the Accounts Receivable Ledger. This is a credit. At the end of the month, you total the credits for all the customers, who paid and credit the total to the Accounts Receivable in the General Ledger and debit the amount of cash to the cash account.

2. Cash Sales.

This is where the customer pays for the goods at the cash register using cash. At the end of the day, you total the amount of cash at each cash register and you make this entry into the Cash Receipts Journal. You credit this amount into the Sales Credit column and debit this amount to the Cash Debit column.

3. Miscellaneous Receipts of Cash.

The receipt of cash for sales and when customers pay their accounts receivable, this is the biggest source of cash inflow for a business. Sometimes a business can receive cash from other sources, so you have to record this in the Other Accounts Credit Column.

4. Month-End Postings.

At the end of the month, you total all the columns and transfer this information to the Ledger Accounts. Before you make the entries in the ledger, the total debits must equal the total credits, so you can check this.

Cash Receipts Journal Page 2
Date Account Credited Explanation PR Other Accounts
Credit
Accts Rec.
Credit
Sales
Debit
Sale
Discounts
Debit
Amount
Feb. 7 Sales Cash Sales 4,450 4,450
12 James Henry Invoice 2/2 450 9 441
14 Sales Cash Sales 3,925 3,925
17 Albert Smith Invoice 2/7 500 10 490
20 Notes Payable Note to bank 1,000 1,000
21 Sales Cash Sales 4,700 4,700
23 Sam Moore Invoice 2/13 350 7 343
25 Paul Roth Invoice 2/15 200 4 196
28 Sales Cash Sales 4,225 4,225
28 Total 1,000 1,500 17,300 30 19,770
Accounts Numbers 112 411 413 111


Accounts Receivable Ledger
Frank Booth
Date PR Debit Credit Balance
Feb. 25 S3 175.00 175.00
James Henry
Date PR Debit Credit Balance
Feb. 2 S3 450.00 450.00
12 R2 450.00 0
22 S3 225.00 225.00
Sam Moore
Date PR Debit Credit Balance
Feb. 13 S3 350.00 350.00
23 R2 350.00 0
Paul Roth
Date PR Debit Credit Balance
Feb. 15 S3 200.00 200.00
25 R2 200.00 0
Albert Smith
Date PR Debit Credit Balance
Feb. 7 S3 500.00 500.00
17 R2 500 0
28 S3 250.00 250.00


General Ledger

Cash No. 111

Date PR Debit Credit Balance
Feb. 28 R2 19,770 19,770
Accounts Receivable No. 112
Date PR Debit Credit Balance
Feb. 28 S3 2,150.00 2,150.00
28 R2 1,500.00 650.00
Notes Payable No. 211
Date PR Debit Credit Balance
Feb.20 R2 1,000.00 1,000.00
Sales No. 411
Date PR Debit Credit Balance
Feb. 28 S3 2,150.00 2,150.00
28 R2 17,300.00 19,450
28 S3 2,150.00 2,150.00
Sales Discounts No. 413
Feb. 28 R2 30.00 30.00

Maintaining a Separate Account for Each Creditor

This is like the Accounts Receivable for a business. A company must keep a separate account for each creditor. You still have the Accounts Payable in the General Ledger. Then each creditor has an account in the subsidiary accounts Payable Ledger.

The Accounts Payable account in the General Ledger is the total that the business owes to creditors. Therefore, this is the controlling account, because when you calculate the total of all the individual creditor accounts, it must equal the amount in the controlling account.

Purchases Journal

This journal is for the recording of merchandise purchased on credit. However, it has more columns, because you can also record the credit purchase of supplies, such a store and office supplies.

At the end of each day, you record the amounts of the creditors to their individual accounts in the subsidiary Accounts Payable Ledger. At the end of each month, you total all the columns and transfer this information to the ledger accounts.

Purchases Journal Page 1
Date Account Credited Date of Invoice Terms PR Accts Payable
Credit
Purchases
Debit
Store Supplies
Debit
Office Supplies
Debit
Feb. 3 Horn Supply Co. 2/2 N/30 350.00 275.00 50 25.00
5 Acme Mfg. Co. 2/5 2/10,N/30 200.00 200.00
13 Wycoff & Co. 2/10 2/10,N/30 150.00 150.00
20 Smith & Co. 2/18 2/10,N/30 300..00 300.00
25 Acme Mfg. Co. 2/24 2/10,N/30 100.00 100.00
28 H.A. Green Co. 2/28 N/30 225.00 125.00 75.00 25.00
28 Totals 1,325.00 1,150.00 125.00 50.00
Account Numbers 212 511 115 116


Accounts Payable Ledger
Acme Mfg. Company
Date PR Debit Credit Balance
Feb. 5 P1 200.00 200.00
25 P1 100.00 300.00
H.A. Green Company
Date PR Debit Credit Balance
Feb. 28 P1 225.00 225.00
Horn Supply Company
Date PR Debit Credit Balance
Feb. 3 P1 350.00 350.00
Smith & Company
Date PR Debit Credit Balance
Feb. 20 P1 300.00 300.00
Wycoff & Company
Date PR Debit Credit Balance
Feb. 13 P1 150.00 150.00


General Ledger

Store Supplies No. 115

Date PR Debit Credit Balance
Feb. 28 P1 125.00 125.00
Office Supplies No. 116
Date PR Debit Credit Balance
Feb. 28 P1 50.00 50.00
Accounts Payable No. 212
Date PR Debit Credit Balance
Feb.28 P1 1,325.00 1,325.00
Purchases No. 511
Date PR Debit Credit Balance
Feb. 28 P1 1,150.00 1,150.00


The Cash Disbursements Journal or Check Register

You use this journal when you pay for something in cash (or by check).

Show what a check is!

You have columns for Accounts Payable and the Purchases Discount. When you pay an obligation, you are crediting the cash column and debiting the Accounts Payable. When you pay early, you can receive a discount, which is credited to the Purchases Discount columns. Then you have a miscellaneous column for debiting other items that are not classified as an Accounts Payable. In order to gain control over cash disbursements, you should write the check number in the column for check numbers.

Cash Disbursements Journal Page 2
Date Check
Number
Payee Account Debited PR Other Accts
Debit
Accounts Payable
Credit Disc.
Pur.
Credit
Cash
Feb. 3 105 L & N. Railroad Transportation-in 514 15.00 15.00
12 106 East Sales Co. Purchases 511 25.00 25.00
15 107 Acme Mfg. Co. Acme Mfg. Co. 200.00 4.00 196.00
15 108 Jerry Hale Salaries Expense. 611 250..00 250.00
20 109 Wycoff & Co. Wycoff & Co. 150.00 3.00 147.00
28 110 Smith & Co. Smith & Co. 300.00 6.00 294.00
Totals 290.00 650.00 13.00 927.00


Accounts Payable Ledger
Acme Mfg. Company
Date PR Debit Credit Balance
Feb. 5 P1 200.00 200.00
15 D2 200.00 0
25 P1 100.00 100.00
H.A. Green Company
Date PR Debit Credit Balance
Feb. 28 P1 225.00 225.00
Horn Supply Company
Date PR Debit Credit Balance
Feb. 3 P1 350.00 350.00
Smith & Company
Date PR Debit Credit Balance
Feb. 20 P1 300.00 300.00
28 D2 300.00 0
Wycoff & Company
Date PR Debit Credit Balance
Feb. 13 P1 150.00 150.00
20 D2 150.00 0


General Ledger

Cash No. 111

Date PR Debit Credit Balance
Feb. 28 R2 19,770 19,770
28 D2 927 18,843
Accounts Payable No. 212
Date PR Debit Credit Balance
Feb. 28 P1 1,325.00 1,325.00
28 D2 650.00 675.00
Purchases No. 511
Date PR Debit Credit Balance
Feb. 12 D2 25.00 25.00
28 P1 1,150.00 1,150.00
Purchase Discounts No. 513
Date PR Debit Credit Balance
Feb. 28 D2 13.00 13.00
Transportation-in No. 116
Date PR Debit Credit Balance
Feb. 3 D2 15.00 15.00
Salaries Expense No. 611
Date PR Debit Credit Balance
Feb.15 D2 250.00 250.00


If someone steals your checks and uses them, you will know about it, when you receive your account information from the bank. To convert checks to cash, you have to have valid identification (with your picture), and this information is written on the back of a check.

Each day, you transfer the information from the Other Accounts Debit to their proper accounts in the General Ledger. Also each day, you record the payment of each obligation to its individual account in the subsidiary Accounts Payable Ledger. At the end of each month, you total the columns and transfer this information into the proper General Ledger accounts.

Note: At the end of the month, you do not post the entries in the Other Accounts Debit column. You have already done this.

Testing the Accuracy of the Ledgers

After you transferred all information from the subsidiary ledgers to the General Ledger.

1. Prepare a trial balance for the General Ledger. If it balances, then the information is assumed to be correct.

2. Take all the individual accounts in the subsidiary Accounts Payable Ledger and sum up all the account balances. This total must equal the balance in the Accounts Payable account in the General Ledger. If they are equal, then you assume that the information is correct.

3. You do this for the Accounts Receivable Ledger. Take all the individual accounts in the subsidiary Accounts Receivable Ledger and sum up all the account balances. This total must equal the balance in the Accounts Receivable in the General Ledger. If they are equal, you assume that no mistakes occurred.

Sales Taxes

Many cities and states require stores to collect a sales tax from their customers. Then the stores send these taxes periodically to the city or state treasurer. You can add another column to the Sales Journal for the collected taxes. The procedure is the same.

You transfer the balances of each customer’s credit to their individual account in the subsidiary Accounts Receivable Ledger. At the end of the month, you total the columns and transfer this information to the General Ledger accounts. The Sales Taxes Payable column will be transferred to the Sales Taxes Payable account in the General Ledger.

Using Sales Invoices as a Sales Journal

To save labor, you may avoid using a Sales Journal for credit sales. Instead you can post each sales invoice total directly to the customer’s account in a subsidiary accounts receivable ledger. Then copies of the invoices are bound in numerical order in a binder. At the end of the month, all the invoices of that month are totaled and you make a general journal entry to debit accounts receivable and credit sales for the total in the General Ledger.

Sales Returns

If a business has only a few sales returns, you may record them in the General Journal.

Oct. 17 Sales Returns and Allowance $17.50
Accounts Receivable, George Ball $17.50
Customer returned merchandise.

You must credit both the accounts receivable controlling account and the customer’s account. Some companies have sufficient sales returns can save labor by using a special journal called the Sales Returns and Allowances Journal.

Sales Returns and Allowances Journal
Date Account Credited Explanation Credit PR Amount
Oct. 7 Robert Moore Defective merchandise 203 10.00
14 James Warren Defective merchandise 204 12.00
18 T. M. Jones Not ordered 205 6.00
23 Sam Smith Defective merchandise 206 18.00
31 Sales Returns and Allowances (Debit), Accounts Receivable (Credit) 412/112 46.00


General Journal Entries

When special journals are used, a General Journal always is necessary for adjusting, closing, and correcting entries. Also you use the General Journal for rare transactions that cannot be recorded in the special journals.

For example, a business returns some defective merchandise and buys office equipment.

Oct. 8 Accounts Payable - Medford Company 212 $32
Purchases Returns and Allowances 512 $32
Returned defective merchandise.
Oct. 11 Office Equipment 133 $685
Accounts Payable - ABC Supply Co. 212 $685
Purchased typewriter.


Computer Data Processing.

1. We have been studying a manual accounting system that could be used for a small business. Now most businesses in the U.S. use computers. A computer can process accounting information with very little human intervention. A computer can:

  • Input and store data.
  • Perform arithmetic calculations on the data.
  • Compare units of the data to find which are larger or smaller.
  • Sort or rearrange data.
  • Print reports from the data stored in the machine.

2. A computer program is a set of instructions written in a language. Some of the widely used languages are COBOL, BASIC, RPG, and Fortran. You can write computer programs that process customer orders, prepare invoices, record sales, and update customer accounts.

3. Modes of Operation.

(i) Batch processing - The program and data to be processed are inputted to the computer, processed, and then removed from the computer before another job is done.

(ii) On-line Processing - The program is kept in the computer along with any required data. As new data is entered, they are instantly processed by the computer.

 

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