Principles of Accounting Systems

Accounting systems: From manual to computerized

The manual accounting system with general journal entry to general ledger has been in use for hundreds of years and is still used by some very small companies and is what you have learned so far.

Gradually, some manual systems evolved to include multiple journals and ledgers for increased efficiency.  The journals included in these systems include:

  • a sales journal to record all credit sales
  • a purchases journal to record all credit purchases
  • a cash receipts journal to record all cash receipts
  • a cash disbursements journal to record all cash payments; and
  • general journal to record adjusting and closing entries and any other entries that do not fit in one of the special journals.

Besides the general ledger, such a system normally has subsidiary ledgers (think secondary) for accounts receivable, inventory and accounts payable showing how much each customer owes, how much of each inventory part we have and how much is owed to each supplier. The general ledger shows the total amount of accounts receivable, inventory and accounts payable, but the details in the subsidiary ledgers allow companies to send bills to customers, purchase additional inventory items and pay bills to suppliers.

Currently,  many businesses maintain all accounting functions using a computerized accounting system.  However, some small business owners still use manual systems because they are familiar and meet their needs.  Your knowledge of the basic manual accounting system described in these first chapters enables you to better understand a computerized accounting system. The computer automatically performs some of the steps in the accounting cycle, such as posting journal entries to the ledger accounts, closing the books, and preparing the financial statements. However, if you understand all of the steps in the accounting cycle, you will better understand how to use the resulting data in decision making. We need to understand the how to follow the accounting process manually so that in the event there is an error made from a computerized system, you can “unwind” what was done from software with our knowledge of how to do things manually.

An accounting system is a set of records and the procedures and equipment used to perform the accounting functions. Manual systems consist of journals and ledgers on paper. Computerized accounting systems consist of accounting software, computer files, computers, and related peripheral equipment such as printers.

Regardless of the system, the functions of accountants include:

  1. observing, identifying, and measuring economic events;
  2. recording, classifying, and summarizing measurements; and
  3. reporting economic events and interpreting financial statements.

Both internal and external users tell accountants their information needs. The accounting system enables a company’s accounting staff to supply relevant accounting information to meet those needs. As internal and external users make decisions that become economic events, the cycle of information, decisions, and economic events begins again.

The primary focus of the first four chapters has been on how you can use an accounting system to prepare financial statements. However, we also discussed how to use that information in making decisions. Later chapters also show how to prepare information and how that information helps users to make informed decisions. We have not eliminated the preparation aspects because we believe that the most informed users are ones who also understand how the information was prepared. These users understand not only the limitations of the information but also its relevance for decision making.

In this chapter we will look at how each special journal operates.