Accounting Systems

 

This unit introduces you to the components and principles of accounting systems.

A system is a way of doing something. There are various ways of doing things.

Let’s say you decided to go home when you go out of your office. There are many ways to do that: You can either take a taxi or you can walk the whole distance home; you can take the main road, or you may wish to use a short cut and so forth.

In accounting also, it is true that almost all business record, process and report business transactions. However, the speed and efficiency of the processing depends on which accounting system they use.

 

There are five basic elements of an accounting system. These are:

   5.2.1  Source Documents

Source documents provide the basic information to be processed by the accounting system. Invoices from suppliers, bills sent to customers, and payroll records are some examples of source documents. You have already seen their meaning and importance in previous chapter.

   5.2.2 Input Devices

Input devices capture information from source documents and enable its transfer to the information-processing component of the system. Journal entries, both paper based and electronic are a type of input devices.

   5.2.3 Information Processors

An information processor is a system that interprets, transforms and summarizes information for use in analysis and reporting. The information processing in an accounting system can be manual or computerized.

Now a days, computer are being increasingly used to process information.

Many businesses in Ethiopia, for example, use the Peachtree accounting software to process accounting information.

   5.2.4 Information Storage

After being input, processed data are usually saved for use in future analysis or report. Information storage is the component of an accounting system that keeps data in a form accessible to information processors.

   5.2.5 Output Device

Output devices are the means to take information out of an accounting system and make it available to users. Output devices include printers, and monitors, which provide such outputs as financial statements, bills to customers and internal reports.

 

   5.3.1 Control Principle

 Any accounting information system should allow managers to control and monitor business activities. To achieve this, accounting system must have internal control as an element.

Internal controls are methods and procedures that direct operations to one goal, ensure reliability of financial reports and safeguard business assets. Internal controls are discussed separately and at a greater detail in the next chapter.

   5.3.2 Relevance Principle

The information that an accounting system provides should be relevant to decision makers. This means, an information system should be designed to capture data that make difference in decision. To ensure this, it is important that all decision makers, be considered when identifying relevant information for disclosure.

   5.3.3 Compatibility Principle

The compatibility principle requires that an accounting system conform to the company’s activities, personnel and structure. The system must also be customized to the unique characteristics of the company.

All in all, accounting systems must be consistent with the aims of the company, i.e., they should work in harmony with company goals.

   5.3.4 Flexibility Principle

Accounting information systems must be flexible to adjust to changes in the company, in the business environment and needs of decision makers. These changes can be technological developments, consumer tastes or company activities.

A system must be designed to adapt to these and other changes.

   5.3.5 Cost-Benefit-Principle

You wouldn’t do anything in your daily life with out first weighing the costs and the benefits. Likewise, the benefits of performing an activity in an accounting system should be greater than its costs.

For example, when you decided whether or not to report certain information, you have to compare the benefits (its usefulness to decision making) and the costs (of computing, personnel and other indirect costs).

 

   5.4.1 Subsidiary Ledgers

When a business has so many customers and suppliers, a control account for Accounts Receivable and a control account for Accounts Payable are established in the general ledger. But in addition to these, subsidiary ledger for receivables and payables may be added to the accounting system to show the balances for each individual customer and supplier separately.

A control account is an account in the general ledger that shows the total balances of all the subsidiary accounts related to it.

Subsidiary ledger accounts show the details supporting the related general ledger control account balance. For example, the subsidiary (supporting) accounts for accounts Receivable may be used to send out to each customer statements showing the balance they owe the company.

A subsidiary ledger is therefore, a group of related accounts showing the details of the balance of general ledger accounts.

Subsidiary ledgers are used to relieve the general ledger of a mass of detail. Thereby, the general ledger trial balance is shortened. What’s more, having separate ledgers promotes the division of labor as one employee can handle the control account while its subsidiary can be assigned to another employee.

The relationship between a control account in the general ledger and its subsidiary accounts can be illustrated as follows in T- account form.

	Control account in the General Ledger				Subsidiary accounts in the Accounts Receivable subsidiary Ledger

 

                                                                                   

 

                 

        Accounts Receivable                        Customer A                            Customer B

   2001                                                     2001                                     2001

   Dec. 31                                                 Dec. 31                                Dec. 31

   Bal. 10,000                                           Bal. 1,000                            Bal. 4,000

 

                                                                     Customer C                   Customer D               

                                                                  

                                                                2001                                  2001                      

                                                                Dec. 31                             Dec. 31                         

                                                                Bal. 2,000                         Bal 3,000

                                                                                           

 

As you can see the sum of all balances in the subsidiary accounts (1,000 + 2,000 + 4,000 + 3,000) on December 31, 2001 is equal to the balance in the control account (10,000).

 

When a transaction is recorded as a journal entry, it must indicate which of the subsidiary ledger accounts is affected. Posting will be made to both the control account and the subsidiary ledger account.

 

Example

 

A Br. 450 sale was made on account to Gome Balcha on January 2, 20X2. The journal entry would be:

Jan. 2 Accounts Receivable-Gome             450

                               Sales                                       450

 

The Br. 450 would be posted as a debit to both the Account Receivable control account in the general ledger and G.Balcha’s account in the subsidiary ledger. The credit would, of course, be to the Sales account in the general ledger.

 

The following can be a summary of what’s discussed above:

 

 

	General ledger         Control Account Accounts Receivable   Accounts Payable   Office Equipment, Delivery Equipment, Office Furniture				Subsidiary ledger Accounts Receivable subsidiary Ledger (account for each customer) Accounts Payable subsidiary Ledger (account for each supplier) Equipment subsidiary ledger (Account for each item of equipment).

 

 

 

 

 

 

 

 

 

 

 

 

 

5.4.2 Special Journals

A general journal is an all-purpose journal where we can record any transaction. However, as the transactions of a company increase, it is better to use special journals along with the general journal to record transactions of similar type in one, such as sales on account or cash payments. Special journals record transactions of a similar nature.

Special journals are designed to systematize the original recording of major transactions, which occur very repeatedly.

The number and format of special journals used by a company depends on the nature and size of the company’s business transactions.

The following are some of the typical examples of special journals used by most merchandising businesses.

 

 

1. Sales Journals for recording credit sales.

3. Purchase journal  for recording credit purchases.

5. General journal for transactions not recorded in any of the special journal

4. Cash payment journal for recording cash payments

2. Cash Receipt journal for recording cash receipts.

 

 

 

 

 

 

 

5.4.2.1 advantages of using special journals

1. Time is saved in journalizing. The amount of writing is reduced because it is not necessary to repeat the account titles printed already at the top of the special columns for every debit and credit.
2. Time is saved in posting- many amounts are posted as column totals rather than individually.

3. Detail is eliminated from the general ledger column. Totals are posted to the ledger means that detail is left in the special journals.

    

4. Division of labor is promoted. Several persons can work simultaneously on the accounting records. This allows management to fix responsibility and quickly locate errors.

5. Management analysis is aided. The special journal can be useful to management in analyzing classes of transactions, such as sales, because similar transactions are in one place. 

 

The sales journal is used to record sales of merchandise on credit; sales on cash are recorded in a cash receipts journal. Sales of assets other than merchandise on credit are recorded in the general journal.

5.4.2.2 Sales Journal

The sales journal is used to record sales of merchandise on credit; sales on cash are recorded in a cash receipts journal. Sales of assets other than merchandise on credit are recorded in the general journal.

Each transaction recorded in the sales journal has a debit to Accounts Receivable and a credit to Sales. Therefore, only one column is needed for these two accounts. The posting reference (P/R) column is not used when transactions are recorded; instead this column is used when posting.

Posting

Sales journal entries are posted as shown with the arrow line in the illustration. Individual transactions in the sales journal are posted regularly (daily) to subsidiary customer accounts in the accounts receivable subsidiary ledger. These postings keep customer accounts up to date.

The sales journals amount column is totaled at the end of the period. The total is debited to accounts Receivable and credited to sales.

The other special journals are illustrated below. Their operation is almost similar to the sales journal.

 

Computer technology can be divided into two broad categories: hardware and software.

Computer hardware-is the physical equipment in a computerized accounting information system. The physical equipment includes processing units, hard drives, modems, monitors, printers, etc.

Computer software- is the program that directs the operation of computer hardware. Peachtree and Sun system are some example of accounting software that help to process information.

Computer technology reduces the time and effort devoted to record keeping tasks. Accountants can now concentrate on analysis and managerial type decisions and work with less effort directed at record keeping tasks.

One added advantage of a computerized accounting system (as opposed to a paper-based manual system) is that various computers in an organization can be networked. Networking means linking or connecting computers with each other to give different users and different computers access to a common database and programs.

 

Although accounting systems vary from business to business the broad principles discussed in this unit apply to all systems.

These principles are the control, relevance, compatibility, flexibility and cost -benefit principle.