Description of Manual Accounting Systems
Organizations and businesses use an accounting system as a method to collect, report, and maintain their financial information. These accounting systems come in all shapes and sizes and can be easily tailored to an individual organization's needs. Some companies prefer a manual accounting system, which allows them to carefully design the process while using the traditional method of keeping track of all financial transactions on paper or in a localized spreadsheet. Manual accounting systems allow the organization to take full accountability of all the records collected and maintained by the organization. Without the added moving parts of technology, the company is able to meticulously and internally make decisions about how information is recorded. Accounting can be a challenging subject to learn. Knowing how to manually perform accounting functions is helpful in understanding the overall financial health of a business.
An alternative to a manual accounting system is a computerized accounting system. Some businesses choose a manual system because implementation of a computerized system can be difficult. The primary difference between the two types of systems is that a computerized accounting system uses computer software (localized or online) to record and maintain all accounting transactions. Though it requires less time and effort to maintain, implementation of a computerized accounting system can be quite costly. Therefore, many start-up organizations elect to begin their business by maintaining their accounting transactions manually. Maintaining a manual accounting system also provides the user with the ability to easily identify relationships between reports and accounting data. Having a more hands-on approach is beneficial in that errors are easier to notice and there is no potential risk of software errors that could threaten the integrity of the accounting records.
Using an accounting system is simply a way of organizing materials effectively and efficiently. Accountants are tasked with maintaining financial information in an organized way that will give rise to a clear and concise presentation of that information when the time comes. Using a system helps to alleviate the task of repeating processes. It also helps with summarizing the information in a clear way. Regardless of the system used or the size of the organization, having some type of accounting system in place is imperative for the financial success of the organization.
Overview of Subsidiary Ledgers and Control Accounts
The general ledger contains the balance of all accounts used within an organization. These accounts are the source of data that is used to create the income statement and balance sheet. Each account listed on the general ledger is derived from information contained within the detailed individual accounts, known as the subsidiary ledgers. A subsidiary ledger is a detailed individual account that feeds into a controlling account used to make up the general ledger balance. The individual accounts are then summarized in a controlling account within the general ledger. When financial statements are presented to shareholders and other interested parties, only the current balance in a given control account is included. However, to arrive at the amount or number used in those accounts, the accountant must keep detailed records of the organization's customers and creditors.
For example, John Wales is a customer of ABC Company. He purchased $5,000 worth of supplies on account, and now his current outstanding balance is $10,000. However, upon looking at the balance sheet, ABC Company has a total balance in the accounts receivable account of $50,000. John's outstanding balance of $10,000 is only part of what makes up the current accounts receivable balance for ABC Company. Even though the details do not show up in the financial statements of ABC Company, the accountant still needs to know what makes up the $50,000 balance. The accounts receivable subsidiary ledger (customer ledger) is an individual ledger account used to keep track of all of the individual customer accounts. These individual accounts are then summed together to make up the total accounts receivable balance. The ability to drill down to the individual account level allows the company to have a record of what makes up its accounts receivable balance at any given time. It is also able to trace information back to its original source and spot errors easily.
As another example, ABC Company purchases supplies from DEF Company, a creditor of ABC Company. An accounts payable subsidiary ledger (creditors ledger or vendor ledger) is an individual ledger account used to keep track of all of the individual vendor/creditor accounts. The individual accounts are then summed together to make up the total accounts payable balance. In addition to providing detailed information for the summarized information presented in the financial statements, using accounts payable subsidiary ledgers is helpful for determining the outstanding balances owed to each of ABC Company's creditors.Subsidiary Ledger
Special Journals
Subsidiary ledgers provide details for purchases and receipts of individuals or companies outside of the organization. A special journal is used to summarize a single group of frequent transactions within an organization. Typically, a sales transaction of an organization will elicit the use of both a subsidiary ledger and a special journal. However, if a transaction or entry does not have a corresponding special journal, then these items are recorded in the general journal, the journal used to record transactions and entries for all accounts used within an organization.
Recording transactions requires two steps: entering details in a journal and then transfering that information from the journals to the subsidiary and general ledger accounts. All transactions are recorded individually, in date order, in either the general journal or one of the four common special journals. At the end of the accounting period, usually monthly, the transactions related to individual customers or creditors are transferred from the special journals to the accounts receivable and accounts payable subsidiary ledgers, respectively. The individual amounts in the general journal are transferred to the appropriate accounts in the general ledger. Double-entry accounting is always used within these special journals, where the total debits and credits must always match.Special Journals and Subsidiary Ledger
Revenue Journal Entries
| Date | Account | Accounts Receivable or Cash (DR) | Fees Earned (CR) |
|---|---|---|---|
| Dec 31 | Customer ABC | $1,600 | $1,600 |
| Dec 31 | Customer DEF | $2,400 | $2,400 |
| Dec 31 | Customer GHI | $1,300 | $1,300 |
When recording journal entries in the revenue journal, any use of the accounts receivable account will result in a change to at least one of the customer accounts in the accounts receivable subsidiary ledger. Keep in mind that the idea of special journals is to keep similar transactions in one place.
The cash receipts journal is used to record all fees earned and paid with cash as well as any other transactions that bring cash into the organization. The cash receipts journal is where all of the increases in cash (debits) are initially recorded for the company. Two common examples of ways that a company might receive cash are through earning revenue for service completed or merchandise sold and receiving interest income. These common journal entries are illustrated.
When thinking about the cash receipts journal, the main thing to remember is that if there is a journal entry for a transaction that requires increasing cash with a debit, then this transaction will be recorded in the cash receipts journal.
The most common accounts used in the cash receipts journal are the cash account and the accounts receivable account. On occasion the company may receive revenue from other sources, such as interest income and the sale of equipment.
Cash Receipts Journal Entries
| Date | Account | Cash (DR) |
Accounts Receivable (CR) |
Other Accounts (CR) |
|---|---|---|---|---|
| Dec 31 | Interest Income | $1,200 | $1,200 | |
| Dec 31 | Customer ABC | $500 | $500 | |
| Dec 31 | Customer DEF | $2,600 | $2,600 |
The purchases journal is used to record all purchases that are made on account. Generally, these entries will have a credit to accounts payable to indicate that this liability account is increasing. In other words a larger amount is owed to creditors. Traditionally, when purchasing items and using the accounts payable account, the organization is buying things such as supplies, inventory, small equipment, and any other small items the company makes using credit. The use of the accounts payable account will also warrant an entry in the accounts payable subsidiary ledger.
In the purchases journal there is a column for the commonly used accounts, supplies and accounts payable, as they both pertain to purchases. There is also a column that is used to catch the remaining items that cannot be categorized as accounts payable or supplies. In the example, the purchase of office equipment includes a credit to accounts payable, but the debit will fall under the other account column, more specifically, office equipment.
Purchases Journal Entries
| Date | Account | Supplies (DR) |
Other Accounts (DR) |
Amount (DR) |
Accounts Payable (CR) |
|---|---|---|---|---|---|
| Dec 31 | Nance Supplies | $600 | $600 | ||
| Dec 31 | Wilson Supplies | $400 | $400 | ||
| Dec 31 | NYLO Business Systems | Office Equipment | $1,300 | $1,300 |
Cash Payments Journal Entries
| Date | Account | Accounts Payable (DR) |
Cash (CR) |
Other Accounts (DR) |
Amount |
|---|---|---|---|---|---|
| Dec 31 | GHI Utility Company | $1,200 | Utilities Expense | $1,200 | |
| Dec 31 | Creditor ABC | $700 | $700 | ||
| Dec 31 | Creditor DEF | $1,600 | $1,600 |