© 1991 John Petroff 


Chapter 7:



The accounting system of an organization should provide all necessary information. The type of accounting system used depends on the information needs of an organization. All accounting systems should have the following characteristics:
1) cost effectiveness,
2) adequate internal controls,
3) flexibility to a changing environment, and
4) compatibility and adaptability to an organization's structure.

The installation and revision of an accounting system requires a complete knowledge of a business operation. The following steps are necessary when installing or changing an accounting system.
1)- Systems analysis: this stage determines data needs, the sources of data and any problem in processing current data.
2)- Systems design: this stage involves designing new or revising current accounting systems based upon the results of the systems analysis.
3)- Systems implementation: this final stage installs and evaluates the new or revised accounting system.

Internal controls are designed to safeguard assets, check accuracy of accounting data, promote efficiency, and encourage adherence to company policies. Internal accounting controls are specifically concerned with the protection of assets and the reliability of accounting information. Internal administrative controls are concerned with operational efficiency, and help determine whether business goals are being met.

Subsidiary ledgers are used for accounts that have a large number of individual accounts with common characteristics. Subsidiary ledgers are commonly used for accounts receivable and accounts payable; both consist of a large number of smaller accounts. The general ledger contains all balance sheet and income statement accounts. Every subsidiary ledger has a controlling account which can be found in the general ledger. The sum of the balances of the subsidiary ledger must be equal to the controlling account.

Special journals are designed to record a specific type of transaction which occurs frequently. The following is a summary of the four most commonly used special journals:
1)- purchases journal: used to record purchases on credit,
2)- sales journal: used to record all sales made on credit,
3)- cash payments journal: records all cash disbursements, and
4)- cash receipts journal: records all cash receipts.
In certain instances, business documents such as purchases and sales invoices are used instead of special journals to reduce expenses.

Items commonly purchased on account are goods held in inventory for sale, supplies, and equipment. The accounts payable account is always credited, and an asset account is debited. Assets purchased on a recurring basis have their own column in the journal. Assets purchased less regularly are posted in the sundry accounts section of the journal. At all times, total debits must equal total credits. At the end of an accounting period, all entries should be posted to a subsidiary ledger or the general ledger.

When the cash payments journal is used, the cash column is always credited whenever a payment is issued. When a payment is made for goods previously purchased on credit, the accounts payable column is credited. In the event a discount is offered for early payment, the purchases discounts column should be debited. The sundry accounts column is used for debits to accounts which do not have an individual column. At the end of the month, all data from the journal should be posted to subsidiary ledgers or the general ledger. The sum of the accounts payable subsidiary ledger must be equal to the controlling account. In the event it is not, errors must be found and corrected.

The sales journal is only used to record sales of merchandise on account. A unique feature of the sales journal is that accounts receivable debits and credits share the same column. A column also often exists to record sales tax payable. Any sales returns or allowances granted for goods sold on credit require an entry to the general journal. If a cash refund is given, the transaction should be recorded to the cash payments journal.

The cash receipts journal is used to record all transactions that increase the cash balance. The most common sources of cash receipts are cash sales and payments for goods on account. When debtors pay for goods purchased on account, the accounts receivable column should be credited. If a cash discount is taken by a customer, the sales discount column should be debited for the cash discount. All accounts in the cash receipts journal are posted periodically to the general ledger. Accounts receivables should be posted monthly to the accounts receivable subsidiary ledger.

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