In a manual accounting system, each of the steps in the accounting cycle is performed by hand. For example, each accounting transaction is entered, manually in the journal and posted manually to the ledger. To obtain ledger account balances and to prepare a trial balance and financial statements, additional manual computations must be made. In this section, therefore, we discuss how the manual processing system can be more efficiently used to process accounting data.
At this point you might be wondering, “Why cover manual accounting systems if the real world uses computerized systems?” First, small businesses still abound. Most of them begin operations with manual (or even “shoe box”) accounting systems and convert to computerized systems as the business grows. Second, to understand what computerized accounting systems do, you need to understand how manual accounting systems work.

Subsidiary Ledgers
Imagine a business that has several thousand charge (credit) customers and shows the transactions with these customers in only one account—Accounts Receivable—in the general ledger. It would be virtually impossible to determine the balance owed by an individual customer at any specific time. Similarly, the amount payable to one creditor would be difficult to locate quickly from a single Accounts Payable account in the general ledger.
To provide such information, companies use subsidiary ledgers to keep track of individual balances. A subsidiary ledger is a group of accounts with a common characteristic (for example, all customers accounts—that is, accounts receivable). The subsidiary ledger frees the general ledger from the details of individual balances. A subsidiary ledger is an addition to, and an expansion of, the general ledger.

Two common subsidiary ledgers are:
1. The accounts receivable (or customers’) ledger which accumulates transaction data with individual customers.
2. The accounts payable (or creditors’) ledger which maintains transaction data with individual creditors.
In each of these subsidiary ledgers, individual accounts are usually arranged in
alphabetical order.
The detailed data shown in a subsidiary ledger are summarized in a general ledger account. The accounts for the two ledgers above are Accounts Receivable and Accounts Payable, respectively. The general ledger account that summarizes subsidiary ledger data is called a control account. Each general ledger control account balance must equal the composite balance of the individual accounts in the related subsidiary ledger at the end of an accounting period. An overview of the relationship of subsidiary ledgers to the general ledger is shown in Illustration 6-2, with the general ledger control accounts in color.

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Good accounting systems do not just happen. They are carefully planned, designed, installed, managed, and refined. Generally, developing an accounting system involves the following four phases:

1. Analysis. The starting point of analysis is to determine the information needs of internal and external users. Once this is established, the system analyst proceeds to identify the sources of the information and the records and procedures for collecting and reporting the data. If an existing system is being analyzed, its strengths and weaknesses must be identified.
2. Design. For a new system, forms and documents must be designed; methods and procedures selected from alternatives; job descriptions prepared; controls integrated; reports formatted; and equipment selected. Redesigning an
existing system may involve only minor changes, a complete overhaul, or replacement of a manual system by a computerized system.
3. Implementation. Implementation of either new or revised systems requires that documents, procedures, reports, and processing equipment must be installed and made operational. Personnel must be hired, trained, and closely supervised through a start-up or transition period.
4. Follow-up. After the system is up and running, it must be evaluated and monitored for weaknesses and breakdowns. Also, its effectiveness and efficiency must be compared to design and organizational objectives. Corrections in design or changes in implementation may be necessary.

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The system of collecting and processing transaction data and disseminating financial information to interested parties is known as the accounting information system. It includes each of the steps in the accounting cycle that you have studied in earlier chapters, the documents that provide evidence of the transactions and events, and the records, trial balances, work sheets, and financial statements that result. An accounting information system may be either manual or electronic.

To have an efficient and effective accounting information system (hereafter referred to simply as the accounting system), certain basic principles must be followed. These principles are:

1. Cost awareness. The system must be cost effective: the benefits obtained from the information disseminated must outweigh the cost of providing it. For example, the value of each accounting report should be at least equal to the cost of producing it.

2. Useful output. To be useful, information must be understandable, relevant,
reliable, timely, and accurate. Designers of accounting systems must consider
the needs and knowledge of various users so that the system’s output (reports
and statements) will be useful to them. For example, sales managers

may need weekly reports of sales, and factory supervisors may need daily reports of production. Others with differing responsibilities (such as vice-presidents) may need such reports only monthly or quarterly.

3. Flexibility. The accounting system should be able to accommodate a variety
of users and changing information needs. The business environment changes
as a result of technological advances, organizational growth, increased competition,
government regulation, or changes in accounting principles, when
it does, the accounting system should be sufficiently flexible to meet the
resulting changes in the demands made upon it.
If the accounting system is cost effective, provides useful output, and has the
flexibility to meet future needs, it can provide a valuable service and make a
major contribution to both individual and organizational goals.

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First, the one-line entry for each sales transaction saves time, because it is not necessary to write out a debit to Accounts Receivable and a credit to Sales for each transaction. Second, only totals, rather than individual entries, are posted to the general ledger, thus saving posting time and reducing the possibilities of errors in posting. Finally, a division of labor results, because one individual can take responsibility for the sales journal.
Cash Receipts Journal
All receipts of cash are recorded in the cash receipts journal the most common types of cash receipts are cash sales of merchandise and collections of accounts receivable. Many other possibilities exist, however, such as receipt of money from bank loans and cash proceeds from disposals of equipment, buildings, or land. A one-column cash receipts journal is not sufficient to accommodate all possible cash receipt transactions. Therefore, a multiple-column cash receipts journal is used.
Generally, a cash receipts journal includes debit columns for cash and sales discounts and credit columns for accounts receivable, sales, and “other” accounts. The other accounts category is used when the cash receipt does not involve a cash sale or a collection of accounts receivable

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Good accounting systems do not just happen. They are carefully planned, designed, installed, managed, and refined. Generally, developing an accounting, system involves the following four phases:
1. Analysis. The starting point of analysis is to determine the information needs of internal and external users. Once this is established, the system analyst development of a proceeds to identify the sources of the information and the records and pro- accounting system. If an existing system is being analyzed, its strengths and weaknesses must be identified.
2. Design. For a new system, forms and documents must be designed methods and procedures selected from alternatives; job descriptions prepared; con troll integrated; reports formatted; and equipment selected. Redesigning an existing system may involve only minor changes, a complete overhaul, or replacement of a manual system by a computerized system.
3. Implementation. Implementation of either new or revised systems requires that documents, procedures, reports, and processing equipment must be in stale and made operational. Personnel must be hired, trained, and closely supervised through a start-up or transition period.
4. Follow-up. After the system is up and running, it must he evaluated and monitored for weaknesses and breakdowns. Also, its effectiveness and iffy clench must be compared to design and organizational objectives. Correction in design or changes in implementation may be necessary.
These phases, which represent the life cycle of an accounting system, suggest that few systems remain the same forever. As experience and knowledge are obtained, and as technological and organizational changes occur, the accounting system may also have to grow and change. The accounting system in the first five chapters is satisfactory in a company where the volume of transactions is extremely low. However, in most companies, it is necessary to add additional ledgers and journals to the accounting system to record transaction data efficiently.

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Two forms of the income statement are widely used by merchandising companies. These income statements are explained below. The multiple-step income statement is so named because it shows the numerous steps in determining net income (or net loss). The Highpoint Electronic income statement in Illustration 5-13 is an example. It shows two steps: (1) cost of goods sold was subtracted from net sales, and (2) operating expenses were deducted from gross profit. These steps pertain to the Company’s principal operating activities. A multiple-step statement provides users with more information about a company’s income performance by distinguishing between operating and non- operating activities. The statement also highlights intermediate components of income and shows sub groupings of expenses.
No operating Activities
No operating activities consist of (1) revenues and expenses that result from secondary or auxiliary operations and (2) gains and losses that are unrelated to the company’s operations. The results of no operating activities are shown in two sections: Other revenues and gains and other expenses and losses.

In a manual accounting system, each of the steps in the accounting cycle is performed by hand. For example, each accounting transaction is entered, manually in the journal and posted manually to the ledger. To obtain ledger account balances and to prepare a trial balance and financial statements, additional manual computations must be made. In this section, therefore, we discuss how the manual processing system can be more efficiently used to process accounting data.
At this point you might be wondering, “Why cover manual accounting system-is if the real world uses computerized systems?” First, small businesses still abound. Most of them begin operations with manual (or even “shoe box”) accounting systems and convert to computerized systems as the business grows. Second, to understand what computerized accounting systems do, you need to

Subsidiary Ledgers
Imagine a business that has several thousand charge (credit) customers and shows the transactions with these customers in only one account Accounts Receivable in the general ledger. It would be virtually impossible to determine the balance owed by an individual customer at any specific time. Similarly, the amount payable to one creditor would be difficult to locate quickly from a single Accounts Payable account in the general ledger.
To provide such information, companies use subsidiary ledgers to keep track of individual balances. A subsidiary ledger is a group of accounts with a common characteristic (for example, all customer accounts that is, accounts receivable). The subsidiary ledger frees the general ledger from the details of individual balances. A subsidiary ledger is an addition to, and an expansion of, the general ledger.

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The standard oil company of Ohio was organized in 1870, combining the oil refining and distribution operations of the Rockefeller brothers and others. Within 2 years, they had acquired control of most of the oil refineries in and around Cleveland. By 1882, standard controlled some 90 per cent of the production, refining, and distribution of oil in the United States.

In o ne of the earliest monopolization cases to search the Supreme Court, the government alleged and the Supreme Court accepted that standard oil had employed the following techniques on its way to achieving this market position:

1. Local price wars to drive rivals out of business or to reduce the price paid by standard oil for a merger agreement.
2. Purchase of rivals for the purpose of dismantling their refineries and taking them out of production.
3. Negotiation of preferential rebates, not available to competitors, from rail road companies.
4. Control of pipelines needed to ship oil from oilfields to refineries.
5. Operation of bogus independent companies, actually controlled by standard oil, to maintain an appearance of competition.

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