Learning Accounting and Bookkeeping Basics

Accounting System Basics: a Quick Primer

The process of accounting is 500 years old. It was begun by Fra Luca Pacioli, aka "The Father of Modern Day Accounting". In fact, the system has changed so little that Pacioli could teach accounting today.

The change has been in the tools we use. In the 1400's they used quill pens and parchment paper. Today we use computers. However, computers are simply an efficient calculator that emulates the accounting process that we did until late in the 20th century by hand. To understand the accounting process you will need to understand the books of accounting.

A complete set of books for any business will likely consist of three parts:

1. Journals
2. General Ledger
3. Subsidiary Ledgers

Each part provides information that will be valuable to a business owner.

Journals (aka, The Original Books of Entry)

The journals are the data entry tool of accounting and the front door to the accounting system. Each time we enter a transaction into an accounting system it is going into one of seven different journals. These seven journals are set up to efficiently record one or more types of transactions. For instance, the Sales Journal records the Sales transactions; The Cash Disbursements Journal records checks, and so on and so on. All entries to the accounting system must be entered into a journal before being processed further. The owner will use these books to locate individual entries.

The General Ledger (aka, The Final Book of Entry)

Every company should have one general ledger. This is the book where the financial data is organized into accounts. These accounts are listed in three primary categories: Assets, Liabilities, and Capital. Once a transaction is entered into a journal, the entries are then organized by account and transferred into the General Ledger. After all journals have been posted to the General Ledger, each account balance is determined (i.e., bank account, accounts receivable, etc.) so that the financial statements can be prepared for the owner.

Subsidiary Ledgers (aka, The Books of Analysis)

Some accounts in the General Ledger require additional information that the General Ledger does not supply. For instance, the General Ledger provides only a total of all customers that owe money to the company in the Accounts Receivable account. Obviously, in order to account for the customer's balance, the company needs to know who each customer is and how much each customer owes. This detail comes from the Subsidiary Ledger. So, in the General Ledger we might show a total balance of $6,000 in Accounts Receivable, while in the Subsidiary Ledger we might have a page for each customer showing their name, address, and the balance that individual customer owes the company. When we add up all the individual customer accounts we find they add up to $6,000. Certainly, the subsidiary ledger is required when collecting what our customers owe us.

Computers, today, often mask these books, or change their name. But an accounting system, by any other name, is still an accounting system.

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