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Manual Accounting Systems
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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 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 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.
