Saturday, 10 April 2010

Traditional and Modern Accounting Procedures

Before starting to record business transactions, accountants have to decide what accounts to maintain and also specify the rules on how to allocate transactions to particular accounts. A Chart of Accounts and an Accounting Manual are the typical accountancy documents that are created to achieve these ends.

The recording of day-to-day transactions into books of account is known as book-keeping. Book-keepers refer to the chart of accounts and accounting manual when necessary and allocate business transactions to the correct accounts.


The graphic to the right looks at traditional and modern book-keeping practices (click on the graphic to enlarge it for readability). In traditional, paper-based systems, book-keeping typically involved:

  • Recording each type of transaction, e.g. sale, purchase, cash, etc in date order in its own book. Thus there was a sales book, purchases book, cash book and more.
  • Transcribing the transaction details from these "Books of Prime Entry" into Ledgers that contained the accounts for income, expenses, assets, liabilities etc. For example, a credit sale to customer X was "posted" to both the Sales account and X's account.
  • Each account has a "debit" column and a "credit" column, in addition to date, description and reference columns. The transaction amounts were entered either in the debit or the credit column, depending on the nature of the transaction.
  • Periodically, the debit and credit columns were totaled and each account's "balance" was extracted. It was a debit balance if total debits exceeded total credits, and vice versa.
  • The balances were then listed in a "Trial Balance". If all transactions have been correctly accounted under double entry accounting principles, the total of Debit Account Balances will be the same as the total of Credit Account Balances and the trial balance will "agree."
  • The balances in the Trial Balance were categorized into Income, Expense, Asset, Liability and Equity categories and summarized in an Income and Expense Statement and a Balance Sheet, which are the main financial statements.
Modern computerized accounting eliminated all the steps above, excepting the first step of recording the transactions into a book of prime entry, in this case a computer data entry screen. The accounting software then sorted the entries by type of transaction and date to generate a day book "report", sorted them by affected accounts to generate a ledger report and did all the balance computations and summarizations to come up with Income & Expense Statement / Balance Sheet reports.

3 comments:

  1. One of the best alternatives to protect the earnings of the business is to hire the services of professional accountants.

    melbourne accountant

    ReplyDelete
  2. The only difference between traditional and modern accounting is online data. In both the method the accounting process is same but in one we use paper and in other online software.

    ReplyDelete
  3. It is not clear pls describe again.

    ReplyDelete