Accounts Management System (AMS)

The Accounts Management System (AMS) allows company accountants to create and delete different types of accounts. Account holders can also transfer funds from one account to another (one at a time or in bulk). Accountants can view accounts, account sheets, and legers. Accountants can also generate Profit/Loss statements and balance sheets. Accountants can generate invoices.

The AMS uses double-entry accounting.

An accounting system is a network (directed graph). Nodes are accounts and arrows are cumulative transactions. Accounts have balances, which are initially $0, and transactions are labeled by amounts. These represent the total amount of money moved from the source account to the destination account. The balance of an account is the sum of amounts deposited into the account minus the sum of amounts withdrawn from the account. The sum of balances is always $0.

For example, assume I open a checking and savings account and my bank gives me a credit card. I begin a new job and open accounts with PG&E and my landlord. Initially all balances are $0. When I get my first paycheck, which is $5000, I deposit $4000 into my checking account and $1000 into my savings account. I pay $2000 in rent from my checking account and pay my $100 PG&E bill with my credit card. Here's my accounting system:

In this system blue accounts represent revenue and expenses, while green accounts represent assets and debts.

Accounts

A basic account has a balance of type Money, withdraw and deposit operations, a unique account number, a statement, and one or more account holders (these are people or organizations authorized to deposit and withdraw money from an account). A statement is a list of transactions. A transaction is a record of a withdrawal of funds from a source account and their subsequent deposit into a destination account.

Types of Accounts

The heart of an account management system is an account manager. An account manager manages four sets of accounts: liabilities, assets, revenues, and expenses.

Liability accounts record money received by a company from investments and loans.

Asset accounts record a company's inventory, equipment, and receivables (outstanding invoices).

Expense accounts record money spent on salaries, supplies, advertising, entertainment, etc.

Revenue accounts record money made by a company from sales of products and services.

Example

Acme Computers sells two types of computers: the Model 1, and the Model 2.

Acme got started with a loan of $50K from ABC Bank and an investment of $100K from Ace Ventures in return for a 30% ownership in the company. ABC bank also provides Acme with a corporate credit card. Acme spent $75K from the Ace investment account to buy computer components, opened a corporate checking account with ABC and transferred all of the loan amount into it, and purchased $500 worth of office furniture using the credit card.

To record this money, Acme's accountant uses the account management system to create three liability accounts: Ace investment, ABC loan, and ABC credit card. She also creates three asset accounts: inventory, ABC checking, and equipment. Next she instructs the account manager to transfer funds from the liability accounts into the asset accounts. Here's the Acme balance sheet:

 

Notice that liabilities are negative numbers and that the total value of the company, called the company's equity, is:

equity = assets – liabilities = $0

Next, the accountant creates payroll expense accounts for Acme's two employees: Chip and Nelly (the accountant). She also creates an expense account for advertising costs. She transfers $3K from checking to her payroll account, $3K from checking to Chip's payroll account, and $5K from checking to the advertising account to pay for a new ad campaign. The campaign pays off, and Acme sells 10 model 1 computers at $500 each and three model 2 computers at $1000 each. Of course this requires using up $3K of inventory to assemble the computers. Here's the balance sheet:

 

Assets are different from expenses in that assets can be sold and their cost (less the depreciation) can be recovered. Money spent on payroll or advertising campaigns can never be recovered.

Acme also issues an annual balance sheet, which computes:

(assets + liabilities) – (equity + revenue - expenses) = $136.5K - $150.5K + $8K - $11K) = $0.

equity = assets – liabilities + revenue – expenses =