Accounting system - What is an accounting system?
An accounting system is the system used to manage the income, expenses, and other financial activities of a business
An accounting system allows a business to keep track of all types of financial transactions, including purchases (expenses), sales (invoices and income), liabilities (funding, accounts payable), etc. and is capable of generating comprehensive statistical reports that provide management or interested parties with a clear set of data to aid in the decision-making process.
Today, the system used by a company is generally automated and computer-based, using specialized software and/or cloud-based services. However, historically, accounting systems were a complex series of manual calculations and balances.
What an accounting system manages
1. Expenses: The amount of cash that flows out of the company in exchange for goods or services from another person or company are the expenses. In older accounting software or with a manual system such as Excel, it is necessary to manually enter, balance, and categories each expense. An automatic accounting system allows quick entry, categorization and automatic balance of expenses.
2. Invoices: Creating a professional looking invoice is an important part of developing a positive brand image and building confidence with customers. Today, some accounting systems such as Debitoor allow for instant invoice creation with the ability to customise and automatically keep track of paid invoices and income.
3. Funding: All the business liabilities, whether accounts payable, bank loans taken to support the business, or mortgages, etc. An accounting system keeps track of these liabilities as payable values and automatically updates the balances as soon a payment is made and accounts are settled.
Accounting systems in history
The earliest known accounting records were found in the Middle East and date back over 7,000 years!
It was important for early rulers, businesses, and individuals to be able to keep track of income and expenditure, whether due to a desire to determine whether a particular activity was profitable, to tax citizens or to impose customs fees.
In the late 1400s, the Italian friar Luca Pacioli earned his accreditation as the 'Father of Accounting', for describing the structure of the double-entry bookkeeping system used by Venetian merchants during the Italian Renaissance, which has served as the direct predecessor of modern accounting practices. He is perhaps best known for stating the Golden Rule of Accounting:
'Do not go to bed before the debits equal the credits'
Modern accounting systems
Jumping ahead to 1880, the first accounting machine was invented by a man named Herman Hollerith. Known as the tablulating machine, it used punch cards to add numbers to a card that could then use to determine the total. Hollerith also founded a company that later merged to become a component of IBM.
In the 20th century, developments in computer technology and especially the introduction of the PC meant that it was possible for "ordinary people" to gain access to a definite system. That is: an accounting system that does it all. From the first DOS-based accounting systems such as PcPlus to today's Internet-based accounting systems such as Debitoor, which uses SaaS (or cloud computing), all serve as models for the distribution of accounting systems.
What Are the Different Types of Accounting Systems? Options Explained
There are two types of accounting systems: The first is a Single Entry System where a small business records every transaction as a line item in a ledger. The other is a Double Entry System, where every transaction is recorded both as a debit and credit in separate accounts.
A Double Entry System ensures a company’s books balance.
What Is the Difference Between Single Entry and Double Entry?
A single entry system of accounting is usually used by very small businesses for its simplicity. Perhaps the business does not do a lot of transactions in a given day, or it’s a sole proprietorship and the owner does not require or have time for extensive bookkeeping. A single entry system is convenient, simple (no formal training is needed) and provides costs savings as it does not require complex software. A small business owner could run a single entry system of accounting on an excel program, if he so desired.
There are drawbacks to a single entry system. Due to the incomplete nature of the data entered, proper financial reporting is impossible. As such, it’s hard for the business owner to do a financial analysis and plan resources for the future. Errors are much more likely to go unnoticed and theft is less likely to be detected (because there is no asset inventory in place). Tax authorities do not recognize a single entry system of accounting for reporting purposes of any kind.
A double entry system is a much more detailed bookkeeping process, typically used by larger businesses. A double entry system will provide complete records and allows for the creation of proper financial statements. Errors are also quicker to detect. A double entry system of accounting paints a much more accurate picture of a company’s finances.
A double entry system is costly, often complex, and time-consuming. It is also subject to error too, if an entire transaction is not recorded there is no way for the system to know.
What Are the Types of Accounting Software?
SINGLE ENTRY SYSTEM
A single entry system does not require complicated software. An excel spreadsheet or something similar is all that’s needed to input the information. For instance, a single entry system transaction could look something like this:
Date | Description | Expense | Income | Tax | Pay Method | Balance |
04/07/18 | Pen set | N/A | $85.80 | $5.80 | Cash | $7,800 |
Note that the ‘Expense’ column is empty. Because this was a sales transaction, the payment by the customer is considered “Income”. Had this business been paying a supplier instead, then ‘expense’ is where the amount payable would have been entered.
The ‘Balance’ refers to the overall cash balance of the company in its business bank account, once the transaction has been added.
DOUBLE ENTRY SYSTEM
A double entry system of accounting does require software to properly manage it. Business owners should look online for software that is easy to understand (designed for business owners, not for accountants) and one that provides instant access to a number of reports, such as:
· Profit & Loss statement
· General Ledger
· Chart of accounts
· Sales tax summary
· Invoice summary
· Payment summary
· Expense reports
What Are the Types of Accounting Methods?
There are two types of accounting methods: Cash Accounting and Accrual Accounting:
CASH ACCOUNTING METHOD
Cash accounting records income and expenses as they are received and paid (when the money trades hands).
ACCRUAL ACCOUNTING METHOD
Accrual accounting records the dollar amounts when a transaction (a bill going out or an invoice coming in) occurs, not when the cash is actually exchanged. An accrual accounting method is required by law when a business exceeds 5 million in sales. It is believed that this method of accounting gives a more accurate picture of a company’s finances.
These are the two main types of accounting methods, although sometimes companies are allowed to use a hybrid of the two, if certain conditions are met.
تعليقات
إرسال تعليق