What is Accounting System?
Accounting System is a system implemented by companies to to record financial information including Income, Expense and other accounting transactions and acts as an important tool that monitoring and tracks the performance of the company and ensures smooth running of the business.
Below are the features that an accounting system should have.
#1 – Reliability
The information produced should be reliable. It is an essential feature. If the data entered in this system is not authentic, then the outcomes are also not trustworthy. So it will not be possible to do the proper estimation of the company’s prospects if it is not reliable.
#2 – Easy To Understand
It shouldn’t involve complicated formulas and should be easy to operate. If it is complex, then the accountant who will be handling it may get confused and make errors. It should be straightforward to understand as to where precisely a transaction is hitting and what effect will the transaction have in the financial statements.
#3 – Comparability
Financial statements produced by one accounting system should be similar to those produced by other accounting systems, resulting in “apple to apple comparison.” Calculation methodologies should be as per industry standards so that the masses can understand financial statements.
#4 – Latest Software
This system should be capable of developing itself automatically with the ever-growing financial world. So the latest software which gets updated automatically should be used. Everything is going automated in today’s world, so this system should be able to adapt to this.
#5 – Easy to Use
Accounting systems should be easy to use; it shouldn’t be that an employee needs to go through rigorous training to understand the system. Once it is easily understood by all, then only everyone can bring ideas for up-gradation. The charts and statements should be easy to generate.
Types of Accounting System
They are of two types –
#1 – Single Entry
This is an informal way of maintaining a record for financial transactions. Here separate accounts are not opened. Only Expenses and Income as and when happening is recorded. So it is not possible to prepare charts and other financial statements from the single entry systemSingle Entry SystemThe Single Entry System is an accounting approach under which every accounting transaction is recorded with only a single entry towards the results of the business enterprise, shown in the statement of income of the company.. Single Entry is mostly maintained by small businesses as they don’t have the expertise to follow the latest systems and not accepted by authorities for tax reporting.
#2 – Double Entry
Double EntryDouble EntryThe double-entry accounting system refers to the double effect of every journal entry. It is based on the dual aspect i.e. Debit and Credit and this principle states that for every debit, there must be an equal and opposite credit. is accurate and is used by all major organizations worldwide. Here transactions are clubbed in separate accounts, and each transaction has two legs that affect different accounts. So it is easy to find mistakes as every transaction has two legs, so it may happen that the other leg is correct and the auditor gets a trigger from there.
How Does it Work?
Step 1: Whenever any transaction happens, such as sales, purchase, expense, or any kind of transaction, then that transaction is recorded through proper journals. So this is the first entry that you do in this system.
Step 2: As all the accounting systems are computerized now, so whenever you post a journal, the respective entry in the correct account’s ledger is done.
Step 3: At the end of the period, it calculates the balance of each ledgerLedgerLedger in Accounting, also called the Second Book of Entry, is a book that summarizes all the journal entries in the form of debits & credits to use for future reference & create financial statements. and prepares financial statements like Balance Sheet, Cash Flows, etc. accordingly.
Examples of Accounting System
Each business has got different kinds of systems dedicated to serving its purpose.
Example #1 – Retail Business
Retailers are engaged in buying and selling of goods. So their accounting system should be concentrated on the level of inventory and how much discount they are getting or giving. So the whole system should be based on different products and how much is payable or receivable. It should help them with ratios like Gross Profit MarginGross Profit MarginGross Profit Margin is the ratio that calculates the profitability of the company after deducting the direct cost of goods sold from the revenue and is expressed as a percentage of sales. It doesn’t include any other expenses into account except the cost of goods sold., Net Profit MarginNet Profit MarginNet profit margin is the percentage of net income a company derives from its net sales. It indicates the organization's overall profitability after incurring its interest and tax expenses., and other measures that they require in their operation.
Example #2 – Contractor
The most crucial factor in construction is material cost. So this system should be more elaborated on different types of raw material inputs. The system should be able to throw different ratios, which shows the movement of cost.
There are four components of the accounting system. The components are stages that help a transaction from recording to the final delivery.
#1 – Input Devices
These are tools that help in recording the transaction in this system. The primary input devices are Keyboards, Voice Assistants recorders, Bar codes, scanners, etc. So with the help of the devices mentioned above, we enter one transaction in the system.
#2 – Processor
After inserting the information, the system picks up the data and directs it to the correct ledger, journal, or other charts as required. This activity is called information processing.
#3 – Storage
Once the data is directed to a particular ledger, this system needs to store the data there. So the system will require the help of storage facilities to perform this task.
#4 – Output
Once the information is sorted, and final statements are prepared, then this system will require devices that will help in the output of the information. So this process is conducted with the help of a monitor, printer, projector, or other devices.
- Systematic record keeping of Financial Transactions helps in the preparation of charts and other outputs useful for making economic decisions.
- It helps to identify accounting frauds and omissions.
- The Financial statements produced helps in tax purposes and another auditing purpose.
The accounting system helps to record financial transactions systematically. This is required for the preparation of financial statements, which is being used by authorities for tax purposes and investors to make informed decisions. Ratios and charts are easily calculated with the help of a proper system.
This has been a guide to what is the accounting system and its definition. Here we discuss examples and two types (Single Entry and Double Entry) of the accounting system with their features and components. You may learn more about financing from the following articles –