Basic Accounting System for Business Profitability and Growth
Accounting system is processes and procedures put together by an organization with the objective of capturing and processing its financial transactions with the objective of generating financial reports that show a true and fair view of the performance and position of the organization at any particular point in time to the stakeholders of the organization.
In simple terms, it can also mean a system employed by an organization to organize and process financial information with the objective of keeping track of expenses, income, assets, liabilities and other activities
Objectives of Accounting system
- Identification financial transactions and tracking of spending and revenue
- Systematically recording financial transactions in the proper books of accounts.
- Establish controls at the point of identification and recording of financial transactions by way of authorizations and limitation levels.
- It streamlines office workflow through processes and procedures
- Prevent and detect fraud, waste, and theft.
- Timely and accurate picture of performance
- Generate financial reports for management, lenders, creditors, and regulatory authorities.
- Facilitate filing of tax returns especially for value-added tax, withholding tax and payroll tax (PAYE).
Types of Accounting System
The choice of accounting system depends on the size of the business, budget and the preferences of the owners and managers in terms of information needs, accuracy, and timely reporting. There are four main types of accounting system as stated below:
- Single Entry System
- Double Entry System
- Manual System
- Computerized (Software) System
Single Entry System: Records each accounting transaction with a single entry in the accounting records. The single-entry system is centered on the results of a business that are reported in the income statement. Cash disbursement and receipts form the basis of a recording in a single entry system. The primary form of record-keeping in a single entry is cash book which can include the cheque register. Asset and liability records are usually not tracked in a single-entry system; these items must be tracked separately.
The most significant problems associated with a single entry system include:
- Assets. Assets are not tracked, so it is easier for them to be lost or stolen.
- Audited financial statements. It is impossible to obtain an audit opinion on the financial results of a business using a single entry system; the information must be converted to a double-entry format for an audit to even be a possibility.
- Errors. It is much easier to make clerical errors in a single entry system, as opposed to the double-entry system, where separate entries to different accounts must match.
- Liabilities. Liabilities are not tracked, so you need a separate system for determining when they are due for payment, and in what amounts.
- Reporting. There is much less information available upon which to construct the financial position of a business, so management may not be fully aware of the performance of the business.
Single-entry systems are strictly used for manual accounting systems since all computerized systems utilize the double-entry system instead.
Double Entry System: This is where every transaction is recorded in two separate account as debit and credit.
Every account has two “sides”, a right side and a left side. A debit refers to an entry on the left side of an account, and a credit refers to an entry on the right side of an account. Double-entry bookkeeping requires that for every transaction, there is an entry to the left side of one (or more) account, and a corresponding entry to the right side of another account(s).
Advantages of Double Entry System
- This system increases the accuracy of the accounting, through the trial balance device
- Profit and loss suffered during the Year can be calculated with details
- By following this system, the company can keep the accounting records in detail which eventually helps in controlling
- The recorded details can be used for comparison purposes as well. Details of the first year can be compared with the second year, deviations found any during comparison can be worked on.
Manual Accounting System: Under this system, both the recording and the processing of financial transactions are performed, by hand, pencils, pen, and paper. It is always a way of keeping business financial records with a written ledger of transactions. This involves the use of paper ledgers and journals to record financial transactions.
Disadvantages of Manual accounting
- It is time-consuming in terms of:
- Location of accounts and journals before recording entries.
- Checking account balances and reviewing information
- Retrieval of information is always difficult.
- Subject to a lot of errors like entering information into incorrect accounts, transposing figures or recording information backward.
- Lack of security of information.
- Few copies are always available.
Components of Accounting System
These are the elements that makeup and uphold the accounting system in generating information for the stakeholders. They are:
- Source/Supporting Documents – are the original document that contains the details that supports or establishes transactions that will be entered or has been entered into the accounting system such as sales invoices, payment vouchers, good received notes. These could be printed paper or soft (digital) documents. Both manual and computerized accounting systems utilized a source document.
- Input Devices – like bar code scanners, keyboards, modems, pen or pen pencils, and paper are tools used to enter transaction information into the accounting system. These are the means by which source documents entered into the accounting system.
- Processing Units – take the raw data from the input devices and post into the journals and general ledger and generates the report for the decision-maker. In the case of manual accounting, it is the man that does the processing using his mental ability and probably calculator to generates a report for the executive.
- Storage Devices – this is the part of the system that stores the journals, ledgers and the reports generated by the processing units. In this day of technology, accounting software is used and this makes the storage devices to be servers and hard drives. In a manual accounting system, file cabinets are storage devices.
- Output Unit – In the modern-day computerized environment, output devices are monitors, printers, projectors, and any other devices that take information from the storage devices and display it in a useful manner, so that it can be used.
Quality specification of a good accounting system
- Reliable Information should be reliable and accurate for accurate budget forecasts and decision making.
- Timeliness If you do not present accounting information in a timely manner, its usefulness to investors and managers is diminished or completely eliminated.
- Consistency In order for accounting information to be useful in decision making, it must be recorded consistently, meaning the same accounting treatment must be applied at all times to a given type of accounting data.
- Comparability is a subset of consistency. If you cannot compare accounting information for one period of time to another, then you cannot derive useful information in order to make operational decisions.
The whole essence of this content piece is to raise awareness of the importance of accounting system among business owners and managers.
Indeed, you started out thinking of what use is an accounting system to my bottom line, I hope by now that you’ve come to realize that a properly set up accounting system can prevent fraud, reduce waste and probably eliminate theft.
I don’t necessarily expect you to suddenly start dismantling your current accounting system. Rather it would be helpful if you can call in a professional accountant to help you review your business accounting system. And you may
also want to look at the competence of your accounting staff.
Go ahead and try it – you may just be surprised at your findings!