How Proper Accounting System Actually Help to Save Money
An accounting system comprises a set of records and the procedures and equipment used to perform the accounting functions. A system is a set of rules or procedures, an arrangement of things, or a group of related things that work towards a common goal or objectives.
The business itself is an embodiment of systems that comprises production system, marketing system, and accounting system which is the hallmark of systems in businesses because it serves as a smart back office and the home of business intelligence.
Poor financial management is one of the primary reasons for small business failure especially in the first year of the business. Therefore for small business owners, accounting is crucial due to the reasons below:
- Keep a track of the cash flow. To prevent your business cash flow from running dry, you should implement policies for efficient record-keeping and a sound financial strategy.
- To understand the concepts of fixed costs, variable costs, and how to accurately cost your project, small business owners can rely on cost accounting. This way you don’t end up losing money on a project you thought would be a big earner
- Accounting gives you a better grasp of the well-being of the business. You can do this by learning to read the statement of financial position (balance sheet), income statement, and cash flow statement
- Helps you detect and avoid fraud and theft by customers, employees, and suppliers
- When you understand the business finance and dealings, you are better equipped with facing audits
- Bankers are more confident when dealing with business owners who have a handle on the business finances and actually understand financial implications
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.
An accounting as an information system (AIS) is a system of collecting, storing and processing financial and accounting data that are used by decision-makers. An accounting information system is generally a computer-based method for tracking accounting activity in conjunction with information technology resources.
Types of Accounting Systems
Choosing an accounting system depends on your budget, preferences, and business size. The four main types of financial software systems include:
- Single-entry systems
- Double-entry systems
- Manual accounting systems
- Computerized accounting systems/software
These can be further broken down into several other categories, such as; custom accounting software, enterprise resource planning software, commercial off-the-shelf software, and more. Modern-day software solutions like Tally offer varied capabilities which make your everyday accounting tasks a cakewalk.
Single-entry systems are the most basic option. As their name suggests, they record each transaction with a single entry in the accounting journal. This method is easy to use and doesn’t require any technical expertise in accounting. It appeals to small companies with a low volume of transactions. However, the downside is that it’s prone to errors and doesn’t track accounts receivable, accounts payable, liabilities, and more.
Double-Entry Systems: a system of accounting or bookkeeping means that for every business transaction, amounts must be recorded in a minimum of two accounts. The double-entry system also requires that for all transactions, the amounts entered as debits must be equal to the amounts entered as credits. This method of accounting requires technical expertise and misapplication could result in the serious irregularity of the financial statements.
Manual accounting systems use physical records, pads of paper, and books, onto which transactions are entered by hand. Accounting pages have four or more printed columns and multiple rows, natural divisions for the necessary information, such as date, description, and dollar amounts.
Computerized accounting systems are software programs that are stored on a company’s computer, network server, or remotely accessed via the Internet. A firm prepares various reports with the help of it.
Accounting systems procedures
- Analyzing and Classifying Data about an Economic Event: Identifying the transactions from the events is the first step in the accounting process.
Events are analyzed to find the impact on the financial position or to be more specific the impacts on the accounting equation.
Documents such as; a receipt, an invoice, a credit note, a debit note, a waybill, a voucher, a deposit slip, a depreciation schedule, and a bank statement, etc. provide evidence that an economic event has actually occurred.
- Journalizing the transaction: Transactions having an impact on the financial position of a business are recorded in the general journal.
In the general journal, the transactions are recorded as a debit and a credit in monetary terms with the date and short description of the cause of the particular economic event.
- Posting from the Journals to General Ledger: Transactions recorded in the general journal are then posted to the general ledger accounts.
The accounts classify accounting data into certain categories and they are recorded in general journal entries according to that classification.
Depending on the frequency of the transactions posting to ledger accounts may be less frequent.
- Preparing the Unadjusted Trial Balance: To determine the equality of debits and credits as recorded in the general ledger, an unadjusted is prepared. It is a way to investigate and find the fault or prove the correctness of the previous steps before proceeding to the next step.
- Unadjusted Trial Balance makes the next steps of the accounting process easy and provides the balances of all the accounts that may require an adjustment in the next step.
The unadjusted balance sheet is for internal use only.
- Recording Adjusting Entries: Adjusting entries: ensure that the revenue recognition and matching principles are followed. To find the revenues and expenses of an accounting period adjustments are required.
Adjusting entries are required to be because a transaction may have influenced revenues or expenses beyond the current accounting period and to journalize to the events that are not yet recorded.
- Preparing the Adjusted Trial Balance: An adjusted trial balance contains all the account titles and balances of the general ledger which is created after the adjusting entries for an accounting period have been posted to the accounts.
It is an internal document and is not a financial statement.
It helps to create the income statement and balance sheet and provides enough information for preparing the cash flow statement.
- Preparing Financial Statements: Financial statements are prepared from the balances from the adjusted trial balance. The financial statements are made at the very last of the accounting period.
Cash flow statement, income statement, balance sheet, and statement of retained earnings; are the financial statements that are prepared at the end of the accounting period.
This is the output of the accounting process, which is used by the interested parties both within and out of the organization.
- Recording Closing Entries: At the end of an accounting period, Closing entries are made to transfer data in the temporary accounts to the permanent balance sheet or income statement accounts.
Transferring the balances of the temporary accounts or nominal accounts (e.g. revenue, expense, and drawing accounts) to the owner’s equity or retained earnings account is used because these types of accounts only affect one accounting period.
- Preparing a Closing Trial Balance: To make sure that debits equal credits, the final trial balance is prepared. As the temporary ones have been closed only the permanent accounts appear on the closing trial balance to make sure that debits equal credits.
- Recording Reversing Entries: Posit closing entries is an optional step of the accounting cycle. A reversing journal entry is recorded on the first day of the new period for avoiding double counting the amount when the transaction occurs in the next period.
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In conclusion, a well-structured accounting system will provide you with enough info to identify areas where you can save money whether you simply spend less on certain items, renegotiate terms with a supplier, reduce bank charges or buy greater quantities, there are numerous opportunities to reduce costs.