An accounting system is used to manage the expenses, income and other financial activities of a business entity. It allows businesses to track all types of financial transactions including sales (income and invoices), purchases (expenses), liabilities (accounts payable, funding), etc. An accounting system helps you to generate comprehensive statistical reports to help the decision-making process of management and interested parties.
Before the emergence of digital bookkeeping systems, manual methods were used which were slow and highly prone to manual errors. The digital accounting system ensures ease of use and reliability by eliminating discrepancies. In this article, we will learn about accounting system software, accounting system automation etc.
Did you know the English word ‘accounting’ originates from the noun ‘account’? It is taken from the old French word ‘acont’ meaning ‘account, reckoning or terminal payment.’
Accounting System Meaning
An accounting system is a software or system that manages and organizes financial activities including expenses, income and other more of a business. The main purpose of having an accounting system in a company is to track business transactions, income, expenses, outstanding and all financial activities.
Overall, it functions as a tool that monitors data that can affect your finances and the monetary health of your business. Most companies are used to basic accounting systems software to facilitate financial activities related to expenses, revenue and liabilities. In the digital era, accountants also use technologically advanced accounting systems like auto-data backup, reporting, payment reminders and more.
Also Read: All You Should Know About Competition Commission Of India
Functions of an Accounting System
The accounting systems help to calculate the credit ratios, and salaries paid to employees, process payroll, sales and inventory data, record in & out transactions and perform all key transactional aspects of the business. Moreover, an accounting system can manage all your financial obligations, such as
It is the stated amount of money that is spent by the organisation/system in exchange for products or services. In the case of manual accounting, all entries need to be entered manually and each expense to be categorized. It is not only time-consuming but hectic and has a high chance of discrepancies. In the new-age accounting system, you can automatically conduct entries and notice further categorization of balance entries.
It is the money that flows in an organisation/system in exchange for services or goods. Modern accounting system helps to manage company profits, income and revenue automatically and seamlessly.
In a modern business strategy creating professional invoices for branding can give you a competitive edge. Accounting systems allow easy invoice customization with a name, brand logo, contact, address etc and automate tracking of income and paid invoices.
Business liabilities such as bank loans, accounts payable, mortgages etc. that are availed of to fund the business, come under underfunding. The system keeps track of every liability and automatically updates the account balance once the money comes in or goes out of the system. The account is automatically settled as soon as the payment is made.
Also Read: Golden Rules of Accounting | 3 Main Principles | Khatabook
Types of Accounting Systems
An accounting system can fall under several categories depending on its features, benefits, uses and more. There are two important types of accounting systems which everyone must know. The two major types of accounting systems are as follows.
Single Entry Accounting System
This is the basic accounting system and records each monetary transaction in a single entry in an accounting book. This is user-friendly and does not necessarily need any expert knowledge. Small businesses with low-volume transactions can easily use the single-entry accounting system. Since it is a sales transaction, the expense column is empty. The payment made by the customer is referred to as ‘Income’. In case the supplier buys any material and pays for it, it will be an ‘Expense”. The balance reflects the overall account balance of the company after adding the transaction.
The single entries can be listed in an excel sheet for a record. Yet, it is prone to possible errors and doesn’t track account receivables, liabilities, payables and else. Therefore, most accounting systems now consider using double-entry bookkeeping. It simply means that the transaction will be made using two accounts since they will be more liable and accurate for drafting reports.
Double Entry Accounting System
A double-entry system in accounting requires modern software to manage all the transactions efficiently. In a double-entry system, there are two accounts where one gives the money and the other one receives it. The transaction is divided into Credit and Debit. Here one account needs to be debited while the other account is to be credited. This double-entry accounting system facilitates the system to check that each debit done has an equal and corresponding credit. This entry system helps businesses by providing reports such as:
Profit and loss statement
Features of Accounting System
Businesses need key features like invoicing, billing, a payments processing system, payroll management, electronic tax payment and inventory management integrated into the system to simplify the accounting process. The features of an accounting system software should be as follows to provide you with a seamless experience.
Also Read: What is a Billing Software? - How Does It Help Small Business in Finances?
This domain contains software development information that comprises all vital information related to financial transactions. It can efficiently manage all details from tax calculations, financial statements, bank statements and balances, accounts receivable, cash flow management, and accounts payable.
The general ledger also includes third-party vendors and details related to payment modes, bank accounts, advance payment, invoices and other financial procedures.
An accounting system must cater to the needs of different customers. While building your accounting system, how should select an intuitive and user-friendly system which can be used by any staff including those with a non-technical, non-accounting background? It should be functional and adaptive with multi-dimensional reporting capacities so that those reports sync with your company’s goals.
Analysis and Report
This feature helps you to track and monitor the financial reports and analyze any critical financial situation. This enables real-time tracking of essential data which contributes to the best accounting system. Easy access to the records facilitates major meetings and tasks within organizations.
Automatic updates and scalability
The accounting system must be capable of being expanded with the firm as it becomes affluent and larger than before. The program should adapt on its own and handle a greater user base and transactions.
Billing and invoicing and Payment Processing
The system should remember your basic client information like names, account numbers, addresses and other normal terms. The system should help you analyse the amount you owe to someone or the amount due to you. They should allow you to print invoices and email them.
Accounting systems have to be mobile-friendly so that businesses can offer mobility of their businesses to their customers. Some mobile apps can assist you with expenditure monitoring, developing and sending invoices and more.
Also Read: What Inventory Management Software Systems Mean And Their Benefits?
This feature gives you access to all vendor information, track of what the business owes and systems which manage the outflow of business transactions.
Identify and Prevent Errors
An efficient system coded to provide real-time data, eliminate mistakes and compute properly can make your company’s financial development easy to achieve.
The accounting system should develop accounting applications with a high level of scalability and security within apps to ensure the privacy and security of critical and sensitive financial information of the business.
Data protection and security are must-haves in any accounting system. These days data leak is a big threat hence, companies should make sure all their accounting records are safe to prevent them from being used negatively. But no wonder, how accounting systems can make your business a lot easier. Hence, must choose your accounting system wisely.
Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium enterprises (MSMEs), business tips, income tax, GST, salary, and accounting.