Accounting Systems

What does a full Accounting System provide?
Every business needs to have an accounting system so that at any time it is able to extract information that will highlight how the business is doing.

A good accounting system will provide the following information:
  • It will show what income is coming into the business
  • It will show what money is being paid out of the business
  • It will show how much cash is sitting in your bank account
  • It will show how much money is due into the business from debtors (those that you have made sales to on credit)
  • It will show how much money is due to creditors (those from whom you have purchased goods on credit)
  • It will show the amount of stock and its value sitting in your shelves, factory or stores
  • It will show the amount of money that is paid for wages and salaries of staff
  • It will show the assets that the business owns at any particular time
  • It will show the liabilities or debts that the business owes at any particular time
  • It will show which products are selling the best and which are slow moving
  • It will show what profit or loss the business is making at any time
  • It will also enable a valuation of the business to be carried out based on the results in the system

Every business needs to have some sort of system whether simple or complex and an accountant should be consulted to assist you in this area if you do not have the experience to put in place a system yourself.

The Accounting Cycle 
The accounting cycle is as follows:

  1. Complete Journals (incl CashBook) - A transaction occurs in the business. This gives rise to a document being written up (or raised). The document results in information that is then recorded in the business's books of original entry - known as "Journals". 

  2. Complete General Ledger - The totals of the Journals and CashBook are summarised and transferred to another book known as the "General Ledger". The General Ledger contains details of each of the individual accounts maintained in the business.

  3. Complete Trial Balance - The General Ledger accounts are all listed in the form of debits and credits. Another report is extracted from this to form what is known as a "Trial Balance". A Trial Balance is simply a list of the balances of each account in the General Ledger.

  4. Complete Financial Statements - From the Trial Balance, adjustments and changes can be incorporated and the information is then ready for the preparation of the "Financial Statements" of the business for the financial period in question. These financial statements comprise the "Profit and Loss Accounts" or "Revenue Statements" (also known as Statements of Performance) and Balance Sheets (also known as Statements of Position). 


What are the Accounting Books and Reports?
The accounting books and subsequent reports consist of the following:

  1. Journals - From a transaction such as a sale or a purchase a journal entry is raised. This originates from the source or original documents which record the transaction. In a business where a lot of transactions are happening at the same time, it is usually a good idea to create sub-journals so that it is easier to find or allocate transactions. These sub-journals would usually be in the area of credit sales (Sales Journal), credit purchases (Purchases Journal), sales returned (Returns In Journal), purchases returned (Returns Out Journal), cash income received (Inwards Cash Book), cash expenses paid (Outwards Cash Book) and "non cash" transactions (General Journal).

  2. General Ledgers - The summary and totals of all the journals are entered into a larger account called the General Ledger. The General Ledger is a summary book that records all the accounts of the business and is organised into various classes for ease of classification and location. These classes are:

      • Assets - This is a record of all items the business owns.
      • Liabilities - This is the record of all the items that the business owes to others (i.e. its debts).
      • Sales - This is a record of all the revenue or income earned by the business for a particular period.
      • Expenses - This is a record of all the expenses or costs incurred by the business for a particular period.
      • Capital - this is a record of the ownership or "equity" that belong to the owners or shareholders of the business.

  3. Trial Balance - At the end of each accounting period or accounting financial year the accounts in the General Ledger are totaled and balanced off. The balances in each account are then summarised and put into another report called the Trial Balance. The Trial Balance is a list of all the balances in the General Ledger - hence the term Trial Balance.

  4. Financial Statements - The information in the Trial Balance will then be interpreted and put into reports known as Financial Statements. Financial Statements consist of Revenue or Income Statements (also known as Profit and Loss Statements), Balance Sheets and Cash Flow Statements 

  5. Revenue Statement - this report shows the income and the expenses of the business plus arrives at the net result after expense are deducted from income. The net result is known as the Net Profit (or Net Loss if expenses are greater than income). It is in effect a statement showing theperformance of the business in monetary terms.

  6. Balance Sheet - this is simply a report of the financial condition of the business at any time and records its assets, liabilities and capital. It is in effect a statement of the position of the business . The Balance Sheet is a list of all the balances remaining in the accounts of the business at the end of a particular accounting period. 

  7. Other Statements - These include reports such as Cash Flow Statements which identify the amount of cash coming in and how that cash was applied or used.