Accounting Systems

Businesses must have an accounting system in place to help them manage financial resources and business activities. An accounting system refers to an organised set of accounting methods, procedures, and controls used by a business organisation to collect, store, analyse, process, and report any financial transactions conducted by the business. These can either be manual or computerised.

Manual accounting systems require bookkeeper and accountants to record transactions in the general journal and general ledger using paper books or spreadsheets on their computers. This means that each transaction is entered individually into the system.

Computerised accounting systems allow users to enter a transaction once and records update automatically. These are widely used by businesses as they provide accuracy and time-efficiency. It also allows users to instantly see the organisation’s financial standing.

Accounting systems have the following basic functions:

• collect and store data relevant to the business activities and financial transactions of the organisation.
• ensure that transactions and financial data are accurately recorded for processing reports.
• provide information for decision making through financial statements and reports generated.

Accounting systems are typically composed of the following parts:

• People: refers to accounting system users such as bookkeepers, accountants, managers, business analysts and auditors
• Procedures: refers to instructions within an organisation on how data will be collected, stored, retrieved and processed
• Data: includes all information, such as transactions and source documents, which are encoded into the computerised accounting system.
• Software: a computer program where the accounting system is created or setup (e..g. MYOB, QuickBooks, Xero etc)
• Internal controls: security measures used to maintain and protect the data

To implement an integrated accounting system, source documents of financial statements, including the general ledger, chart of accounts, and subsidiary accounts, must be encoded into the system you are using. 

Key features of accounting software

MYOB desktop version 

• One-off purchase fee  
• Upgrades must be completed manually    

MYOB cloud-based version 

• Monthly subscription  
• Automatic upgrades    

Reckon/ Quickbooks/ Intuit

• Customisable, choose only the features you need 
• Monthly subscription 

Xero 

• Accessible on any device via a mobile app 
• 24/7 online support

Businesses should think of the following when choosing a computerised accounting system:

• Something that is flexible and can move between users, operating systems and the hardware including the data entry, availability and design of the various reports that it will produce. 
• The cost of installation and maintenance which can be determined by doing a cost-benefit analysis. 
• The size of the organisation and the volume of business transactions will affect the choice of software. 
• Ease of use and the training required to get users to operate the system. 
• The MIS reports and the extent to which they are used in the organisation is something to be considered. 
• The software's security features that keep important data away from unauthorised users and those that may wish to manipulate the data. 
• The ease of the transfer of data from operating systems and different applications. 
• The reputation and capability of the software vendor to support your accounting needs is something to be thought of.

Advantages of a Computerised Accounting System (CAS)

A CAS compared to manual reporting will have the following advantages:

• Speed: Accounting data is processed faster. 
• Accuracy: The possibility of errors is limited in a CAS because the primary accounting data is entered just once for all subsequent usage.
• Reliability: The CAS is well-adapted to performing repetitive work without the challenges of boredom, tiredness or fatigue.
• Up-to-Date Information: In a CAS, accounting records are updated automatically when accounting data is entered and stored. 
• Real-Time User Interface: As most CAS are linked through a network of computers, information is readily available to different users on a real-time basis. 
• Automated Document Production: Most CAS have standardised, user-defined formats for accounting reports that are generated. 
• Scalability: The scope and number of people that need to be involved in the process are limited, mostly to those encoding data. 
• Legibility: The data displayed in the CAS is legible and can be easily understood. 
• Efficiency: CAS allows for the better use of time and resources.
• Management Information System (MIS) Reports: Reports are produced almost immediately which allows business management to monitor and control the business better.
• Storage and Retrieval: The CAS does not need a large amount of physical space to store data. This allows the system to retrieve these data and information almost instantly. 
• Motivation and Employee Interest: As people are needed to work with the system, existing staff require specialised training which motivates them and builds interest in the job.

Limitations of a CAS

• Cost of training. CAS requires specialised staff personnel to be trained and to facilitate training, these activities both cost money.
• Resistance from staff will always be present whenever automation is present as it is seen as a threat to their jobs.
• Disruption to the flow of work will be a result of the migration to this new automated system. 
• System failures may happen and may result in work stoppage. 
• Unanticipated errors may happen as these systems lack the capability to judge as the humans may commit these errors and put it in the system.
• Security breaches may happen as computer-related crimes are quite difficult to detect.
• Health problems may arise as prolonged computer use has known to have negative effects on health.

A general ledger is the master book, log or registry of all transactions conducted by the business organisation. It contains all of the accounts currently used in a chart of accounts and is sorted by account number.

Assets recorded in the cash receipts journal and sales journal and liabilities recorded in the cash payments journal and purchases journal are included in the general ledger.

A narrative general ledger is a typical format for the general ledger. It shows columns for debit and credit activity and the remaining balance from each transaction. Note that debit activities are placed in the left column of the ledger, while credit is on the right.

For example:

Other businesses use a T-account format for their general ledger. This format displays the balances in each account. Similar to the narrative general ledger, debit is placed in the left column, while credit is on the right

A chart of accounts is a list of accounts grouped according to their accounting classification, with each account having a unique number. The chart of accounts acts like an index to the general ledger so that accounts can be located quickly. Each account group has its own nature that relates back to the Accounting Equation:

Assets = Liabilities + Equity

Assets are debit accounts that make the Liabilities and Equity credit accounts. The nature of the Income and Expense accounts are decided by how they affect the equity accounts. Income increases the Equity, so they have a credit nature, and Expenses decrease the Equity so they have a debit nature.

The chart of accounts is typically arranged in a sequence of account groups. Account types in Xero are arranged in 5 categories:

The Chart of Accounts is composed of a list of accounts used by an organisation to define each class of items for which money or the equivalent is spent or received.

Under each account group is different types of accounts, such as accounts for assets, liabilities, equities, income, the cost of sales and expenses. A numbering system or prefix is used in the chart of accounts for easy identification of specific accounts.

The Chart of Accounts is tailor-fitted for each company depending on its needs.

In a computerised accounting system, a chart of accounts is adjustable so that other accounts can be added if necessary, such as new business needs and financial interests.

The chart of accounts for business will vary depending on the specific industry legislation that affects the business, and the company’s policies and procedures. Smaller businesses will typically have a simpler chart of accounts. The larger the business, the more complex its chart of accounts will be.

The subsidiary ledger contains detailed information relating to the control account in the General ledger.

There are four (4) common subsidiary ledgers that would be connected to the general ledger via four (4) different control accounts. The subsidiary ledger contains the detailed transaction while the control account contains a summary of what is happening in the control account.

The common Subsidiary Ledgers and their corresponding Control Accounts are:

• Subsidiary ledger:
  • Accounts receivable subsidiary ledger
  • Accounts payable subsidiary ledger
  • Inventory subsidiary ledger
  • Asset subsidiary ledger
• Control account:
  • Accounts receivable control
  • Accounts payable control
  • Inventory control
  • Asset control

All businesses running accrual accounting systems will contain an Accounts Receivable Subsidiary and Accounts Payable Subsidiary Ledgers as part of their Accounting System. If you examine the diagram below, the Accounts Receivable Subsidiary contains all the transactions that are associated with customer accounts, so the sales and payments are recorded for each customer. The Control Account in the General Ledger shows the total of what is owed by all customers.

The Accounts Payable subsidiary and control accounts work in the same way but record the transactions that relate to the Accounts Payable of the business.

The Inventory and Asset subsidiary work on the same principle where the detail for the items is recorded in the subsidiary ledger and the control account contains the summary of the transactions.

In a computerised accounting system, this process is automated and depends on the choices you make when entering the transactions.