What is an accounting system?
Accounting is the method in which financial information is gathered, processed, and summarized into financial statements and reports. An accounting system can be represented by the following graphic, which is explained below.
- Every accounting entry is based on a business transaction, which is usually evidenced by a business document, such as a check or a sales invoice.
- A journal is a place to record the transactions of a business. The typical journals used to record the chronological, day-to-day transactions are sales and cash receipts journals and a cash disbursements journal. A general journal is used to record special entries at the end of an accounting period.
- While a journal records transactions as they happen, a ledger groups transactions according to their type, based on the accounts they affect. The general ledger is a collection of all balance sheet, income, and expense accounts used to keep a business's accounting records. At the end of an accounting period, all journal entries are summarized and transferred to the general ledger accounts. This procedure is called "posting."
- A trial balance is prepared at the end of an accounting period by adding up all the account balances in your general ledger. The sum of the debit balances should equal the sum of the credit balances. If total debits don't equal total credits, you must track down the errors.
Finally, financial statements are prepared from the information in your trial balance. Reports and analysis are also generated from financial statements to support management decision making. The processing may be automated, semi-automated or manual. All together, they form the management information system (MIS).