How Do You Design An Accounting System?
- Are you starting a new business?
- Are you worried about the accounting system in your business before starting?
- Do you want to learn how to set up an accounting system at the initial stage?
- If you are starting with even a small business, an accounting system is a vital part of the business.
- This section helps small you understand accounting as it is an essential part of the business activities.
What is An Accounting System?
According to the dictionary, the accounting system is defined as the "enumeration of financial transactions." It plays a vital role in setting up a business. It is used to manage financial activities, including expenses, sales, liabilities, etc. It takes track of all the transactions going on in the company.
What Are The Types Of Accounting Systems?
1. Single Entry system
The first type of accounting system is a Single-Entry System, where a small business records every transaction as a line item. It is a simple and convenient method used in small businesses.
2. Double-Entry System
Second is the Double Entry System, where every transaction is recorded both as a debit and credit in separate accounts.
Why is an accounting system important?
- How much profit did you gain in the business?
- How would You keep track of your cash flow?
- What were the transactions that took place over a period of time?
- The answer to all these questions is an accounting system.
- To keep track of the money flow in a company is necessary to ensure it is not spending needlessly anywhere.
- A business owner can also generate reports based on "profit" and" loss," cash flow, and balance sheets with the help of accounting software.
- It shortly gives a picture of where the business stands.
- It is basically the pulse of a business. An accounting system will help you to know about the past and present state of your business.
How to set up your first accounting system?
1. Have complete knowledge of transactions in the business:
Obviously, before starting an accounting system, you should have complete knowledge about financial activities, including transactions, investments, assets, liabilities, etc. Complete knowledge will raise your confidence in carrying every step in setting up your business's accounting system.
2. Open a business account
This is the first step before starting a business. Personal and business accounts must be kept separate at all times. You must have an account to store money safely.
3. Choose a method of payment collection
First, you need to understand that there are two methods that form the base of an accounting system. The two of them are described below:
# Accretion method: In this method, the income is counted just after the sale is made regardless of whether you have actually received the payment or not. This method includes making invoices for the product or service before the payment is made by the customer.
#Cash Method: In the method, the income is counted after the customer makes the payment. It is a common method in setting up a small business, especially in the ones that take immediate charges from the customers.
You can select any of the methods above, either the cash method or the accretion one. The accretion method is more accurate, whereas on the other hand, the cash method is easier to maintain, so it is usually preferred in small businesses.
3. Keep a record of your transactions
After selecting one of the above methods, you need to select a method to record the transactions. You can do the same manually or through software. Keeping a record of transactions will help you keep proof of every transaction you make, calculate profit earned, and analyse losses that occurred and all the money flow in your business.
4. Make a chart of accounts:
It is an organisational tool that provides a list of all the financial accounts in a company; It basically separates financial assets, liabilities, expenditures, and transactions. It also helps to give a clear picture of a company's financial health to the investors and shareholders. A chart of accounts must include the following :
#Under the asset account, the sub-accounts present should be:
In the assets, the following should be present:
- Savings account
- Inventory assets
- Undeposited funds
- Accounts receivable
#Under the liability account, the sub-accounts must be:
- Notes payable
- Credit card
- Accrued liabilities
- Payroll liabilities
5. Keep track of your receipts and invoices:
You should keep all the important documents, including receipts and invoices, safe so that they can be used for future reference whenever required. You can do that on paper or any electronic device. Also, it will serve as proof of all the transactions made in the company.
6. Think about your taxes:
This is very surprising, but it is true that you need to think about taxes even before starting sales. Your taxable income is your net income, which is the output after deducting all the expenses. This is why it is important to keep a record of all important documentation as it will make the process easier. Your business must develop a stand-in, both provincial and federal taxes. Find a tax expert who could help you in handling the tax responsibilities and pre-emptive preparations to study the tax bites.
7. Keep track of due payments:
In case you have a cash method, keep a note of all the amounts collected from the customers. If you use the accretion method, your bookkeeping system must provide you with the invoices and balances. When you collect payments from the customers, ensure to remind due dates 2-3 days before. Start with a simple payment collection method and slowly and gradually start accepting checks and even online payments.
8. Forecast your expenses:
Make an analysis of the flow of money with the help of the accounting system. Record the anticipated expenses to help you to manage your cash bites. It will help you to gain good financial management and do good planning for future purposes. Also, you will save money and invest accordingly in the business. So, knowing or forecasting future expenses is advantageous.
What else should you keep in mind while setting up an accounting system?
- Keep it simple: At the initial stage, keep your accounting system as simple as possible.
- Don't invest too much but include everything: It Is not a good option to invest a very high amount in the accounting system.
- Work smartly and efficiently include every step with minimal expense in the initial stage.
- If possible, hire people to do specific tasks: If your budget allows you to pay, hire some people.
- Instead of doing everything yourself, hire someone who can handle the financial activities well.
- It will save a lot of time and energy and will reduce the chances of mistakes.
- Grow slowly and gradually: Start with a basic accounting system, be patient, and keep working hard.
- Basically, to keep an eye on all the financial activities going on in your business accounting system is really important.
- A well-organised accounting system will act as the base of your company's profits, including the investments and liabilities.
- In any step of the business, it is important to be patient and work hard.
- Growing a business is a slow process, but the fruit of patience and hard work is always sweet.
- You must work smartly and follow each step sincerely, which will definitely help you reach heights in your business.
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Q. What is Accounting Software?
Ans. It is a type of application software that records and processes accounting transactions and functional modules like payable and receivable accounts, general finances, payrolls, and trial balance.