An effective accounting system is accurate, useful and timely. Its purpose is to provide information for external entities, such as tax agencies and investors, and for internal purposes, such as evaluating efficiency and profitability. The effectiveness of an accounting system depends on how it is created and maintained. It should be set up to closely reflect a company's operations, including its different sources of revenue and different types of expenditures. It should be maintained as regularly as necessary, depending on the volume of business that the company transacts and its requirements for reporting to tax agencies and financial stakeholders.

Describe the ledgers necessary to track revenue and expenditures. A sales ledger provides a record of transactions that your business has provided to customers, dividing these sales into categories such as wholesale and retail sales, or sales and services. An expense ledger tracks outgoing funds used for business expenses, dividing these transactions into expense categories such as materials, payroll, taxes, fees, taxes, rent, utilities and interest. Sales and expense ledgers should also track accounts receivable and accounts payable, or sums that customers owe to your company or sums that your business owes to its vendors for products and services it has received.

Summarize an effective payroll system by detailing its capacity to calculate employee wages based on reported hours and calculate withholdings for income tax, Social Security and Medicare, as well as employer contributions to payroll tax funds. A payroll system should also keep track of these tax liabilities to simplify the filing and payment of payroll taxes. Tracking payroll tax liabilities also helps a business set aside accrued amounts rather than losing track and using them for operating cash flow. A payroll system that details employee hours and breaks them down into categories such as production and deliveries also enables a business to monitor processes and create efficiencies.

Outline the accounting system's capacity to provide the information necessary to create financial statements. A profit and loss statement shows different categories of revenue as well as different types of expenses and organizes this information so you can subtract total expenses from total revenue and calculate net profit. A cash flow statement shows the funds you anticipate flowing into and out of your business, enabling you to determine whether you have sufficient revenue and to come up with solutions if you don't. A balance sheet is a snapshot of your company's financial situation at a specific moment, showing how much you own and how much you owe and comparing the two figures to determine your net worth.