As a business owner, it's your responsibility to keep track of your finances and pay taxes on time. Depending on your preferences, you can do your own accounting, hire a professional or designate someone in your organization to handle this job. No matter what option you choose, take the time to familiarize yourself with the various accounting systems out there. Make sure you have a clear understanding of the differences between single-entry systems and double-entry systems in addition to manual and computerized accounting software programs.
What Is an Accounting System?
There are different types of accounting systems, and each has distinctive features. However, they all have a common purpose: to manage the financial activities of a business, such as its revenue, expenses and liabilities. In this digital age, most accountants use sophisticated systems featuring overdue payment reminders, advanced reporting capabilities, automated data backups, cloud-based services and more.
Without an accounting system in place, you'd find it difficult to get your books ready for monthly and yearly reporting, keep track of your day-to-day expenses and assess your company's financial performance. Manual calculations are obsolete and prone to human error. Computerized accounting systems, on the other hand, are accurate and make everything a lot easier. You or your team will save time and money while preventing costly mistakes.
These programs can handle all types of accounting information and generate detailed reports. You can use them to calculate the wages paid and payable to employees, record transactions, check credit turnover ratios and process data related to sales, payroll, inventory and other key aspects of your business. Some accounting systems are designed for small businesses and freelancers, while others appeal to large enterprises, government agencies or specific industries.
Types of Accounting Software
Choosing an accounting system depends on your budget, preferences and business size. The four main types of financial software systems include:
- Single-entry systems
- Double-entry systems
- Manual accounting systems
- Computerized accounting systems
These can be further broken down into several other categories, such as cloud accounting software, custom accounting software, enterprise resource planning software, commercial off-the-shelf software and more. The latest programs have marketing and sales automation capabilities, unlimited invoice scheduling, payroll modules and other cutting-edge features. Their application in accounting goes beyond tracking your day-to-day financial operations.
Single-entry systems are the most basic option. As their name suggests, they record each transaction with a single entry in the accounting journal. This method is easy to use and doesn't require training in accounting. It appeals to small companies with a low volume of activity. The downside is that it's prone to errors and doesn't track accounts receivable, accounts payable, liabilities and more.
Most types of financial software systems nowadays, including those designed for small enterprises, use double-entry bookkeeping. This means that every transaction will involve at least two accounts, which allows for more accurate reporting and timely error detection.
Manual vs. Computerized Accounting Systems
Both types of accounting systems are based on the same principles. Manual accounting, however, is time consuming and involves more paperwork. Those who use it need to prepare financial statement reports, calculate trial balances, record transactions in physical registers and so on. Since everything is done manually, there's a higher risk of human error.
Computerized systems, on the other hand, record financial transactions electronically and can streamline your operations. Users can choose to view data in different formats, store it in the cloud and access it on the go. Examples include FreshBooks, Zoho Books, FreeAgent, QuickBooks, Xero and ActivityHD.
Depending on your niche, you can also opt for industry-specific accounting systems, such as Sage 300 Construction and Real Estate, Abila MIP Fund Accounting or Sage Fixed Assets. Many programs are specially designed for health care facilities, manufacturing companies, nonprofits and other types of organizations.