You can’t afford to leave anything to chance with your business finances. And without a clear understanding of your business’ financial health, you’re essentially flying blind. To make informed strategic decisions, you need to operate from a position of knowledge. An accounting system is an integral tool for informing your operational decision-making and demystifying your business finances.
But what is an accounting system? And how do you know that you have the right accounting information system for your needs? Here we’ll help you to better understand the function and importance of accounting systems.
Accounting system definition
The definition of an accounting system is fairly loose. It applies to any system that allows you to track the money coming into and out of your business. Essentially, your accounting system is how you keep your financial records. You use it to log transactions, invoices, bills from vendors, and other income and expenditure.
Your accounting system is a repository of raw data that you can draw upon for financial reporting such as profit and loss statements and balance sheets. These inform your operational decisions and dictate where you allocate funds to grow your business, appeal to your target market and appease your stakeholders.
An accounting system can be something as simple as an MS Excel spreadsheet or it can be a purpose-built software platform like Xero.
What do accounting systems track?
Accounting systems can track and manage all kinds of entries. They generally fall under the following categories:
Invoices and revenue
To gauge your financial health and manage your cash flow, you need a clear understanding of how much revenue is actually coming into your business. This gross income will primarily come from sales and settled invoices, although some may come from other sources such as interest payments or (in the case of the financial services industry) investment capital.
Some accounting systems also allow you to create invoices instantly and then automatically keep track of when they are paid.
Your income is your top line, while your combined expenses make up your bottom line. The space in between these is your profit margin. The further apart you can keep your top and bottom lines, the healthier your business finances.
Excel spreadsheets and older accounting systems require users to enter, balance and categorize each expense manually. However, most contemporary accounting systems allow for quick entry and categorisation, as well as automatic balancing of business expenses.
Your business has other liabilities outside of conventional expenses, and these also need to be carefully tracked. These may include mortgage expenses, business finance (e.g. startup loans) and other accounts payable such as plant on hire purchase.
Accounting systems can track these liabilities as payable values, and automatically update balances when payments are made.
Single entry systems vs double entry systems
While there are lots of different types of accounting systems, they all fall into two main categories— single and double entry systems.
Single entry systems
Single entry systems are favored by sole traders and microbusinesses for their simplicity. An Excel spreadsheet is a type of single entry system. It tracks rudimentary data such as:
Date of sale
Description of item sold
Cost of item
VAT on sale
Business account balance
Double entry systems
Double entry systems are more complicated and require dedicated software to use. They provide more complete records and therefore afford a more accurate and granular account of business finances.
Double entry systems are used by larger businesses to track their finances and generate reports like expense reports, invoice and payment summaries, and profit and loss statements.
We can help
If you’re interested in discovering more about accounting systems, or any aspect of managing your business finances, then get in touch with our financial experts. Find out how GoCardless can help you with ad hoc payments or recurring payments.