You can't afford to leave anything to chance when it comes to your business finances. And without a clear vision of your company's financial health, you're essentially blind. To make sound strategic decisions, you need to operate from a position of knowledge. An accounting system is an indispensable tool to support your operational decisions and demystify your business finances.
But what is an accounting system? And how do you know you have the right accounting information system for your needs? Below, we'll help you better understand the function and importance of accounting systems.
Definition of an accounting system
The definition of an accounting system is quite broad. It refers to any system that allows you to track receipts and disbursements in your business. Essentially, your accounting system is how you keep your financial records. You use it to record transactions, invoices, bills from vendors, and other income and expenses.
Your
accounting system is a treasure trove of raw data that you can refer to for financial reporting such as income statements and balance sheets. These serve as the basis for your operational decisions and determine where you allocate resources to grow your business, appeal to your target market, and satisfy your stakeholders.
What do accounting systems record?
Accounting systems can record and manage all types of accounting entries. They generally fall into the following categories:
Invoices and Revenue.
To assess your financial health and manage your cash flow, you need a clear idea of how much revenue is actually coming into your business. This gross revenue comes primarily 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.
Expenses
Your revenue is the top line, while your combined expenses are the bottom line. The space in between is your profit margin. The further apart you can keep the top and bottom lines, the healthier your business finances will be.
Excel spreadsheets and older accounting systems require users to manually enter, balance and categorize each expense. However, most modern accounting systems allow for quick entry and categorization, as well as automatic reconciliation of business expenses.
Payables
Your business has other liabilities besides traditional expenses that also need to be carefully recorded. These can include mortgage costs, business financing (such as start-up loans), and other liabilities such as equipment on a lease-purchase basis.
Accounting systems can record these liabilities as payable values and automatically update the balances as payments are made.
