What Is the Meaning of the Term Accounting System?
An accounting system is a record-keeping system based on gathering financial information, processing it and summarizing it into financial statements and reports. Most accounting systems are computerized using software designed exclusively for this purpose. An accounting system follows a set of procedures and includes all aspects of financial information for a business.
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General Ledger
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Every accounting system contains a general ledger. This ledger is a record of all accounts a business has. Businesses have five categories of accounts; assets, liabilities, equity, revenue and expenses. The ledger is divided by these five categories and has subcategories in each section. Each account tracks specific amounts for a business. For example, a company might have ten expense accounts, tracking each expense individually. This is done for financial reporting and for future reference and planning.
Transactions
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An accounting system begins by recording all financial transactions into the company's general ledger. Every time a company makes a sale, pays a bill or receives money a transaction occurs. Each transaction is recorded in the ledger when the transaction occurs and each transaction affects at least two accounts. Each account has either a debit or credit balance. In accounting, debits must always equal credits. The general ledger is where all the transactions are recorded and a balance of each account is kept.
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Trial Balance
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At the end of a month or year, a trial balance is created. This balance is simply a listing of all the accounts in the general ledger and the balance each account contains. The trial balance is created as a summary of the entire general ledger. It contains a debit balance and a credit balance, and these two amounts again must equal each other.
Adjusting Entries
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Adjusting entries and closing entries are part of every accounting system. At the end of each month, accountants must adjust certain accounts to bring the balance of each up-to-date. An example of a closing entry occurs when an annual insurance premium is paid; the total amount of it is put into an account called Prepaid Insurance, which is an asset account. This insurance premium is an asset to the company until the company has actually used the insurance. Each month then, the company makes an adjusting entry by removing one month's worth of insurance out of Prepaid Insurance and placing it into the Insurance Expense account.
Financial Statements
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Financial statements play a key role in an accounting system. All the information that was gathered and processed is summarized into three main financial statements; the Income Statement, Balance Sheet and the Statement of Owner's Equity. These financial statements are analyzed by company managers, owners, stockholders and potential investors.
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References
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