An accounting system consists of the methods and records that identify your transactions and provides a basis for accounting for your assets. It is vital to managing your business.
[related|post]In designing an accounting system, it’s important that you consider starting a chart of accounts—a classified listing of all accounts in use and a guide on what account to use for certain transactions—and a manual of accounting policies, which dictates how your transactions are to be treated and recorded.
Your accounting system should also include a general ledger, a book summarizing all transactions made for each account and whose data come from the general journal or book of original entry. The general journal follows the double-entry system where, to ensure accountability, a corresponding entry is made in another account for every transaction recorded in one account.
If, for instance, you have sold some merchandise to a customer on account, you record such transaction as a debit in your accounts receivable and a credit in your sales account to indicate a sales transaction. Though you have yet to receive payment, the records establish a claim from the customer, and once you receive payment, you record it as a debit to cash in the bank and a credit to your accounts receivable.
The basis for recording transactions in the general journal is the source documents, and they include invoices, payment vouchers, bank checks, official receipts, purchase orders, billings, and other documents that you use to transact business with suppliers and customers.
The other components of your accounting system are your accounts receivable and accounts payable—the major accounts in the general ledger that let you to track your receivables and payables and are normally supported by sub-ledgers—books that summarize your transactions from each supplier or customer and allow you to manage your cash flows.