The Accounting System
Before you can set up your accounting records, dive into your day-to-day
transactions, and get your books ready for end-of-month or end-of-year
reporting, you must gain an understanding of basic accounting concepts.
Accounting is the method in which financial information is gathered,
processed, and summarized into financial
statements and reports. An accounting system can be represented by the
following graphic, which is explained below.
- Every accounting entry is based on a business transaction, which is
usually evidenced by a business document, such as a check or a sales
- A journal is a place to record the transactions of a business. The typical
journals used to record the chronological, day-to-day transactions are sales
and cash receipts journals and a cash
disbursements journal. A general journal
is used to record special entries at the end of an accounting period.
- While a journal records transactions as they happen, a ledger groups
transactions according to their type, based on the accounts they affect. The
general ledger is a collection of all
balance sheet, income, and expense accounts used to keep a business's
accounting records. At the end of an accounting period, all journal entries
are summarized and transferred to the general ledger accounts. This
procedure is called "posting."
- A trial balance is prepared at the end of
an accounting period by adding up all the account balances in your general
ledger. The sum of the debit balances should equal the sum of the credit
balances. If total debits don't equal total credits, you must track down the
- Finally, financial statements are prepared from the information in your
Your accounting records are
important because the resulting financial statements and reports help you
plan and make decisions. They may be used by some third parties (bankers,
investors, or creditors) and are needed to provide information to government
agencies, such as the Internal Revenue Service.
For a more in-depth explanation of the accounting system, take a look at the