Accounting system: Definition, types, and how to use them

Your accounting system is the heart of your business. It helps you track expenses and manage invoices—keeping you on track with managing your cash flow. Yet, without accurate accounting data, businesses may struggle to make informed decisions. 

But what exactly is an accounting system, and how do you use one in 2023? Let’s dive into the definition of an accounting system, its types, and how to make the most of yours. 

Processes of an accounting system

An accounting system works by tracking and recording financial data, generating reports, and analyzing that data to make informed decisions. This process typically involves entering information, like sales invoices and receipts, into the accounting system, which stores it in a database.

Advanced systems can then generate reports such as balance sheets and income statements—and you can also create custom financial reports.

There are five key processes in an accounting system: 

1. Recording: The first step in an accounting system is recording financial transactions like sales, expenses, equipment purchases, loans, and asset sales. 
2. Classifying: The second process is the classification of the transactions. With this, you will categorize the transactions using categories like revenue, expenses, assets, and liabilities.
3. Summarizing: The third step in the accounting system process is to summarize the transactions, usually in the form of financial statements. Key financial statements include the balance sheet, cash flow statement, and income statement. 
4. Analyzing: After summarizing the transactions and creating financial statements, it’s time to analyze these reports. Business owners will assess the company's performance and look for any problem areas or ways to improve their decision-making.
5. Financial reporting: The last part of the process is financial reporting. You'll send financial info, such as financial statements and analyses, to relevant stakeholders. A company's key stakeholders may include creditors, lenders, management, or tax regulators. 

The processes, however, can be easier depending on whether you use single- or double-entry accounting systems. 

Single-entry vs. double-entry accounting systems

Single-entry and double-entry accounting bookkeeping systems are the two most common types of accounting systems. 

Single-entry accounting is simpler, as it only includes transactions on one side of the ledger. That is, you only book a debit or a credit. This system is especially useful for small businesses or individuals who don’t need to track complex financial records.

Double-entry accounting requires transactions for both sides of the ledger—and balances must match between the entries. This more comprehensive system allows for greater accuracy and reliability when tracking financial information.

While single-entry systems can provide basic reporting needs, double-entry systems are better suited for larger organizations as they enable more detailed financial analysis and insights that help inform decision-making.

Types of accounting systems

You can choose between three accounting systems. You can use either single-entry or double-entry with all three systems. Each type has unique features and benefits, making it important to understand which system best meets your business needs. The most popular accounting systems include:

Manual

A manual accounting system is a pen-and-paper form of accounting. Using a manual accounting system means recording your transactions in a general ledger. Manual accounting is one of the oldest forms of bookkeeping—it doesn’t require a computer, accounting software, or a complex system. 

These systems use a physical accounting ledger (aka a general ledger). That ledger holds all the financial transactions, usually in chronological order. You will then add any new transactions to the ledger. 

Running a manual system means you’ll need to keep track of physical invoices and receipts. You’ll use them to enter transactions into the ledger and verify that transactions are accurate. 

Manual accounting is simple and straightforward. The downside to a manual accounting system is that it can be time-consuming and less accurate than using software. 

Computerized 

Computerized accounting systems have become more popular than manual systems, thanks to computers and accounting software. Computerized systems help improve the efficiency of bookkeepers and business owners while improving accuracy. 

A computerized accounting system is software that automates the bookkeeping process—from recording transactions to financial reporting. This type of software is also customizable. With computerized systems, transactions are quickly recorded and stored. 

Additionally, such systems can allow you to automate various accounting tasks, such as processing payroll or managing accounts payable. 

Cloud-based

A cloud-based accounting system is essentially a computerized system—except it runs on remote servers. This means you use the internet to access the system and your data. 

The big benefit for business owners is they can access their financial info from anywhere—as long as they have internet. Cloud-based accounting systems often run via mobile apps or directly in your browser. This means greater flexibility and cost-effectiveness compared to manual or standard computerized systems. 

Cloud-based accounting is great for companies of all sizes, but you get all the same benefits of a computerized accounting system, such as:

• Invoicing ability 
• Payment processing
• Expense tracking
• Financial reporting
• Collaboration tools

However, all accounting systems have broader advantages that can make your accounting processes more efficient. 

Accounting system pros and cons

An accounting system can help you manage cash flow, but there are other pros. The key advantages of having and using an accounting system include: 

• Accuracy: Accounting systems can help ensure your records are consistent and accurate. Many systems automate many calculations and reduce the risk of accounting errors.
• Efficiency: Accounting systems can save time and increase efficiency by automating routine tasks. Key tasks it can automate include invoicing, tracking expenses, and creating financial reports.
• Analysis: Accounting systems provide detailed financial information, which you can use to analyze business performance and identify areas for improvement. 
• Compliance: Accounting systems can also help businesses stay compliant with regulations and tax laws, with accurate and timely financial records.

On the other hand, there are some disadvantages to implementing accounting systems, such as: 

• Cost: Implementing and maintaining an accounting system can be expensive, particularly for business owners with tight budgets.
• Complexity: Accounting systems can be complex and may require training to use effectively.
• Security: Accounting systems may contain sensitive financial information, so it’s important to ensure key security measures are in place. 
• Dependence on technology: Accounting systems rely on technology and are vulnerable to technical problems. 

Overall, the benefits of accounting systems usually outweigh the drawbacks, but consider your needs and resources when choosing an accounting system—do so by knowing what to look for in accounting software. 

Accounting systems to consider

Accounting systems are software applications or platforms that help businesses and individuals manage and process their financial transactions and records. Here are five examples of accounting systems:

Overall, picking an accounting system can be stressful. The key is to balance the usability and features you need with the cost. 

Streamline your accounting and save time 

A big part of streamlining your accounting is to pick an accounting system that works best for your company. The right accounting software will have all the needed accounting systems built in.

Whether tracking expenses or managing bills, QuickBooks can help ensure your accounting system is one less thing to worry about.