Accounting systems are a set of processes that aim to record and manage all of a company's financial information. Businesses and organizations of all sizes use these systems to record their revenues, expenses, sales, taxes, payroll, and many other financial activities. Depending on the size of the business and the scope of its activities, accounting systems can be computerized or manual. There are two types of accounting systems: double-entry and single-entry.
Although there are only two types of accounting systems, there are plenty of accounting tools that can help you complete bookkeeping and accounting tasks. QNE Software Philippines offers comprehensive accounting software for small business owners, contractors and freelancers.
In this article, we'll go over the two main accounting systems and introduce the accounting software that can help you keep track of your financial data and streamline your accounting operations.
What are the two types of accounting systems?
As mentioned earlier, there are two types of accounting systems for businesses: single-entry and double-entry. The two systems differ in how each transaction is recorded. In simple accounting, only one entry is recorded, either debit or credit. Double-entry bookkeeping, on the other hand, records both debits and credits, so two accounts are involved in each transaction.
As a small business owner, it is important to familiarize yourself with the specifics of the two accounting systems before choosing one over the other. The two systems differ in terms of their complexity and suitability for the size of your business. Once you have a clear idea of what each of the two systems offers, you will be able to use the right system. Below is a more detailed explanation of the two accounting systems and the advantages and disadvantages of each.
The Single-Entry Accounting System Explained
In simple accounting, all financial transactions are recorded in a single log without recording assets and liabilities. A typical single entry includes the value of the transaction, whether it is an expense or a revenue, the date, a brief description, and a balance that indicates the amount of money you have available.
The main advantages of a simple
accounting system are simplicity and cost efficiency. You do not need formal training to implement such a system, nor do you need to retain the services of a professional accountant or certified public accountant (CPA) to maintain it.
This system is ideal for non-profit organizations and businesses with no employees or very few financial transactions. The downside, however, is that it does not capture enough data to produce proper financial statements. In other words, you can't create a balance sheet, income statement, or profit and loss statement.
The double-entry accounting system - Explanation
In double-entry accounting, all financial data is recorded on two sides: debit and credit. For each transaction recorded in the system, one account is debited while another account is credited. For example, if you sell $2,000 worth of products, the system debits Accounts Receivable and credits Sales for the same amount.
The advantage of this data entry system is that it provides a complete overview of your company's financial activities. Profit and loss can be easily identified, and proper financial reporting can be produced. Because of the completeness of the system, double-entry accounting is ideal for any business that wants to ensure sound and accurate financial management. As for the disadvantages, the system is much more complex than simple accounting, and its maintenance may require hiring a professional accountant.
What are the two types of accounting methods?
Just as there are two types of accounting systems, there are also two types of accounting methods: cash accounting and accrual accounting. In cash accounting, expenses and revenues are recorded when cash is paid or received. In contrast, accrual accounting records revenues and expenses at the time of the transaction, such as before a cash settlement.
Keep in mind that there are several factors you should consider before deciding on an accounting method for your business. Variables such as the size of the business and the industry play a critical role in how your books should be kept. The following sections explain these accounting methods in more detail and outline the types of businesses for which each method is best suited.
The cash accounting method explained
The cash accounting method is fairly simple in its application. The basic concept is similar to that of a personal checkbook. By recording transactions after cash has changed hands, you can track your business's financial activity in real time and get an up-to-date picture of its current cash flow status.
There are numerous benefits to this accounting method. In addition to the ability to manage cash flow in real time, this method offers several potential tax benefits. In fact, a business can legally lower its tax liability simply by managing the timing of cash payments. However, this method is not without its drawbacks. Because cash receipts and disbursements do not report liabilities, a company with large accounts payable may appear more solvent than it actually is.
Because of its simplicity, cash basis accounting is ideal for small businesses or sole proprietorships that do not sell goods or maintain inventory.
The accrual method explained
Compared to cash accounting, accrual accounting is relatively complex. Recording revenues and expenses at the time of the transaction requires the use of accounts payable and accounts receivable, as well as the recording of long-term liabilities, such as unearned income. In addition, accrual accounting requires a monthly bank reconciliation to ensure that the amount in the bank account matches the closing balance.
Unlike cash-based accounting, payments that are expected to be received in the future are recorded as current revenues. This provides a more accurate picture of a company's financial health and long-term profitability. The disadvantage of this method is that cash flow cannot be tracked as well, which can lead to shortages at inopportune times.
Accrual accounting is the preferred method for businesses ranging from e-commerce to manufacturing. In addition, accrual accounting is required by law for businesses with annual revenues of more than $25 million.
Use of accounting software for businesses
Although a basic understanding of
accounting system software and methods is essential, you don't need to know every aspect of accounting in detail to manage your business finances. These days, there are a variety of easy-to-use software solutions and mobile apps for Android and iOS that can help you with your accounting tasks. These solutions cover the entire scope of business accounting, from bookkeeping and budgeting to cloud accounting and time tracking.
It's worth noting that certain software packages include only core accounting functions, while others are geared towards more comprehensive project management tasks. These software solutions are called enterprise resource planning (ERP) systems and are used by companies that want to integrate the management of all processes into one system. Companies like QNE Software Philippines also offer ERP solutions for small businesses at competitive prices.
Here are some examples of accounting solutions that offer comprehensive features for small businesses:
Invoicing and purchase order software.
There are several software solutions that can help you create two documents that are essential for any business that deals with selling and buying goods and services: Invoices and Purchase Orders. Invoices help you collect payments on time, while purchase orders are used to procure goods and services from suppliers. Invoices and purchase orders are also a great way to ensure document-based traceability of all your transactions.
Expense tracking software
Keeping an accurate record of expenses is extremely important for small businesses. Tracking expenses allows you to manage your cash flow, measure your profitability, and consistently stick to your budget.
Solutions like QNE Software Philippines offer streamlined tracking of all your expenses and a variety of other
accounting system Philippines features that allow you to keep track of your bookkeeping. You can clearly record sales tax and store revenue, view income and expenses in a general ledger, and generate financial reports whenever you need them.
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