Accounting system

An accounting system is the system used to manage the income, expenses, and other financial activities of
a business

An accounting system allows a business to keep track of all types of financial transactions, including
purchases (expenses), sales (invoices and income), liabilities (funding, accounts payable), etc. and is
capable of generating comprehensive statistical reports that provide management or interested parties with
a clear set of data to aid in the decision-making process.

Today, the system used by a company is generally automated and computer-based, using specialised
software and/or cloud-based services. However, historically, accounting systems were a complex series of
manual calculations and balances

What an accounting system manages

1. Expenses: The amount of cash that flows out of the company in exchange for goods or services
from another person or company are the expenses. In older accounting software or with a manual
system such as Excel, it is necessary to manually enter, balance, and categorise each expense. An
automatic accounting system allows quick entry, categorisation and automatic balance of
expenses.
2. Invoices: Creating a professional looking invoice is an important part of developing a positive
brand image and building confidence with customers. Today, some accounting systems such as
Debitoor allow for instant invoice creation with the ability to customise and automatically keep
track of paid invoices and income.
3. Funding: All the business liabilities, whether accounts payable, bank loans taken to support the
business, or mortgages, etc. An accounting system keeps track of these liabilities as payable
values and automatically updates the balances as soon a payment is made account is settled

How Important is an Accounting System to My Business?

If you want to run an efficient business you need to automate your business functions. This is true no
matter how large or small your business is. Consider the sales order processing function:
A call comes in from a potential customer. After talking for few minutes the prospect is interested
enough to ask you for a quote. You prepare the quote on your computer system and fax it to your
prospect from your computer. The call ends, you save the quote and go about your business. A day or so
later, the prospect calls back to place the order. You retrieve the quote prepared previously and confirm
that he wants the items you quoted. You convert the quote to a sales order and fax it to your customer
from your computer. You print the shipping copy of the order and route it to your shipping department or
fax it to your drop shipper. Once you have confirmation that the order has been delivered, you retrieve
the sales order and convert it to an invoice, which you then fax, or mail, to your customer. The system
updates your accounts receivable showing the customer owes you the amount of the invoice.
When the customer pays, you apply the cash receipt to the invoice and your accounts receivable balances
are updated to reflect the payment.
Even if you are a very small business, there are accounting systems available that are very inexpensive
and quite capable of saving you loads of time. Get one and use it!
You probably already know that you frequently have to provide financial statements to your bank, to
vendors or other third parties. Once your accounting system is set up and running, it will be easy for you
to provide these at any time. If you’re tired of having to call an accountant every time you need
something, your accounting system will relieve some of that pressure. I’m not saying you will never need
an accountant, but you won’t need him or her quite as often.
In order for the system to properly record accounting transactions in the background, the system will have
to be set up properly. You’ll need a chart of accounts that fits your business and modules like accounts
payable, accounts receivable, payroll, inventory, purchasing and sales order processing will need to be
configured to post to the proper accounts. If you have no accounting experience, you’ll need to find
someone to help you with this, but it should take no more than a couple of hours at most, so that won’t be
expensive either. If you don’t have someone locally who can help you, call us and we’ll be happy to help.

Why Do Businesses Need An Accounting System?

A reliable information system is a necessity for all companies. Companies must properly maintain
accounts and detailed records or face unnecessary costs. A well-devised accounting information system,
which ensures relevant and reliable information is reported in financial statements, benefits every type of
company.

Maintaining a set of accounting records is not optional, it's a law! The Internal Revenue Service (IRS)
requires that businesses prepare and retain a set of records and documents that can be audited. Internal
Revenue Code requires that business have the ability to compute taxable income by using some sort of
common-sense accounting system that clearly reflects income. In addition, the federal legislation requires
public companies to have a detail and accurate books, records, and accounts of transactions and
dispositions of the assets.

If you decide to just blow off this requirement you might get away with your omission. But if the Internal
Revenue Service examines your return and you’ve ignored the law, the IRS gets to do your accounting the
way it wants. And the IRS way means that you pay more in taxes and that you also pay taxes earlier than
you would have otherwise.

Beyond complying with the law, a company that fails to keep an accurate record of its business
transactions may lose revenue and is more likely to operate inefficiently. You can’t successfully manage
your business without the accounting system. Success requires the ability to perform financial analysis,
which is to accurately measure business growth, profitability, and cash flow, as well as to reasonably
estimate your financial condition.

To make smart business decisions, you need to have a good accounting system in place that provides a
true picture of business performance. Management can answer many questions with the data provided by
an efficient accounting information system.
A good accounting information system helps management answer such questions as: What assets do we
have? How much and what kind of debt is outstanding? Were the sales higher this period than last? Did
we make a profit last period? Are any of product lines or divisions operating at a loss? Is the rate of return
on net assets increasing? What were cash inflows and outflows? Is the cash flow enough to pay back
debt? Can we safely increase our dividends to stockholders?

Your business must have a decent accounting system no matter how you feel about accounting and even
no matter how time-consuming and expensive such a system is or becomes. The law requires you to have
such an accounting system and successful business management depends on such an accounting system.

Advantages of Good Cost Accounting System:

A good system of cost accounting serves management in the following ways:
(1) Classification and Sub-divisions of Costs:
Costs are collected and classified by various ways in order to provide information to management for

control purposes and to ascertain the profitability of each area of activity. It enables a concern to measure
the efficiency, and then to maintain and improve it. Unprofitable activities are disclosed and steps can be

taken to make an improvement in those activities.

(2) Control of Materials, Labour and Overhead Costs:

An efficient check is provided on stores and materials. Stores Ledger and Material Abstracts are

maintained which provide an effective check on the stores and material used in a business. By adopting

the maximum limit for stores the total capital outlay is controlled and total financial loss due to over-

stocking is obviated. Information of stock of various materials and stores is constantly available.

(3) Business Policies:

Business Policy may require the consideration of alternative methods and procedures and this is

facilitated by cost information correctly presented. For example, by the aid of cost reports management

can decide whether the manufacture of certain products increases overhead expenditure

disproportionately or whether to treat by-products even at a loss to make possible a more important trade

in another product.
(4) Budgeting:
It provides the use of budgets and performance reports and enables management to correct inefficiencies

before they enter into business. It is a coordinated plan of action for every responsible person for
comparing the actual results with the budgets. Two important cost accounting tools for helping managers

are budgets and performance reports. Budgets are financial and/or quantitative statements prepared and
approved prior to a defined period of time, of the policies to be pursued during that period for the purpose

of attaining objectives of management.

Thus, budgets are the formal quantifications of the plans of management. Performance reports measure

actual performance and give accounts of comparisons of budgets with actual results which facilitate

action against those persons whose performance is less than the performance specified in the budgets.

The technique of control through performance reports is technically known as management by exception,

which is the practice of concentrating on areas whose performance is not upto the mark as it was planned

and ignoring areas that are running smoothly as these were planned.

(5) Standards for Measuring Efficiency:

It provides the use of standards to assist management in making estimates and plans for future and to

provide the basis of management of efficiency. Actual are compared with predetermined standards to
determine the operating efficiency.

(6) Best Use of Limited Resources:

In all varied fields we are concerned to make the best use of limited resources that are available to us.

Thus the intention is to obtain the maximum output from a given input. Cost Accounting provides the

reliable data of costs with regard to materials, wages and other expenses.
These help management to get maximum output at the minimum cost by indicating where economies may

be affected, waste eliminated and efficiency increased ; some of the loss occasioned by reduced turnover
and falling prices may be avoided.

(7) Instrument of Management Control:

It provides management with valuable data for planning, budgeting and control of costs. The organisation
and management of undertaking must be planned and controlled in such a way that the desired volume of

production is achieved at the least possible cost in relation to the scheduled quantity of the product.

The measurement of the degree to which this objective is attained, is provided by cost accounting. An

efficient system of cost accounting is, thus, regarded as an important part in the efforts of any

management to secure business “stability.

(8) Cost Audit:

The operation of a system of cost audit in the organisation will assist in prevention of errors and frauds. It

will help to improve cost accounting methods and techniques to facilitate prompt and reliable information

to management.

(9) Special Factors:

It informs management about the special factors such as optimum profitability, seasonal variations in
volume and costs, idle time of labour and idle capacity of the machine etc. It also helps to curtail the
losses during the off season.

(10) Price Determination:

It helps management to fix the remunerative selling prices of various items of goods in different

circumstances. During the period of depression a businessman has to become very watchful and vigilant

in tracking down the concealed inefficiencies and sources of wastage, so that he may reduce the cost of
production to the minimum. He has to resort to price cutting to such an extent so as to recover variable

costs. Cost accounting makes a distinction between fixed and variable costs and helps the businessman in

the determination of prices in the depression period.

The fixation of prices cannot be properly done unless proper figures of costs are available. If prices are

fixed without costing information, it is possible, that prices quoted may be too high or too low. In periods
of depression, it may become necessary to reduce the prices even below total cost. It is only costing which

will guide the businessman in this matter.

(11) Expansion:
Management is able to formulate expansion policy on the basis of estimates of cost of production at

various levels provided by cost accountant

ANNEXURES:-

Annexure -1(Balance sheet)

Introduction to Balance Sheet

The accounting balance sheet is one of the major financial statements used by accountants and
business owners. (The other major financial statements are the income statement, statement of
cash flows, and statement of stockholders' equity) The balance sheet is also referred to as
the statement of financial position.
The balance sheet presents a company's financial position at the end of a specified date. Some
describe the balance sheet as a "snapshot" of the company's financial position at a point (a
moment or an instant) in time. For example, the amounts reported on a balance sheet dated
December 31, 2017 reflect that instant when all the transactions through December 31 have been
recorded.
Because the balance sheet informs the reader of a company's financial position as of one
moment in time, it allows someone—like a creditor—to see what a company owns as well as
what it owes to other parties as of the date indicated in the heading. This is valuable information
to the banker who wants to determine whether or not a company qualifies for additional credit or
loans. Others who would be interested in the balance sheet include current investors, potential
investors, company management, suppliers, some customers, competitors, government
agencies, and labor unions.
In Part 1 we will explain the components of the balance sheet and in Part 2 we will present a
sample balance sheet. If you are interested in balance sheet analysis, that is included in
the Explanation of Financial Ratios.
We will begin our explanation of the accounting balance sheet with its major components,
elements, or major categories:

 Assets
 Liabilities
 Owner's (Stockholders') Equity
Assets
Assets are things that the company owns. They are the resources of the company that have
been acquired through transactions, and have future economic value that can be measured and
expressed in dollars. Assets also include costs paid in advance that have not yet expired, such
as prepaid advertising, prepaid insurance, prepaid legal fees, and prepaid rent. (For a
discussion of prepaid expenses go to Explanation of Adjusting Entries.)

Examples of asset accounts that are reported on a company's balance sheet include:

 Cash
 Petty Cash
Temporary Investments
 Accounts Receivable
 Inventory
 Supplies
 Prepaid Insurance
 Land
 Land Improvements
 Buildings
 Equipment
 Goodwill

Usually asset accounts will have debit balances.

Contra assets are asset accounts with credit balances. (A credit balance in an asset account is
contrary—or contra—to an asset account's usual debit balance.) Examples of contra asset
accounts include:
 Allowance for Doubtful Accounts
 Accumulated Depreciation-Land Improvements
 Accumulated Depreciation-Buildings
 Accumulated Depreciation-Equipment
 Accumulated Depletion
 Etc.
Classifications Of Assets On The Balance Sheet
Accountants usually prepare classified balance sheets. "Classified" means that the balance sheet
accounts are presented in distinct groupings, categories, or classifications. The asset
classifications and their order of appearance on the balance sheet are:
 Current Assets
 Investments
 Property, Plant, and Equipment
 Intangible Assets
 Other Assets
An outline of a balance sheet using the balance sheet classifications is shown here:

Liabilities
Liabilities are obligations of the company; they are amounts owed to creditors for a past
transaction and they usually have the word "payable" in their account title. Along with owner's
equity, liabilities can be thought of as a source of the company's assets. They can also be
thought of as a claim against a company's assets. For example, a company's balance sheet
reports assets of $100,000 and Accounts Payable of $40,000 and owner's equity of $60,000.
The source of the company's assets are creditors/suppliers for $40,000 and the owners for
$60,000. The creditors/suppliers have a claim against the company's assets and the owner can
claim what remains after the Accounts Payable have been paid.
Liabilities also include amounts received in advance for future services. Since the amount
received (recorded as the asset Cash) has not yet been earned, the company defers the
reporting of revenues and instead reports a liability such as Unearned Revenues or Customer
Deposits. (For a further discussion on deferred revenues/prepayments see the Explanation of
Adjusting Entries.)
Examples of liability accounts reported on a company's balance sheet include:

 Notes Payable
 Accounts Payable
 Salaries Payable
 Wages Payable
 Interest Payable
 Other Accrued Expenses Payable
 Income Taxes Payable
 Customer Deposits
 Warranty Liability
 Lawsuits Payable
 Unearned Revenues
 Bonds Payable
Liability accounts will normally have credit balances.

Contra liabilities are liability accounts with debit balances. (A debit balance in a liability account is
contrary—or contra—to a liability account's usual credit balance.) Examples of contra liability
accounts include:
 Discount on Notes Payable
 Discount on Bonds Payable
 Debt Issue Costs
 Bond Issue Costs

Classifications Of Liabilities On The Balance Sheet

Liability and contra liability accounts are usually classified (put into distinct groupings,
categories, or classifications) on the balance sheet. The liability classifications and their order of
appearance on the balance sheet are:
 Current Liabilities
 Long Term Liabilities
ANNEXURE-2

PROFIT AND LOSS A/C

The account through which annual net profit or loss of a business is ascertained, is
called profit and loss account. Gross profit or loss of a business is ascertained
through trading account and net profit is determined by deducting all indirect expenses
(business operating expenses) from the gross profit through profit and loss account. Thus
profit and loss account starts with the result provided by trading account.

The particulars required for the preparation of profit and loss account are available from the
trial balance. Only indirect expenses and indirect revenues are considered in it. This account
starts from the result of trading account (gross profit or gross loss). Gross profit is shown
on the credit side of the profit and loss account and gross loss is shown on the debit side of
this account. All indirect expenses are transferred on the debit side of this account and all
indirect revenues on credit side. If the total of the credit side exceeds the debit side, the
result is "net profit" and if the total of the debit side exceeds the total of the credit side, the
result is net loss. As the net profit or net loss of a certain accounting period is determined
through profit and loss account, so its heading is:

Name of Business
Profit and Loss Account for the year ended 31.12.2005
(if accounting period ends on 31.12.2005)

Sequence of Expenses in Profit and Loss Account:

There is no hard and fast rule as to the order in which the items of expenses are shown in
profit and loss account. Generally, the items of expenses are shown in the following
sequence:

Office and Administration Expenses:

These are the expenses with the management of the business e.g. salaries of manager,
accountant and office clerks, office rent, office stationary, office electric charges, office
telephone etc.

Selling and Distribution Expenses:

These are the expenses which are directly or indirectly connected with the sale of goods.
These expenses vary with the sales i.e. they increase or decrease with the increase or
decrease of sale of goods. Examples are advertisements, carriage outward, salesmen's
salaries and commission, discount allowed, traveling expenses, bad debts, packaging
expenses, warehouse rent etc.

Financial and Other Expenses:

All other expenses excepting those mentioned above are considered under this class.
Features of Profit and Loss Account:

1. This account is prepared on the last day of an account year in order to determine the net
result of the business.
2. It is second stage of the final accounts.
3. Only indirect expenses and indirect revenues are shown in this account.
4. It starts with the closing balance of the trading account i.e. gross profit or gross loss.
5. All items of revenue concerning current year - whether received in cash or not - and all
items of expenses - whether paid in cash or not - are considered in this account. But no
item relating to past or next year is included in it.
6. The following is a specimen of profit and loss account

The advances of profit and loss account are as follows:

• It is shows the operating results of company in terms of net profit and net
loss.
• It facilitates to compares the profit of a current year with theat of last year
and thus helps to knows whether the company is running effectively or not not.
• It helps in controlling indirect expenses and in improving profitability.
• It provides relevant information for determining bonus for worker. Commission
to manager and tax payable to the government.
Name of Business
Profit and Loss Account for the year ended .....

$ $

Trading A/C Trading A/C

Gross profit (transferred) ----- Gross profit (transferred) -----

Office and Administration Expenses: ----- Interest received -----

Salaries ----- Rent received -----

Rent, rates, taxes ----- Discount received -----

Postage & telegrams ----- Dividend received -----

Office electric charges ----- Bad debts recovered -----

Telephone charges ----- Provision for discount on creditors -----

Printing and stationary ----- Miscellaneous revenue -----

Selling and Distribution Expenses: Net loss - transferred to capital A/C -----

Carriage outward -----

Advertisement -----

Salesmen's salaries -----

Commission -----

Insurance -----

Traveling expenses -----

Bad debts -----

Packing expenses -----

Financial and Other Expenses:

Depreciation -----

Repair -----

Audit fee -----

Interest paid -----

Commission paid -----

Bank charges -----

Legal charges -----

Net profit - transferred to capital A/C -----

If credit side exceeds the debit side = Net profit

If debit side exceeds the credit side = Net loss

ANNEXURE-3

Depreciation
The reduction in value of a tangible fixed asset due to normal usage, wear and tear, new
technology or unfavorable market conditions is called Depreciation.

Assets such as plants and machinery, buildings, vehicles, etc. which are expected
to last more than one year, but not for infinity, are subject to this reduction. It is an
allocation of the cost of a fixed asset in each accounting period during its expected time
of use.

Journal entry for depreciation (Assuming no provision is maintained)

Depreciation A/C Debit

To Asset A/C Credit

Types of Depreciation

 Straight Line Method

 Diminishing Value Method
 Annuity method
 Machine hour rate method
 Revaluation method
 Sum-of-the-years’ digit method
Straight Line Method
Also known as Original cost method, Fixed installment method, and Fixed
percentage method.

Simplest, most used and popular method of charging depreciation is the straight-line
method. An equal amount is allocated for each accounting period. The rate of
depreciation is the reciprocal of the estimated useful life of an asset, so, for example, the
useful life of an asset is 5 years, the depreciation charged will be 1/5 = 20%.

According to Straight Line Method,

Depreciation Amt = (Cost of asset − Salvage Value) / Useful life of asset in

years

Example – Straight Line Method

Asset cost = 1,000,000

Depreciation Rate = 20%

1st year = 20/100*1,000,000

=>2,00,000

2nd year = 20/100*1,00,000

=>2,00,000
Advantages of Straight Line Method are;

1. Simple and easy to understand.

2. The book value of an asset can be reduced to Zero.
3. A fair evaluation of an asset each year on the balance sheet.

Related Topic – What is Accumulated Depreciation?

Diminishing Value Method

Also known as Written down value method, Reducing installment method
and Fixed percentage on diminishing balance.

According to the diminishing value method, depreciation is charged on reducing

balance & a fixed rate. Depreciation, in this case, is charged over the useful life of an
asset over its written down value. The percentage, at which depreciation is charged,
remains fixed, however, the amount of depreciation goes on diminishing year after year.

According to the Diminishing Value Method,

D = Depreciation %

n = Useful life of the asset in years

r = residual value of the asset

c = Cost of asset
Example – Diminishing Value Method
Asset cost = 1,000,000

Depreciation rate = 20% (DVM)

1st year = 20/100*1,000,000

=>2,00,000

2nd year = 20/100*(1,000,000-2,00,000)

=>1,60,000

Advantages of Diminishing Value Method are;

1. More practical and easy to apply.

2. Decreasing charge for depreciation cancels out increasing charges for repairs.
3. This method is applicable for income tax purposes.
ANNEXUE-4

GST(Goods & service tax)

What is GST?
GST is an Indirect Tax which has replaced many Indirect Taxes in India. The Goods and
Service Tax Act was passed in the Parliament on 29th March 2017. The Act came into effect on
1st July 2017; Goods & Services Tax Law in India is a comprehensive, multi-
stage, destination-based tax that is levied on every value addition.
In simple words, Goods and Service Tax (GST) is an indirect tax levied on the supply of goods
and services. This law has replaced many indirect tax laws that previously existed in India.
GST is one indirect tax for the entire country.
So, before Goods and Service Tax, the pattern of tax levy was as follows:

Under the GST regime, the tax will be levied at every point of sale. In case of intra-state sales,
Central GST and State GST will be charged. Inter-state sales will be chargeable to Integrated
GST.
Now let us try to understand the definition of Goods and Service Tax – “GST is
a comprehensive, multi-stage, destination-based tax that will be levied on every value
addition.”
Multi-stage
There are multiple change-of-hands an item goes through along its supply chain: from
manufacture to final sale to the consumer.
Let us consider the following case:

 Purchase of raw materials

 Production or manufacture
 Warehousing of finished goods
 Sale to wholesaler
 Sale of the product to the retailer
 Sale to the end consumer

Goods and Services Tax will be levied on each of these stages which makes it a multi-stage tax.

Value Addition
The manufacturer who makes biscuits buys flour, sugar and other material. The value of the
inputs increases when the sugar and flour are mixed and baked into biscuits.
The manufacturer then sells the biscuits to the warehousing agent who packs large quantities of
biscuits and labels it. That is another addition of value after which the warehouse sells it to the
retailer.
The retailer packages the biscuits in smaller quantities and invests in the marketing of the
biscuits thus increasing its value.
GST will be levied on these value additions i.e. the monetary worth added at each stage to
achieve the final sale to the end customer.

Destination-Based
Consider goods manufactured in Maharashtra and are sold to the final consumer in Karnataka.
Since Goods & Service Tax is levied at the point of consumption, in this case, Karnataka, the
entire tax revenue will go to Karnataka and not Maharashtra.

What are the components of GST?

There are 3 taxes applicable under this system: CGST, SGST & IGST.

 CGST: Collected by the Central Government on an intra-state sale (Eg: Within

Maharashtra)
 SGST: Collected by the State Government on an intra-state sale (Eg: Within
Maharashtra)
 IGST: Collected by the Central Government for inter-state sale (Eg: Maharashtra to
Tamil Nadu)
Advantages Of GST
GST will mainly remove the Cascading effect on the sale of goods and services. Removal of
cascading effect will directly impact the cost of goods. Since tax on tax is eliminated in this
regime, the cost of goods decreases.
GST is also mainly technologically driven. All activities like registration, return filing, application
for refund and response to notice needs to be done online on the GST Portal. This will speed up
the processes.