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Dynamics GP – Basic Functions And Elements Of An Accounting System

Overview

An accounting system is comprised of accounting records (checkbooks, journals, ledgers, etc.) and a series of processes and procedures assigned to staff, volunteers, and/or outside professionals. The goals of the accounting system are to ensure that financial data and economic transactions are properly entered into the accounting records and that financial reports necessary for management are prepared accurately and in a timely fashion.

Components of an Accounting System

Traditionally, the accounting system includes the following components.

Chart of Accounts

The chart of accounts is a list of each item which the accounting system tracks. Accounts are divided into five categories: Assets, Liabilities, capital, Revenues, and Expenses. Each account is assigned an identifying number for use within the accounting system. 

General Ledger

The general ledger organizes information by account. The chart of accounts acts as the table of contents to the general ledger. In a manual system, summary totals from all of the journals are entered into the general ledger each month, which maintains a year-to-date balance for each account.

In a computerized system, data is typically entered into the system only once. Once the entry has been approved by the user, the software includes the information in all reports in which the relevant account number appears. Many software packages allow the user to produce a general ledger which shows each transaction included in the balance of each account.

For example:
Acct. No. 5105

Account Name: Office Supplies

Beginning Balance @ April 30: $1,535.26

Ck.   No.   1443   John’s   Office   Supplies   5/12   $347.40
Ck.   No.   1451   Quality   Paper   Store       5/17    $32.89
Closing Balance @ May 31: $1,915.55

Journals and Subsidiary Journals

Journals, also called books of original entry, are used to systematically record all accounting transactions before they are entered into the general ledger. Journals organize information chronologically and by transaction type (receipts, disbursements, other). There are three primary journals:

  • The Cash Disbursement Journal is a chronological record of checks that are written, categorized using the chart of accounts.
  • The Cash Receipts Journal is a chronological record of all deposits that are made, categorized using the chart of accounts.
  • The General Journal is a record of all transactions which do not pass through the checkbook, including non-cash transactions (such as accrual entries and depreciation) and corrections to previous journal entries.

As organizations mature, and handle greater numbers of financial transactions, they may develop subsidiary journals to break out certain kinds of activity from the primary journals noted above. The most common examples of subsidiary journals include:

  • The Payroll Journal, which records all payroll-related transactions. This may be useful as the number of payroll transaction s grows and becomes too large to handle reasonably within the cash disbursements journal.
  •  The Accounts Payable Journal and Accounts Receivable Journal track income and expense accruals. These are useful for grouping income and/or expense accruals which are too numerous to track effectively through the general journal. Some accounting packages require you to set up all bills as accounts payable and all revenue as accounts receivable, eliminating the cash disbursements and receipts journals altogether.

 The process of transferring information from the journals to the general ledger is called posting. Computerized accounting systems often require users to post all income and expense transactions through the accounts receivable and payable journals. Other automated systems allow users to post to cash disbursements or receipts journals, but cannot produce detailed financial information from these journals (such as a list of checks written presented in numerical order.)

Checkbook

In very small organizations, the checkbook may serve as a combined ledger and journal. Most financial transactions will pass through the checkbook, where receipts are deposited and from which disbursements are made. Smaller organizations receiving few or no restricted contributions find it easier to keep track of financial activity by running all of their financial transactions through a single checking account. Very small organizations, with few deposits and disbursements, may prepare reports directly from the checkbook after the balance has been reconciled with the bank balance.

Accounting Procedures Manual

The accounting procedures manual is a record of the policies and procedures for handling financial transactions. The manual can be a simple description of how financial functions are handled (e.g., paying bills, depositing cash and transferring money between funds) and who is responsible for what. The accounting procedures manual is also useful when there is a changeover in financial management staff
The Accounting Cycle

The accounting cycle may be represented systematically as follows:
financial transactions -> analyze transaction -> record transaction in journals -> post journal information to general ledger -> analyze general ledger account and make corrections -> prepare financial statements from general ledger. The routine aspects of the accounting cycle (recording transactions, posting, etc.) are generally done by bookkeepers or data entry clerks. Accountants focus on the more analytical aspects of the accounting cycle (analyzing transactions, preparing financial statements.) Many small organizations rely on a single individual to perform all of these functions.

Maintaining the Integrity of an Accounting System

The key tasks for maintaining the integrity of an accounting system include the following.

Trial Balance

In a manual system all balances from the general ledger are tallied on a monthly basis to make sure that debit balances equal credit balances. Once debits equal credits, financial statements can be prepared using trial balance amounts. Computerized accounting systems almost always produce a trial balance as a built-in report. Many software packages will not allow you to post an entry to the general ledger until the debit and credit balances are equal.

Bank Reconciliation

Each month you will need to reconcile the balance in your checkbook with the balance in your account according to your bank. This process has three basic steps:

  • Compare deposits and checks as they are recorded in the checkbook with those reflected in the bank statement. Adjust any discrepancies.
  • Adjust for bank charges or interest earned into the checkbook balance.
  • Subtract un-cashed checks from the banks balance and add in checks you have deposited which are not yet reflected in the bank’s balance.

 

 

 

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