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» How Does an Accounting System Work?

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How Does an Accounting System Work?by Chris Anderson
Categories: Accounting & Internal Control, Accounting Procedures Manuals, Writing Policies and Procedures Tags: accounting cycles, Accounting Procedures, accounting system, accounts payable, accounts receivable, Bookkeeping, Cash Disbursements, Credits, Debits, Double-Entry Accounting, General Journal Cycle, Internal controls, Payroll Cycle, Purchase Cycle, Revenue Cycle

Thefinancial transactions of any accounting system can be grouped into four major accounting cycles: Revenue, Purchase, Payroll, and General Journal.

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Four Main Accounting Cycles Accounting transactions in the form of sales invoices, receipts, purchase invoices, checks, and payroll entries are posted to theappropriate journals. Simultaneously — as a form of internal control — these postings are recorded in the general ledger, or “GL”. The GL accumulates all transaction activity, where it is organized by account class. Various reports, including financial statements, can be prepared from the data collected in the GL. Corrections or necessary adjustments can be made to the general ledger by creatingadjusting journal entries, posted to the general journal.

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» How Does an Accounting System Work?

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1. Revenue Cycle
Order Entry. Invoices entered through direct entry, sales orders, or apoint-of-sale (POS) system, such as a cash register, are posted to the sales journal. These entries also accumulate on the accounts receivable ledger, organized by customer. If the business maintains an inventory, the posting of sales also affects the inventory ledger. Finally, all sales journal activity is also posted to the GL. A discussion of your revenue cycle should be covered in your revenueprocedures. Cash Receipts / Deposits. Receipts on sales and other bank deposits are posted to the cash receipts journal. Sales receipt information also accumulates on the accounts receivable ledger, organized by customer. These postings are also entered on the bank account ledger. Finally, all cash receipts journal activity is also posted to the GL. Accounts Receivable. Accounts Receivable is aseparate journal that records both sales and cash receipt data by customer. The data comes from the postings to the cash receipts journal and the sales invoice journal.

2. Purchase Cycle
Purchase Orders / Purchasing. Invoices entered through direct entry, or through purchase orders, are posted to the purchase journal. These entries also accumulate on the accounts payable ledger, organized by...