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Basic components of an accounting system.

 

 

Think of the accounting system as a wheel whose hub is the general ledger (G/L). Feeding the hub information are the spokes of the wheel. These include

  • Accounts receivable

  • Accounts payable

  • Order entry

  • Inventory control

  • Cost accounting

  • Payroll

  • Fixed assets accounting

These modules are ledgers themselves. We call them sub-ledgers. Each contains the detailed entries of its specific field, such as accounts receivable. The sub-ledgers summarize the entries, and then send the summary up to the general ledger. For example, each day the receivables sub-ledger records all credit sales and payments received. The transactions net together then go up to the G/L to increase or decrease A/R, increase cash and decrease inventory.  

We'll always check to be sure that the balance of the sub-ledger exactly equals the account balance for that sub-ledger account in the G/L. If it doesn't, then there's a problem.  

Think of the G/L as a sheet of paper on which transactions from all four categories of accounts-assets, liabilities, income, and expenses-are recorded. Some of them flow up from various sub-ledgers, and some are entered directly into the G/L through a general journal entry. An example of such a direct entry would be the payment on a loan.  

The same concept of a sheet of paper holds for each sub-ledger that feeds the general ledger. A computerized accounting system works the same way, except that the general ledger and sub-ledgers are computer files instead of sheets of paper. Entries are posted to each and summarized, and then the summary is sent up to the G/L for posting.  

Organize your small-business accounting system by function. Often there's just one person there to do all the transaction entries. From an internal control standpoint, this isn't desirable. Having too few people doing all the accounting opens the door for fraud and embezzlement. Companies with more people assign functions in such a way that those done by the same person don't pose a control threat.  

Having the same person draft the checks and reconcile the checking account is a good example of how not to assign accounting duties.  

 

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