Understanding the Different Types of Accounting Systems

The primary function of accounting is to monitor a company or organization’s expenses and revenue. All businesses, big or small, depend on some form of accounting to ensure that pertinent financial transactions are recorded to keep track of earnings and losses. This allows companies to create financial statements, compile performance reports, and plan their finances. Businesses must also keep sufficient records of all their transactions to properly file annual tax returns.

Accurate financial records provide a good picture of a businesses’ overall financial health. Since it’s a vital process for any industry, it’s important to invest in a reliable accounting system. This minimizes financial errors that can negatively impact a company’s revenue. Moreover, it’s equally crucial for companies in various industries to employ the proper type of accounting methods for their needs.

Different types of accounting can be classified according to the system and method of entry, as well as the specific business industry. This guide will help you understand different types of accounting and how they may benefit your business.

Two Main Types of Accounting Systems

Single Entry System

Many small businesses usually start by using a single entry system for accounting. It’s a simple system that does not employ a lot of complicated bookkeeping. It also does not involve a lot of formal training and can be done manually. It can be recorded using simple software, such as Microsoft Excel. If a business does not deal with a lot of transactions, a company may use this type of accounting. Business owners who don’t require extensive financial records, or those who do not have enough time to keep track of transactions, may prefer a single entry system.

However, because it only keeps track of basic details, single entry systems do not provide complete financial information. The lack of records makes it prone to errors. If a theft occurs, it’s more likely to go undetected. Without complete financial records, businesses cannot review their performance or employ more effective financial planning. Moreover, single entry systems provide insufficient financial information for business tax reporting.

The accounting method associated with the single entry system is cash accounting. This process involves recording revenue and costs as money is exchanged during collection and payment.

Double Entry System

Companies that handle a high volume of transactions generally rely on a double entry system of accounting. This is used by large and growing businesses to closely keep track of their finances. Double entry systems provide a complete financial record for companies. More financial data also means it’s easier to catch errors and instances of theft within a business. With more information, companies can accurately assess the state of their financial health and improve their business plans.

On the other hand, double entry systems are more complicated to use. They take a lot more time to implement and usually require complex software programs for businesses. If you’re running a growing company, it’s best to upgrade your accounting systems and consult with a professional accountant to keep your financial records in order.

The method of accounting contiguous to the double entry system is accrual accounting. This process records expenses and revenue transactions as they occur, not during collection or payment. One example of this is when a business pays sales tax before a collection is made. Companies would also record their sales as soon as they issue a cash invoice to a customer. In the United States, the accrual accounting method is required when a business earns over $5 million worth of sales.

Types of Accounting for Different Industries

Depending on the nature of the business, different companies have specific accounting needs. Here’s how accounting systems vary in several types of industries.

• Retail Industry – Since retailers regularly sell and purchase products, they require a detailed record of their inventory. Accounting systems must provide the latest reports on the status of payable accounts, credit card processing, as well as current product discounts. This ensures transactions go more smoothly.
• Distribution Industry – Distributors also require detailed accounting records of their inventory. They must know the cost of purchasing a product, its selling price, and how much they are projected to earn with each sale. Distributors must keep track of their accounts receivable to confirm if their customers pay their orders on time.
• Manufacturing Industry – A manufacturer’s accounting system must not only keep an inventory of finished products, but they must also monitor the cost of raw materials, labor production, and sales commissions. Overhead costs such as renting a warehouse and purchasing equipment must also be accounted for.
• Construction Industry – Contractors in the construction business must account for the cost of raw materials required for each project. This allows them to project costs and maximize their budget. To determine if their project is profitable, they must analyze the cost of labor and hours needed to complete a project efficiently.
• Nonprofit Organizations – Organizations that receive a steady stream of donations from benefactors must have a dependable accounting system to keep track of their funds. Nonprofits must keep a detailed record of their budget and how the funds are spent to report back to their benefactors.

The challenges of accounting vary for every company in any industry. It becomes more complex, especially as your business expands. To keep accounting efficient, consult with a reliable accounting firm and upgrade your accounting program. ANSI is a Philippines-based business solutions provider that offers high-quality accounting systems according to your needs. If you’re looking to update your accounting software to streamline your business, ANSI can help your business grow.

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