What is an accounting system?

Accounting record-keeping everywhere is done using a wide range of systems - from paper-based systems to computer technology that allows businesses to record their financial transactions even more accurately, efficiently and quickly using the latest technological tools.   

History 

Before accounting software, there existed books of accounts, like sales journals, purchases journals, cash receipts journals, cash payments journals and general journals to name the more important ones.  These were kept in multi-columnar ledger books typically up to 13 columns-wide and as many pages as the book could hold.  'Bookkeeping' is the practice of keeping the financial records to show how Sales, Purchases, Bought "on account", Sold "on account" and transacted over a given period - usually monthly, but also daily/weekly/fortnightly depending on the type of business.

The 1400s

Before ruled accounts, history attributes the system of double-entry accounting to an individual by the name of Father Luca Pacioli, who in 1494 first described this system used by Venetian merchants in his “Summa de Arithmetica, Geometria, Proportioni et Proportionalita.”  Reference: Accounting Basics: History Of Accounting - Investopedia

The 1900's

Print products for accounting, such as journal and ledger paper formats became popular and existed until today, helping businesses keep their books of account tidy, streamlined, accessible and easy to read.  One company Kalamazoo (Aust) Limited, established in 1919, innovated a brilliant system of recording that saved time countless hours by allowing bookkeepers to record transactions in more than one book of accounts at one time - the 'multi-write' system. Reference: History of Kalamazoo.

1990's Accounting software

With the growth of personal computers, computerised accounting systems for record-keeping became popular because technology now allowed people in business wanted to know more quickly things like: 

  • How well is my business performing? 
  • What is the value of our current business?
  • Who owes me money?
  • To whom do we owe money?
  • Where did all our money go?

and - taxes

Accounting systems are also important - because, well, taxes! GST, Income Tax, employee PAYG withholding, and others.  Sales of computerised accounting software exploded around the time of introduction of the GST in Australia on 1 July 2000, because businesses feared they could not report their tax obligations otherwise.

The Australian Taxation Office (ATO) requires by law that business records must:

  • explain all transactions
  • be in writing (electronic or paper)
  • be in English or in a form that can be easily converted
  • be kept for five years (some records may need to be saved longer)
  • AND -If you don't retain the right tax records, you can incur penalties.

Reference:  Record Keeping for Small Business

Current accounting systems

There are hundreds of accounting systems that you can use - the main requirements are that these systems are capable of:

  • producing invoices and receipts
  • payroll requirements, including wages, annual leave, long service leave
  • managing multiple bank accounts or businesses/franchises
  • dealing with foreign currency
  • doing budgets or forecasting cash flow
  • getting regular reports
  • Back-up processes and security -  to keep them in a safe place in case of flood, fire or theft
  • increase the quality of your business management and record keeping
  • track sales and expenditure
  • streamline your accounting practices
  • improve compliance with your tax obligations
  • automatically tally amounts and provide ready-made reports
  • develop summaries and reports for GST and income tax purposes
  • report some information to us online (if the package meets our requirements), for example, your activity statement

Source: Electronic Record-Keeping (ATO)

In 1983, Scott Cook was one of the first to see that personal computers would lend themselves towards replacements for paper-and-pencil based 'personal accounting' and started the company INTUIT.  The company soon launched its flagship product Quicken, used across the world.  Simultaneously, MYOB in Australia was being developed, listing as a public company on the ASX in 1999. 

Some of the most popular of accounting software systems for Small-medium enterprises (SMEs) in Australia are:

But which accounting system should I choose?

First, you need to know that accounting systems everywhere in the world need the same core functions - to record the financial transactions for any type of business.  These are to record sales, purchases, debts owed by customers to a firm, how much you owe to suppliers, how much you have invested in the business and how much you owe your staff.  You also need to pay taxes to the government. 

So, how is one accounting system different from another in this respect?  The answer is - not very much.  Businesses are run the same way everywhere.

Secondly, all accounting systems - paper-based, computerised, used for small businesses or multi-national corporations still use the core double-entry system of record keeping.    How can an accounting system be better than another?  Answer: Not very much.

What determines your choice of accounting system you is rarely whether the system is able to record core services like sales transactions better than another, or purchases bills, or give you a much better for how well your business has performed.  

What is different about accounting systems are the marginal features.  How many people can use the system at the same time?  How much will it cost?  What level of skills and experience will I need to use this system?  What extra features does my specific business need to run my business most effectively?  Connection to intraday banking exchange rates? 

These additional features are marginal because time-billing, project management, employee time sheets, retail point-of-sale "add-ons", and the like are not core services in accounting systems, but are "great to excellent to have".

Remember that the ATO has very general requirements of any accounting system you use.  

A clear business model and strategy for how your business is going to run and grow will give you the hints as to what to look for in an accounting system. Tidybiz can help you decide a system to meet your requirements.