Accounting systems
This chapter introduces the accounting systems used by business entities.
Learning objective
By the end of this lesson, you should be able to:
- Identify the main types of business transaction and the documents that evidence them.
- Identify and explain the function of the main data sources in an accounting system.
- Describe how an accounting system provides useful information and supports compliance with organisational policies and deadlines.
- Describe the key features of a computerised accounting system, including the use of external servers to store data (the cloud).
A well-designed accounting system does more than record transactions - it produces timely, accurate, and complete information that managers and external users rely on for decision-making. It also enforces organisational policies, such as authorisation limits and the approval of purchase orders before goods are ordered, and it supports both internal deadlines (month-end close, supplier payment runs) and statutory filing deadlines.
Throughout this course, it is assumed that a manual accounting system is kept. However, due to rapid advances in technology, most business entities - especially large companies - have adopted computerised accounting systems.
A manual accounting system relies on physical records such as ledger books, journals, and paper-based source documents to record and process transactions. Manual systems are straightforward in concept, but they can be time-consuming, prone to human error, and impractical for businesses that handle large volumes of transactions.
Before looking at computerised systems in detail, it helps to understand the main data sources that feed into any accounting system, whether manual or computerised. These include source documents, such as invoices and bank statements, and internal records, such as inventory records. Together, they provide the evidence and audit trail behind every entry in the accounting system.
The main types of business transaction are cash and credit sales, cash and credit purchases, receipts from customers, and payments to suppliers and for expenses. Each is evidenced by a source document. The twelve business documents, and which transaction each one evidences, are covered in Source document.
| Data source | Evidence of | Transactions it starts | First recorded in |
|---|---|---|---|
| Sales/purchase invoice | A sale or purchase on credit | Sales or purchases | Sales day book / purchases day book |
| Receipt / remittance advice | Money received or paid | Receipts and payments | Cash book |
| Inventory record | Goods received or issued | Goods received or issued | Inventory ledger |
A bank statement is an external record from the bank. Most cash book entries come from the business’s own receipt and payment documents, and the statement is used afterwards to check them, as Bank reconciliation statement shows. Items the business learns of only from the statement, such as bank charges, interest and direct debits, are then entered in the cash book from it.
Regardless of whether a system is manual or computerised, the underlying accounting principles stay the same. Transactions must still be identified, measured, recorded, classified, and summarised. What changes is how these steps are carried out:
- In a manual system, each step requires deliberate human effort.
- In a computerised system, many steps are automated, which frees time for analysis and decision-making.
Computerised accounting system (CAS)
Features of CAS
- Automation of recording and posting: Transactions entered once automatically update all relevant general ledgers, reducing duplication and errors (see the credit sale example below).
- Integration with other business functions: Links with inventory, payroll, and others to ensure real-time financial data. This integration reduces the need to re-enter data across departments, which saves time and lowers the risk of inconsistent records.
- Use of databases: Has a centralised storage which allows for quick retrieval, queries, and generation of financial reports. Unlike manual filing systems, databases allow users to search, filter, and analyse large volumes of financial data quickly, making reporting and decision-making more efficient.
- Cloud computing (external servers): Data can be stored online, which enables access at any time, automatic updates, backups, and scalability. Cloud-based accounting systems are especially useful for businesses with multiple locations or remote teams because authorised users can access the same financial data from anywhere in real time. Cloud storage can also reduce the risk of data loss from physical damage to on-site servers or hardware. Businesses can scale storage and features up or down as needs change, without major investment in physical infrastructure.
- Security features: There are user access controls, passwords, and an audit trail that ensure data confidentiality and integrity. Audit trails are important because they create a chronological record of every transaction entered, modified, or deleted, making it easier to detect errors, irregularities, or fraudulent activity. Different levels of user access can also be assigned so that sensitive financial data is only available to authorised personnel.
- Compliance tools: Features to generate tax reports, sales tax returns, and regulatory submissions to support timely compliance. Many systems are updated automatically to reflect changes in tax legislation, reducing the risk of late or incorrect submissions.
Example: Recording a credit sale
A business sells goods on credit and issues a sales invoice.
- In a manual system: the invoice is entered in the sales day book, then posted to the customer’s account in the receivables ledger, and the day book totals are periodically posted to the sales account and receivables control account in the general ledger.
- In a CAS: the invoice is entered once, and the sales account, the receivables ledger, and the control accounts all update automatically.
Answer: Both systems apply the same double-entry principles - the CAS simply automates the posting steps that a manual system performs by hand.
Despite the many advantages of computerised accounting systems, it’s important to recognise their limitations. The initial cost of purchasing and implementing accounting software can be significant, particularly for small businesses. Staff training is also needed to ensure the system is used correctly. Businesses that rely heavily on cloud-based systems may face risks related to internet connectivity and cybersecurity threats, such as data breaches or hacking. For these reasons, strong internal controls and robust IT security measures remain essential, even when using advanced accounting software.
Refer to ACCA technical write-up on computerised accounting written by a member of the examination team.