So you have decided to upgrade to accounting software. Congratulations on a wise decision and here’s to improved profitability and greater business efficiency.
However, before you upgrade to the best accounting software, be sure to understand some vital accounting basics, or alternatively, rope in an accountant to help you wrap your head around them.
Before we dive into the accounting basics that you need to know before adopting accounting software, is essential for business owners and company bosses to recognize that the best accounting software does not eliminate the need for accountants and bookkeepers. You might be able to manage with a trimmer team, you will enjoy better productivity and eliminate the chance of human error, and you will gain spontaneous business insights, but you still do need an accountant.
That said, let’s dive into some accounting basics to know before upgrading to the best accounting software:
- Business bank account
First and foremost, you need a business bank account so that your personal transactions and your business transactions are kept distinct from one another. It is also essential so that you are aware of your business-related expenditure. The business bank account will be linked to your books when you adopt the best accounting software.
- Analysis and source documents
Source documents include bank statements, invoices, purchase orders, and so on. These documents need to be referenced for the purpose of analyzing and recording business transactions. When you upgrade to the best accounting software, these source documents can be scanned by the system to ease the data entry process. Source documents are also saved by the system along with the data entry to facilitate easy backchecking and auditing.
- General journal and special journal
These journals are also referred to as Books of Original Entry or simply as journals. This is where you or your accountant must enter financial transactions chronologically.
The commonest practice is to record recurring transactions like salaries, utility bills, etc in a special journal and the others in a general journal.
- Ledger
The ledger is also known as the general ledger or Books of Final Entry. Here changes to the accounts based on prior transactions are recorded. Also included is the current balance of the various accounts.
- Unadjusted trial balance
This is how accountants check their own work. The total debits and total credits are added up – the two amounts must be equal, failing which, the accountant realizes that there are errors. Such errors could be linked to the calculation or even to duplicate entries or missing data.
If this is the case, one has to pore over prior data to locate the errors and make the required corrections.
- Adjusting entries
These entries are linked to the accrual of income and expenses, allowances, depreciation, deferrals, and also prepayments.
They are made at the end of an accounting period and as the name suggests, they are linked to making adjustments. For example, income might have been earned during the given accounting period but might not yet be reflected in the books. This would go under an adjusting entry.
- Adjusted trial balance
Once the adjusting entries are made, the accountant must once more add up the debit transactions and credit transactions for the accounting period at hand and ensure that the two amounts match.
- Financial statements
Here are some financial statements that need to be prepared at the end of an accounting period or at the end of the accounting process. These statements are the product of most of the points we have discussed above:
- Balance sheet
- Statement of cash flow
- Statement of income
- Statement of changes in equity
- Closing entries
After the end of an accounting period, the books or system need to be readied for the next cycle. At this point, the post-closing trial balance is calculated and now you are ready to start over from point number 2 onwards.
- Accounting method
There are two types of accounting methods that an accountant must choose from:
Accrual basis – this is what is known as the double-entry accounting system. A record is made when the business incurs some expense or makes a sale. This method is the most popularly chosen accounting method.
Cash basis – this is a far simpler method of accounting. In this method, a record is only made when a payment is actually received or an amount is actually debited.
When you upgrade to accounting software a lot of these transactions are simplified. However, you do still need a pair of eyes ensuring that data is flowing seamlessly from your business bank account to your books as it is supposed to. Additionally, accountants can help you prepare business plans, achieve better tax efficiency, file your taxes correctly and help you understand business insights delivered by the software.
