Components of the 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
- Fixed assets accounting
- Payroll
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, then send
the summary up to the general ledger. For example,
each day the receivables sub-ledgers 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.
Differences between Manual and Automated
Ledgers
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-ledgers 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, then the summary is sent
up to the G/L for posting.
ORGANIZATION OF THE ACCOUNTING DEPARTMENT
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. We'll talk extensively
about internal control later. However, for now,
small businesses often can't afford the number of
people needed for an adequate separation of duties.
The internal control structure that we'll install
in your new accounting system helps mitigate that
risk through mechanics and procedures rather than
expensive people.
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Assignment of Duties
Here's your first assignment: Figure out who is
going to do what in your new accounting system.
The duties and areas of responsibility we need to
assign include
- Overall responsibility for the
accounting system
- Management of the computer system
(if you're using one)
- Accounts receivable
- Accounts payable
- Order entry
- Cost accounting
- Monthly reporting
- Inventory control
- Payroll (even if you use an outside payroll service, someone must be in control and responsible)
- Internal accounting control
- Fixed assets
We'll always check to be sure that the balance of
the sub-ledgers exactly equals the account balance
for that sub-ledgers account in the G/L. If it doesn't,
then there's a problem.
In many cases the same person will do many of these
things. However, these are the areas we'll be dealing
with in setting up the accounting system. The person
you assign to be in overall charge of the system
should be the one who is most familiar with accounting.
If you are just starting your company, you might
want to think about the background of some of your
new employees. At least one should have the capacity
to run the accounting system.
If you find it difficult to determine someone's
expertise in a field with which you are unfamiliar,
here are some solutions:
1 - Have them interviewed with our experts (they
all are CPAs).
2 - Carefully check references from past jobs.
Ask detailed questions on exactly what they did
in the accounting function. Compare the answers
with what they say they did.
3 - Ask them some accounting questions. It may
sound odd that you (of all people) should be asking
such questions. However, even if you can't judge
the technical merit of the answers, you can get
a feel for how comfortable they are with the subject
and the authority with which they answer.
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