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Accounting system - What is an accounting system?

An accounting system is the system used to manage the income, expenses, and other financial activities of a business

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An accounting system allows a business to keep track of all types of financial transactions, including purchases (expenses), sales (invoices and income), liabilities (funding, accounts payable), etc. and is capable of generating comprehensive statistical reports that provide management or interested parties with a clear set of data to aid in the decision-making process.

Today, the system used by a company is generally automated and computer-based, using specialised software and/or cloud-based services. However, historically, accounting systems were a complex series of manual calculations and balances.

What an accounting system manages

  1. Expenses: The amount of cash that flows out of the company in exchange for goods or services from another person or company are the expenses. In older accounting software or with a manual system such as Excel, it is necessary to manually enter, balance, and categorise each expense. An automatic accounting system allows quick entry, categorisation and automatic balance of expenses.
  2. Invoices: Creating a professional looking invoice is an important part of developing a positive brand image and building confidence with customers. Today, some accounting systems such as Debitoor allow for instant invoice creation with the ability to customise and automatically keep track of paid invoices and income.
  3. Funding: All the business liabilities, whether accounts payable, bank loans taken to support the business, or mortgages, etc. An accounting system keeps track of these liabilities as payable values and automatically updates the balances as soon a payment is made and accounts are settled.

Accounting systems in history

The earliest known accounting records were found in the Middle East and date back over 7,000 years!

It was important for early rulers, businesses, and individuals to be able to keep track of income and expenditure, whether due to a desire to determine whether a particular activity was profitable, to tax citizens or to impose customs fees.

In the late 1400s, the Italian friar Luca Pacioli earned his accreditation as the 'Father of Accounting', for describing the structure of the double-entry bookkeeping system used by Venetian merchants during the Italian Renaissance, which has served as the direct predecessor of modern accounting practices. He is perhaps best known for stating the Golden Rule of Accounting:

'Do not go to bed before the debits equal the credits'

Modern accounting systems

Jumping ahead to 1880, the first accounting machine was invented by a man named Herman Hollerith. Known as the tablulating machine, it used punch cards to add numbers to a card that could then use to determine the total. Hollerith also founded a company that later merged to become a component of IBM.

In the 20th century, developments in computer technology and especially the introduction of the PC meant that it was possible for "ordinary people" to gain access to a definite system. That is: an accounting system that does it all. From the first DOS-based accounting systems such as PcPlus to today's Internet-based accounting systems such as e-conomic that use SaaS (or cloud computing), all serve as models for the distribution of accounting systems.