is the method in which financial information is gathered, processed,
and summarized into financial statements and reports. An accounting
system can be represented by the following graphic, which is explained
- Every accounting entry
is based on a business transaction,
which is usually evidenced by a business document, such as a check
or a sales invoice.
- A journal
is a place to record the transactions of a business. The typical
journals used to record the chronological, day-to-day transactions
are sales and cash receipts journals and a cash disbursements journal.
A general journal is used to record special entries at the end of
an accounting period.
- While a journal records
transactions as they happen, a general
ledger groups transactions according to their type,
based on the accounts they affect. The general ledger is a collection
of all balance sheet, income, and expense accounts used to keep
a business's accounting records. At the end of an accounting period,
all journal entries are summarized and transferred to the general
ledger accounts. This procedure is called "posting."
- A trial
balance is prepared at the end of an accounting
period by adding up all the account balances in your general ledger.
The sum of the debit balances should equal the sum of the credit
balances. If total debits don't equal total credits, you must track
down the errors.
- Finally, financial
statements are prepared from the information in
your trial balance.
Your accounting records
are important because the resulting financial statements and reports
help you plan and make decisions. They may be used by some third
parties (bankers, investors, or creditors) and are needed to provide
information to government agencies, such as the Internal Revenue