Management Takeaway: Accounting Systems

Accounting systems all have the same the basic format even though they do not look the same.

Every transaction that involves cash, accounts receivable, accounts payable, and inventory has a user-friendly built-in feature.  Transactions that do not involve cash, accounts receivable, accounts payable, or inventory requires a journal entry.

Watch the demonstration to better understand how accounting systems work.

Now that you understand a small portion of accounting systems, please note that you should evaluate the following items before trusting financial statements.

1. Have all checking accounts and credit card accounts been reconciled to the respective statement?  If they do not know what this means, the financial statements are no accurate.
2. Look at the Income statement also known as the Profit and Loss (P&L).  Are only revenue and expenses listed?  If not, work needs to be done in the chart of accounts to classify accounts correctly.
3. Look at the Balance Sheet. Are only assets, liabilities, and owner’s equity listed?  If not, work needs to be done in the chart of accounts to classify accounts correctly.
4. Once you have completed the first three items, you can calculate working capital to see if the company is financially healthy.
5. Next, perform a vertical analysis on the income statement to determine what accounts should be evaluated.