In part 1, we discussed the importance of data entry methods. Now, we'll look more at the accounting process itself.

The first item of concern is your system of internal control. This will determine if your accounting system produces accurate and reliable information. Through the judicious use of passwords and administrative policies, you can create an excellent system of internal control with any accounting software package.


Your accounting system will produce, among other types of reports, a balance sheet. The purpose of this sheet is to show the financial condition of your business at a particular date. Most packages allow you to customize the look of this sheet, but decide on one format and stick with it for the whole fiscal year.

The balance sheet shows assets in one column and liabilities and equity in the other. The totals of each column must match, to the penny. If they are off, the statement is inaccurate. Finding the problem can be a nightmare, which is one reason your methodology of data entry is so critical. View the balance sheet at regular intervals and reconcile any differences. You may want your data entry procedure to include checking the balance sheet after each entry. Then, if there is a problem, you won't have to sift through a month of entries to find it.

Assets are the economic resources your business owns and that you expect to benefit future operations. According to generally accepted accounting principles (GAAP), you value these at cost rather than appraised market values. There are four reasons for this: The Cost Principle, The Ongoing Concern Assumption, The Objectivity Principle, and The Stable Dollar Assumption. All have fairly lengthy explanations you can sum up this way: according to GAAP, this cost valuation method is not open to debate.


Liabilities are debts, and all businesses have them. An account payable (AP) is a liability arising from the purchase of goods and services, and you owe the AP to a creditor. An AP carries no interest payments or formal promise to the creditor; it is debt incurred in the normal course of conducting business. Examples include invoices, wages, and supplier accounts. Some accounting packages provide separate entries for delinquent APs because these begin to accrue interest.

A note payable is a longer-term loan, usually for a specific purpose that allows business expansion. Notes require a formal written agreement and interest payments. Notes usually appear ahead of APs on your balance sheet and any financial report that would include APs and notes.


Software packages have made it unnecessary to fill out the intermediate forms involved in bookkeeping, and to manage the several types of journals manual methods require. However, you still must follow the principle of double-entry accounting. For every change on the balance sheet's left hand side (assets), you must have an equal change on the right hand side (either liabilities or equity).

The better accounting packages lead you through this or automate it completely. The program will also number and arrange all transactions in financial statement order and update your balance sheet. If the program can't find an invoice, it'll prompt you for further information.

What we have just seen is completion of the accounting cycle, which consists of the four steps shown in sidebar below. You will have times when you need to adjust your entries. You'll need to apportion costs amongaccounts, apportion unearned revenue, correct for unrecorded revenue, and correc t for unrecorded expenses.