The accounting system records the flow of Money In the organisation and the flow of Money Out of the organisation.

These are called financial transactions and all businesses carry out a wide range of financial transactions. 

These transactions will then be documented so that the business will be able to track all the monies that flow to the organisation and all the monies that flow from the organisation.

Typical financial transactions include: Selling goods and services, Making purchases and Paying expenses.

Recording financial transaction is a complex process but it needs to be done. We simply have to keep track of everything. These include: amounts paid for expenses and purchases, wages paid, amounts receivable from customers and payable to suppliers, and all the payments into and out of the bank account. 

If these transactions are not recorded accurately, the owner of the business and other interested parties may not know whether the business is making or losing money.

The 6 Stage Accounting System

All money in and money out transactions have to be recorded in the accounting system. Actually, the rest of this unit is based on the accounting system, the six-stage accounting system. 

1. Financial Transactions – Originating transaction, e.g. a sale or a payment 
2. Financial Documentation – Documents generated as a result of a transaction, eg Invoice
3. Books of Prime Entry – first book where transactions are recorded, eg, sales day book
4. Ledger Accounts – the main accounting records of the accounting system
5. Trial Balance – A listing of all the ledger accounts
6. Financial Statements – Financial documents that summarise and present the transactions