ZACH DE GREGORIO, CPA
www.WolvesAndFinance.com

This video discusses how accounting systems work, or what is generally called "bookkeeping." Bookkeeping is the process of recording transactions in an accounting system. The problem you experience without an accounting system, is the only financial information you have about a business is your bank account balance and your monthly bank statement. This list of transactions does not give you much information about your business. It does not explain your profit or loss, or explain how much debt you have. Accounting systems start with Economic transactions, which could be a purchase, sale, transfer of money, or acquisition of debt. The first step in an accounting system is to record the economic transaction with a journal entry. A journal entry captures the account affected and the dollar amount involved. There is always a debit and credit that balance. Journal entries are then transferred to Account Ledgers. Each account has its own ledger which can be represented by a T-account to track debits and credits. Ledgers can be used to calculate the total for the account at any time. Ledgers are then transferred to the Trial Balance, which is a listing of all accounts with the current balance. The Trial Balance is used to generate the Financial Statements (Balance Sheet and Income Statement). Accounting Systems provide the benefit that they are organized ways to summarize business information, they provide useful information like profit and debt levels, and they create an audit trail. Accounting systems take the chaos of random activities and communicates them in a formalized and easy to understand report.

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