Establishing an Accounting System: Essential Steps for Financial Success
Steps to Establish an Accounting System: A Practical Guide from Concept to Operation
Setting up an accounting system doesn’t mean “opening software and entering journals”; it means building an auditable financial information structure that converts daily operations (sales/purchasing/inventory/payroll) into accurate entries and useful reports with minimal errors. In this guide, you will learn the steps to establish an accounting system step-by-step: from designing the Chart of Accounts and Document Cycle to policies, controls, system selection, data migration, and pilot runs.
- Define company scope and reporting requirements before building any settings.
- Design the Chart of Accounts (COA) and cost centers to serve management and audit.
- Establish the Document Cycle and necessary documents for valid entries.
- Write Accounting Policies and activate controls (permissions/approvals/period locks).
- Execute a migration and pilot plan that prevents balance discrepancies after launch.
1) What is an Accounting System and What Does it Consist Of?
An accounting system is the “translation of company operations” into reliable financial information. It is not just software; it is a package of components working together: COA, Document Cycle, Policies, Controls, and Reports.
| Component | Practical Meaning | Quick Success Indicator |
|---|---|---|
| Chart of Accounts (COA) | Flexible tree linking ops to Revenue/Expense/Assets/Liabilities. | Few manual “aggregating” entries at month-end. |
| Document Cycle | Document path from creation to approval to posting to archiving. | Every entry has a clear document and reference. |
| Accounting Policies | Rules for recognition, measurement, disclosure, and error handling. | Consistent decisions regardless of staff changes. |
| Controls & Permissions | Segregation of duties + Approvals + Period Lock + Audit Log. | Any modification has a reason and approval. |
| Reporting | Statements + Mgmt Analysis + KPIs. | Reports generated from system, not scattered files. |
2) Defining Scope and Reporting Requirements Before Building
Before drafting a COA or choosing a system, gather “Information Requirements” practically: Who are the report users? Management? Investors? Audit? Tax? Banks? Then convert this into a needs list.
- Nature of activity? (Service/Trade/Manufacturing/Contracting/Multi-branch)
- Do you have inventory? Do you need cost tracking (FIFO/W.Avg)?
- Are reports needed by Branch/Project/Product? (This defines Dimensions).
- What are your regulatory obligations? Tax/Zakat/E-Invoicing?
- Volume of transactions and users now and in 12 months?
3) Designing the Chart of Accounts (COA) to Serve Management
The COA is the “system language.” Correct design reduces adjustments and yields clear reports. Start with two principles: Sufficient Simplicity + Flexibility for Growth.
3.1 Practical COA Approach
- Divide into groups: Assets / Liabilities / Equity / Revenue / Expenses.
- Separate items by management decision: Revenue by business line, Expenses by nature (Salaries/Rent/Marketing).
- Don’t “branch” accounts unnecessarily—use Dimensions/Cost Centers instead.
4) Cost Centers and Analytical Dimensions: Why They Precede Reporting?
If management wants reports by Branch/Project/Product, the solution is not creating a “Revenue Account for Each Branch,” but using Cost Centers and Dimensions added to the entry while keeping the account constant.
- Branch / Region
- Project / Contract
- Department (Sales/Marketing/Production)
- Sales Channel (Store/Online/B2B)
5) Document Cycle and Evidence: Basis of Correct Entry
A strong accounting system cannot be built without a clear document cycle. The goal is for every transaction to have: Document → Approval → Posting → Archiving. This reduces errors and strengthens your position in audits.
Data Migration & ERP Controls - Working Templates
| Operation | Key Documents | Typical Accounting Impact | Control Point |
|---|---|---|---|
| Purchasing | PR + Quote + PO + GRN + Invoice | Expense/Inventory + AP | 3-Way Match (PO/GRN/Invoice) |
| Sales | Quote/Order + Invoice + Credit Note | AR + Revenue | Prevent editing invoice after approval |
| Expenses | Request + Approval + Receipt + Payment Voucher | Expense + Cash/Bank | Approval Limits + Mandatory Cost Center |
| Assets | GRN + Invoice + Asset Tag | Asset + Depreciation | Clear Capitalization Policy |
6) Accounting Policies and Closing: Preventing Chaos
Accounting policies prevent treatment inconsistencies between staff. Essential for growth. At minimum write: Revenue Recognition, Capitalization, Discount Handling, and Expense Policy.
6.1 What’s in the Monthly “Closing Pack”?
- Cash and Bank Reconciliation.
- Sub-ledger (AR/AP) to GL Reconciliation.
- Accruals and Prepayments recording.
- Reviewing unusual expenses and exceptions.
- Period Lock after approval.
7) Internal Controls and Permissions: An Auditable System
Even the best COA won’t protect you if permissions are “open.” Build internal controls to reduce error/fraud risks and facilitate auditing.
- Segregation of Duties (SoD): Creator ≠ Approver ≠ Payer.
- Approval Workflow: For purchasing, expenses, and adjustments.
- Period Lock: Prevent editing after close without approved unlocking.
- Audit Log: Who edited? What? When? Why?
8) System Selection and Setup (Accounting vs ERP)
Selection depends on volume and complexity. A good accounting software fits SMEs, while ERP becomes vital when cycles expand (Inventory/Mfg/Branches).
8.1 Non-deferrable Setup
- Define Roles/Permissions from Day 1.
- Set Dimensions as mandatory fields where needed.
- Configure Document Templates and Approval Paths.
- Set Period Lock rules.
9) Data Migration, Opening Balances, and Parallel Run
The riskiest stage. Any error here appears as balance discrepancies. Treat it as a mini-project: Clean, Map, Test, Pilot.
- Clean Data: Customers/Vendors/Items/Accounts—remove duplicates.
- Mapping: Link old accounts to new ones + Dimension rules.
- Opening Balances: With supporting docs and independent review.
- Parallel Run: Period of comparing both systems before final launch.
10) Closing, Periodic Reporting, and KPIs
After go-live, aim for a consistent closing cycle: same steps, same reports, same controls. Accounting shifts from “Reactive” to “Management.”
10.1 Indispensable Reports
- Trial Balance with monthly comparison.
- P&L by Cost Center/Branch.
- Aging Analysis (AR/AP).
- Exception Report: Entries without Cost Center/Docs/Approval.
11) Readiness Checklist Tool
Use this tool to assess your readiness. Every unchecked item means a “risk” likely to appear as variance or audit weakness.
12) FAQ
Should I start with the Software or the COA/Policies?
Start with methodology: Scope + Reports + COA + Doc Cycle + Policies + Controls. Then choose software capable of executing this.
How detailed should the COA be?
Accounts should match “Management Decision level,” not every invoice. Use Dimensions/Cost Centers for analysis instead of over-branching.
What is the most important post-close control?
Period Lock + Audit Log, with approval path for adjustments. This alone reduces manipulation and variances.
13) Conclusion & Action Plan
Successful system establishment means the Correct Entry results automatically from a correct process and document, and reports are built on stable definitions and clear controls. Start foundational, then optimize.
- Define reports & stakeholder needs.
- Design & Approve COA.
- Design Cost Centers/Dimensions.
- Document Cycle & Mandatory Docs.
- Write & Approve Basic Policies.
- Activate Controls (SoD/Workflow/Lock/Logs).
- Select System & Config.
- Execute Migration (Clean/Match/Parallel).
- Establish Monthly Closing Pack & Reviews.