What Is a POS System and How Does It Work?

A POS system, or point-of-sale system, is a set of devices, software and payment services merchants use to make sales in person. A POS system manages customer purchases, accepts payments and provides receipts. Operating a retail store calls for a range of administrative, management and marketing skills. From ensuring that there’s enough inventory to putting together monthly sales reports, these skills are necessary for your store to run smoothly.

How does a POS system work?

A POS system calculates a customer’s purchase amount, adds sales tax, processes the payment and logs the time and date of the transaction. After completing the transaction, many POS systems generate a paper and/or digital receipt as well as adjust inventory records. POS systems are the modern version of cash registers.

1.A customer decides to buy your product or service

If you have a physical store, they may ask a sales associate to ring them up. That associate could use a bar code scanner to look up the item’s price. Some POS systems, such as the Square Point of Sale, also allow you to scan items visually with the camera on your device. For online stores this step happens when a customer finish adding items to their cart and clicks the checkout button.

2.Your POS system calculates the price of the item, including any sales tax

Then the system updates the inventory count to show that the item is sold.

3.Your customer pays

To finish their purchase, your customer will have to use their credit card, tap card, debit card, loyalty points, gift card, or cash to make the payment go through. Depending on the type of payment they choose, your customer’s bank then has to authorize the transaction.

4.The point-of-sale transaction is finalized

This is the moment when you officially make a sale. The payment goes through, a digital or printed receipt is created, and you ship or hand your customer the items they bought.

Components of a POS system

Typically, the three main components of a POS system are hardware, software and payment processing services.

Hardware components of a POS system

These are the common physical components required to get your POS up and running.

Monitor/tablet: Displays the product database and enables other functions, such as employee clock-in and viewing sales reports.

Barcode scanner: Automates the checkout process. Scanning barcodes pulls product info and adds it to the checkout total. Barcode scanners can also integrate with inventory management systems to automatically adjust stock levels.

Credit card reader: Used to scan credit cards for payment

Receipt printer: Used for printing receipts for clients

Cash drawer: It may fade away in years to come, but cash is still king. Until then, you’ll need a secure place to store cash for transactions.

Software features of a POS system

On-premises POS system software:

Sometimes known as a legacy system, this software is only accessible on the POS terminal where it’s installed. It facilitates payment processing, logs sales and labor information, and preferably syncs with accounting software. This solution often works for small businesses that prioritize in-store sales and have one POS terminal.

Cloud-based POS system software:

This type of POS software syncs information from multiple POS terminals and typically offers mobile and desktop access. Cloud POS systems offer greater flexibility and may be the better solution for online businesses, mobile businesses or those with multiple terminals or locations.

Payment processing services

Payment processing is one of the core functions of a POS system. Each time a customer buys an item, your POS system processes the transaction.

There are a number of different payment types a POS system might accept:

  • Cash
  • Secure online payments through your eCommerce site
  • Magstripe credit cards, which are cards that you swipe
  • Chip cards, which are credit cards with an embedded chip
  • Contactless payments, which might include a contactless card that customers tap or a mobile wallet (e.g.Mpesa)
  • Card-not-present transaction, which happens when your customer and their credit card aren’t actually in front of you, so you have to manually enter their credit card information. This also occurs when a customer enters their payment details while checking out online.

Inventory management

Inventory management software allows you to keep tabs on all your products. Some automated inventory software can connect with your sales data and let you know when an item is running low.

Employee management

Team management software lets you know when your employees are working and how they’re performing. Your team can also use it to clock in and out, and some types of software can grant permissions so employees can get access to certain tasks.

Customer relationship management (CRM)

A CRM tool that’s tied to POS software lets you see what your customers bought and when they bought it. This knowledge helps you personalize your communications, marketing, and customer service.


Now that you have a better understanding of POS systems, you’re ready to find the right POS solution for your business, no matter what or where you sell.

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