What Is a POS System and How Does It Work?

What Is a POS System and How Does It Work?
Researching your POS options? This overview can help you put together the right setup for your business, no matter where you sell.
by Kira Deutch Nov 30, 2023 — 5 min read
What Is a POS System and How Does It Work?

A point of sale, or point of purchase, is where you ring up customers and accept payments. When customers check out online, walk up to your checkout counter, or pick out an item from your stand or booth, they’re at the point of sale. You can even do this on existing hardware you already use for your business—your computer.

Your point-of-sale system is the hardware and software that enable your business to make those sales.

How does a POS system work at a small business?

A POS system allows your business to accept payments from customers and keep track of sales. It sounds simple enough, but the setup can look and work differently, depending on whether you sell online, have a physical storefront, or both.

A point-of-sale system used to refer to the cash register at a store. Today, modern POS systems are entirely digital, which means you can check out a customer wherever you are. All you need is a POS app and an internet-enabled device, such as a tablet or phone.

So what does a POS system do? Usually, it works like this:

point-of-sale transaction example

  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 barcode scanner to look up the item’s price. Some POS systems, such as  Square Point of Sale, also allow you to scan items with the camera on your device. For online stores, this step happens when a customer finishes 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.

Which types of hardware and software does a POS system typically include?

Every POS system uses POS software, but not all businesses need POS hardware.

If you have an online store, then all of your sales happen on your website, so you don’t need POS hardware to help you accept payments. But if you have a cafe, you may need a register and a credit card reader. If you operate a food truck, a phone or tablet could be all you need to process orders. Some businesses simply use their POS software on their computer as a virtual terminal to collect payments from customers.

Here’s a rundown of common types of POS hardware and software, which can help you figure out the total cost of your POS system. Keep in mind that what you need depends on your business.

Common types of POS hardware

POS hardware allows you to accept payments. If you’re getting a new POS system, you should make sure it accepts all forms of payment, including cash, credit cards (especially chip cards), and mobile payments. If it makes sense for your business, your POS system should also print receipts, store cash in cash drawers, and scan barcodes. You can achieve this through multiple different setups and hardware accessories, even adding a printer and barcode scanner to your computer if you choose.

This list of hardware can give you a place to start as you’re evaluating your POS setup options.

point-of-sale system setup

Common POS software features

POS software is like your command center. At a basic level, it allows you to find items in your library and ring up sales. More robust point-of-sale solutions also feature helpful tools such as sales reporting, customer engagement software, inventory management, and more. POS systems also take care of routing funds to your bank account after each sale.

Some POS solutions, such as Square, include the features below. Other systems may require you to use outside software to get the features you need. Learn more about how Square compares to other POS systems.


Payment processing

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

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

Computer POS

The option and flexibility to take a payment without added hardware, like a register or even a terminal, is one aspect of a POS that might be more important for some businesses than others. With Square Virtual Terminal, you can have a computer POS with all of the benefits of an external POS terminal right on your computer. Accepting card-not-present payments is an alternative to invoicing or waiting for physical checks in the mail. If you’re a seller using Square Virtual Terminal, your business can accept payments through a computer without the need for additional hardware, making your computer the only hardware needed for accepting payments. Plus, you can send payment links via text, take payments over the phone, or manually key in a card number. And if you do decide to add hardware like a printer, card reader, or an item scanner, you always can add those on too. 

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.

POS reports

POS reports give you a quick look into how much you’re selling and earning. With clear reports, you can sell more and make better business decisions.

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)

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


Receipts make processing refunds easier since there’s a digital or paper trail connected to the purchased item. They can also make your business look more polished.

Tipping support

For restaurants and service professionals, tips can be a big part of getting paid. POS solutions that allow customers to add a digital tip during the checkout process make it more likely that they’ll tip.


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.

Kira Deutch
The Bottom Line is brought to you by a global team of collaborators who believe that anyone should be able to participate and thrive in the economy.


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