Understanding Accounting Basics

Based on US Generally Accepted Accounting Principals (GAAP)

Warehouse & Inventory Basics

Double Entry Inventory
Inventory Valuation Methods

Payroll and Time Management

Payroll, Employer Contribution, Taxes, Vacation
How to Manage Time

Understanding Accounting (US GAAP) Basics

A must have background for nERP

Understanding the Terms

The Profit and Loss (P&L) report shows the performance of the company over a specific period (usually the current year).

  • The Gross Profit equals the revenues from sales minus the cost of goods sold.

  • Operating Expenses (OPEX) include administration, sales, and R&D salaries as well as rent and utilities, miscellaneous costs, insurances, … anything beyond the costs of products sold.

The Balance Sheet is a snapshot of the company’s finances at a specific date (as opposed to the Profit and Loss which is an analysis over a period)

  • Assets represent the company’s wealth, things it owns. Fixed assets include building and offices, current assets include bank accounts and cash. A client owing money is an asset. An employee is not an asset.

  • Liabilities are obligations from past events that the company will have to pay in the future (utility bills, debts, unpaid suppliers).

  • Equity is a number of the funds contributed by the owners (founders or shareholders) plus previously retained earnings (or losses).

    Each year, net profits (or losses) are reported to retained earnings.

Profit & Loss

  Net Profit
  Gross Profit
Revenue
  Revenue
Less Costs of Revenue
  Cost of Goods Sold
  Operating Income or Loss
Less Operating Expenses
 R&D
 Sales, General & Administrative
Plus Other Income
 Foreign Exchange Gains
 Asset write-downs

Less
Other Expenses
 Interest on debt
 Depreciation

Balance Sheet

Net Assets
Total Assets
Current Assets
 Cash & Bank Accounts
 Accounts Receivable
 Deferred Tax Assets
Plus Non-current Assets
 Land & buildings
 Intangible Assets
Less Current Liabilities
 Accounts Payable
 Deferred Revenue
 Deferred Tax Liabilities
Less Non-current liabilities
 Long-term loans
 Total Equity
Equity
 Common Stock
Plus Retained Earnings 

 What is owned (an asset) has been financed through debts to reimburse (liabilities) or  equity (profits, capital).

 A difference is made between buying an assets (e.g. a building) and expenses (e.g. fuel).  Assets have an intrinsic value over time, versus expenses having value in them being consumed for the company to “work”.

Assets = Liabilities + Equity

Chart of Accounts

The chart of accounts lists all the accounts, whether they are balance sheet accounts or P&L accounts. Every financial transaction (e.g. a payment, an invoice) impacts accounts by moving value from one account (credit) to an other account (debit).

Balance = Debit - Credit

Customer Statement Example

Accounts Receivable Debit Credit
Invoice 1 100
Payment 1.1 70
Invoice 2 65
Payment 1.2 30
Payment 2 65
Invoice 3 50
Total To Pay 50
 
AccountDebitCreditReconciliation
Account Receivable100Invoice ABC
Undeposited funds100Check 0123
AccountDebitCreditReconciliation
Undeposited funds100Check 0123
Bank100

Accounting Codes

Debit Credit Balance
1 Assets
11000 Cash
13100 Accounts Receivable
14000 Inventory
14600 Goods Issued Not Invoiced
17200 Buildings
17800 Accumulated Depreciation
19000 Deferred Tax Assets
2 Liabilities
21000 Accounts Payable
22300 Deferred Revenue
23000 Goods Received Not Purchased
26200 Deferred Tax Liabilities
3 Equity
31000 Common Stock
4 Revenue
41000 Goods
42000 Services
5 Expenses
51100 Cost of Goods Sold
52500 Other Operating Expenses
53000 Price Difference

Journal Entries

Every financial document of the company (e.g. an invoice, a bank statement, a pay slip, a capital increase contract) is recorded as a journal entry, impacting several accounts.

For a journal entry to be balanced, the sum of all its debits must be equal to the sum of all its credits.

Debit Credit
Assets: Cash 1000
Equity: Common Stock 1000

Explanation :

  • The company receives $1,000 in cash
  • Shares worth of $1,000 belong to the founders

The initial capital can be cash, but could also be intellectual property, goodwill from a previous company, licences, know how, etc…

Sometimes, capital is not released immediately, accounts for "capital to be released" may be necessary.

Reconciliation

Reconciliation is the process of linking journal items of a specific account, matching credits and debits.

Its primary purpose is to link payments to their related invoices in order to mark invoices that are paid and clear the customer statement. This is done by doing a reconciliation on the Accounts Receivable account.

An invoice is marked as paid when its Accounts Receivable journal items are reconciled with the related payment journal items.

Reconciliation is performed automatically by the system when:

  • the payment is registered directly on the invoice
  • the links between the payments and the invoices are detected at the bank matching process

Customer Statement Example

Accounts Receivable Debit Credit
Invoice 1 100
Payment 1.1 70
Invoice 2 65
Payment 1.2 30
Payment 2 65
Invoice 3 50
Total To Pay 50

Bank Reconciliation

Bank reconciliation is the matching of bank statement lines (provided by your bank) with transactions recorded internally (payments to suppliers or from customers). For each line in a bank statement, it can be:

matched with a previously recorded payment:
a payment is registered when a check is received from a customer, then matched when checking the bank statement
recorded as a new payment:
the payment’s journal entry is created and reconciled with the related invoice when processing the bank statement
recorded as another transaction:
bank transfer, direct charge, etc.

nERP should automatically reconcile most transactions, only a few of them should need manual review. When the bank reconciliation process is finished, the balance on the bank account in nERP should match the bank statement’s balance.

Checks Handling

There are two approaches to manage checks and internal wire transfer:

The first journal entry is created by registering the payment on the invoice. The second one is created when registering the bank statement.

Account Debit Credit Reconciliation
Account Receivable 100 Invoice ABC
Undeposited funds 100 Check 0123
Account Debit Credit Reconciliation
Undeposited funds 100 Check 0123
Bank 100