Accounting Unplugged


SOPA Blackout

Posted in 0. Rants by admin on the January 17th, 2012

I am participating in the SOPA Blackout to protest internet censorship.

What a great impact we had today, please continue to support your representatives in voting NO on PIPA and SOPA.

Accountability is not a Luxury, it’s a Crucial Responsibility

Posted in 0. Rants by Erin Lawlor on the August 8th, 2009

The act of hiring an accountant does not relieve an employer of the responsibility of safeguarding its resources and interests.

Similarly, that act of electing a representative does not relieve a group of the responsibility of safeguarding its resources and interests.

Whether we’re talking about money or power, when the employer fails to oversee and demand accountability, money/power will eventually be used to benefit the one who is controlling it rather than the one(s) to whom it belongs.

The most dangerous thing for any person or group is unchecked access to resources and power.  That sort of power makes them into targets for temptations and pressures that cannot always be risen above.  How much easier is it to tempt or coerce one person or even 60 people than it is to tempt or coerce multitudes of people?

When we send representatives off with a blank check and we don’t demand accountability we are in essence sending them off to the destruction of themselves as well as the destruction of those they represent.  The election process is neither frequent nor effective enough to ward off the pressures they are subjected to.

With regard to the political arena in the U.S. which is in an emergency state -

We must support our representatives and protect them from the pressures they face.  The quickest way to do this is for every person to demand full accountability of those they elect and hire.  We must demand it of our school boards, mayors, governors, congressmen, senators and President.  We must demand that they read and understand what they are signing and/or voting on before they do so.  And we must demand a full accounting of the reasons for their vote on a point by point basis for every issue in a bill - including ear marks.

If we fulfill our own responsibility in the process we will have a better outcome.  We will have laws and services that better reflect the interests of the people and perhaps most importantly, we will remove the power from those who seek to corrupt the process for their own profit.  The pressure of corruption can be very effective when it is exerted on an individual or on a small group but that pressure is too expensive and ineffective when it must be spread over great numbers.

Our representatives are only the custodians of our collective vote/power not the owners of it.  Demanding accountability from our representatives will do two crucial things.  First, it ensures that we retain ownership of our vote/power and second it supports our representatives by removing temptations and pressures.

Call or write your representatives.  Thank them for their service but also respectfully ask for accountability.  We see the difference we are making nearly every day now.  Keep up the good work!

© 2009-2010 Erin Lawlor

**disclaimer:  All information posted on this blog is from my own experience and training.  The guidelines I present are general and in my experience, standard practice.  I do not write with authority from any Accounting Standards Boards.

Workbook

Posted in Workbook by Erin Lawlor on the May 22nd, 2009

A few months ago I proposed the idea of selling a workbook for the purposes of supporting this site.   I changed the dates and then just never delivered the workbook.

This is what happened.  I wrote it and agonized over its release because there is always just one more thing I want to add.  It has sat quietly in my files for over a month waiting for me to release it and now I am going to set it free (so to speak).  I just finished reviewing it and changing a key word in it that was troubling me and if you would like a copy, Click Here for the .pdf. Please remember to send me some feedback.  I promise that I will not share or use your email address for any reason unless you request it from me.

I will provide the workbook for free for now.  If you feel that you’ve benefited from my work and would like to return some benefit to me there will be an optional donate button on the site.

My own review.  I think the workbook has great substance and is very useful. It is not a practical how-to workbook for bookkeeping, it is a how-to-understand accounting workbook.  The forms I included are far from perfect in appearance but they are useful and illustrate my points well.  I do think I ran out of editor steam towards the end and it isn’t as engaging at the end as I think it is in the beginning.  I will probably work through those issues and try to improve it as I receive feedback.

Thank you for continuing to visit my site and I sincerely hope that it has been of help to you.

Erin

© all rights reserved 2009-2010 Erin Lawlor

>>Accounting Overview

**disclaimer: All information posted on this blog is from my own experience and training. The guidelines I present are general and in my experience, standard practice. I do not write with authority from any Accounting Standards Boards.

Understand Your Numbers

Posted in 0. Rants by Erin Lawlor on the March 28th, 2009

>>Accounting Overview

I just finished checking out yet another “accounting” program that promises to do all the heavy lifting and thinking for a business owner.  Those programs make me worry.

The process of setting up and maintaining your accounting is a crucial part of understanding whether your business can/might make money.  It worries me when software promises to automate away the importance of upfront planning and setup.

To illustrate the importance of being involved in the processes, take a moment to brainstorm about the numbers.  What will you charge for your product or service?  What will it cost you to purchase, manufacture and/or provide your products and services, what are the other costs of running a business? Examples of other costs include Rent, Office Supplies, Telephone and Maintenance.

See how easy that was? Those products and costs that you just brainstormed up are the start of your accounting books. You can always add accounts later as you encounter new things but you can see in the example below how functional our initial setup is.

Subtract the cost of your product from the price you will charge your customers.  That is your margin.  Now, add up all the “other” costs of doing business like rent, utilities, fuel and payroll and divide them by your margin.  That number is how many products you will have to sell to break even.

  • Product:  Shipping Container
  • Direct Cost of each container = $100
  • Sales Price for each Shipping Container:  $200
  • Margin:  $100
  • Other costs of business:  $2,500
  • Break-Even Point: $2,500/$100 = 25

If your product costs, your other costs of business and your sales prices don’t change, you will break even if you sell 25 container each month and you’ll have a profit of $100 for each container sold over 25.

The process of estimating the margin and break even point has established your budget numbers. You’ll use them to measure against your actual results. This is all crucial information and a crucial part of managing a business.

Now, you have established a plan.  You can dream about selling thousands of containers each month and raking in the money.  Caution!  I know I told you that you would have a profit of $100 per container sold over 25 but now you have to start watching both your predicted costs and the additional costs that come with higher volumes of products sales.  Some of your costs - such as payroll and storage will increase with your the number of sales.

My point here is this, don’t allow yourself to be lulled into a false sense of security by the promises of simple accounting software.  It is potentially very dangerous to avoid that first step of understanding your numbers and it is just as dangerous to allow your software to just process your information without paying close attention to the details.

Seek help in setting up your accounting but be involved in the setup process. Automated setups are not all evil, they can actually give you clues about costs you might not have thought about. For heavens sake, use software to help automate the accounting and bookkeeping process but stay involved. If you pay a person or service to take care of the process for you, at least make sure you set aside time to review the results as often as possible preferably at least once a week while you’re getting established but for sure do it at least once a month.

Automation can be a beautiful thing, I am not against business owners using simplified bookkeeping programs and services with one caveat.  Understand Your Numbers! Seriously, you don’t have to do the setups or bookkeeping yourself but you do need to pay attention.  If you don’t want to take the time to pay close attention to your numbers should you try to run a business?

© 2008-2010 Erin Lawlor

>>Accounting Overview

**disclaimer:  All information posted on this blog is from my own experience and training.  The guidelines I present are general and in my experience, standard practice.  I do not write with authority from any Accounting Standards Boards.

Frustrated Commenter

Posted in Uncategorized by Erin Lawlor on the December 4th, 2008

I just finished with one of my favorite guilty pleasures.  I listen to a weekly podcast done by a couple of guys that started a new site/service for programmers called stackoverflow.  Since I am not a programmer, I feel a little bit like a voyeur listening to their podcasts but they are really smart and they talk about the human aspects of programming that are easily relatable.

I stumbled upon a blog called Joel on Software a couple of years ago and have been a fan and a reader ever since.  So, when the writer, Joel Spolsky, partnered up with Jeff Atwood (codinghorror.com) for this new site, I was curious and when I started listening to their weekly podcasts (they’ve done 32 as of this writing) I was hooked.

This week, their podcast included a topic that I wanted to talk about and relate to my experience in writing my “blog”.  I encourage you to follow the link above for stackoverflow and listen to the latest podcast (at least starting at about 34:45 and ending at about 55:15) the discussion is very insightful.

The topic I want to write about is how to stay positive after receiving negative feedback.  Actually, I have received both good and bad feedback for my site, I try to give them equal consideration.  I received one comment that told me my site was poo.  My initial reaction to that comment was that the person was just mean because clearly, my site is not poo to me.  But then I tried to be more open to what that person might be trying to tell me.  Perhaps that person was looking for a quick answer to a question and was frustrated because it is likely that there are no quick answers here.   In that sense, I failed the frustrated commenter.

The negative comment caused me to evaluate my writing more than any positive comment would.  I am still not a quick answer person but I do try to keep in mind that posts that are too wordy are boring and unhelpful.  My conclusion is that instead of allowing negative comments to hurt your feelings, step back and take another look and decide what there is to be learned from them.  Don’t dwell on the negative, instead, appreciate the opportunity to learn from it.  Applying this philosophy to the negative feedback you receive in life - including unsuccessful sales, job interviews or blogs can only help you to improve and become more successful.

To address the frustrated commenter, the only possible way I can give a quick answer is to have a clear question first.  I invite/encourage you to put your questions in the comment section.   It is likely that either I or other readers will be able to provide an answer that will be helpful for you.

Add Value

Posted in 6. Operations by Erin Lawlor on the December 1st, 2008

<< How to Use Financials and Ratios

Businesses live or die on the value of their products and services.   Similarly, individuals and departments within businesses survive on the value of their internal products.  Accounting is no different.  Accounting provides both services and products that add value to an organization.

The most important thing in accounting is to understand accounting and your own accounting systems.  But, if you want to truly succeed, think beyond debits, credits and reconciliations and become an expert in your company’s industry.   Financial accounting knowledge transfers fairly seamlessly from one business to another but specific industry and management accounting knowledge may not and it is through that kind of knowledge that you can add value to your organization.

Research your industry, spend time with operations people, become familiar with what their processes are and the order in which they occur.   Learn how they use their information systems, understand the logic behind both the information they track and the order in which that information is organized.  Become familiar with the way your systems interact, how they are dependent on each other and how they are independent of each other.   Find out from them what information they have and what information they wish they could have.  Ask them if they use reports from accounting, if so, do they find them to be reliable, timely and useful.  (Always make sure to have the appropriate permissions for internal research).

As an accountant you perform the financial functions that keep a business going but you are also the custodian of a wide variety of business information.  In addition to standard accounting data, you have access to information about lenders, suppliers, customers and operations.  As you increase your understanding of your company and industry you will increase your understanding of the information available to you.   Find ways to increase and improve the information you can make available to your company and you will have a real impact on its success and on the value you add to it.

© 2008-2010 Erin Lawlor

<< How to Use Financials and Ratios

**disclaimer: All information posted on this blog is from my own experience and training. The guidelines I present are general and in my experience, standard practice. I do not write with authority from any Accounting Standards Boards.

How to Use Financial Statements and Ratios

Posted in 2. Double Entry Transactions, 5. Financial Statements, 6. Operations by Erin Lawlor on the September 24th, 2008

<< Accounting System Structure - Quick Reference

This post talks about how to make use of the information in Financial Statements.  Those statements are really the results of past operations.  It is important to use this information to be proactive and look to the future to predict results and to set goals, expectations and budgets based on the evidence provided from the past.

Time analysis is the most important tool you will use in analyzing your Financial Statements.  It is essential in managing and securing resources because it can quickly pinpoint changes that indicate errors or fraud as well as the unexpected changes that might require adjustments to cash planning and/or operations.

The first Statement to look at is the Comparison Trial Balance.  This Statement is very important, it shows the amounts posted to each account month by month complete with totals at the end.  The month to month analysis is extremely important for verifying your numbers before you start with ratio analysis.

You can either show all accounts on this Statement or you can limit it to Income Statement Accounts. I choose to include both types of Accounts so I can track the changes in Financial Position provided by the Balance Sheet Accounts.

I’ve added a few entries to the Comparison Trial Balance Report from posts # 7 and 9.   You can see that the monthly changes in Rent Expense for Oct and Nov will catch your attention.

Account Description Jun Jul Aug Sept Oct Nov Dec Total
1000 Checking -$3,000 $-3,000 $-3,000 -$3,000 -$3,000 -$3,000 -$3,000 $-21,000
2000 Accounts Payable $0 $0 $0 $0 -$3,000 $3,000 $0.
7000 Rent $3,000 $3,000 $3,000 $3,000 $6,000 $0 $3000 $21,000
Totals $0 $0 $0 $0 $0 $0 $0 $0

**This example starts with June because of space limitations here.  The additional entries for all months except September are not included in the Income Statement or Balance Sheet, I’ve only added them here for illustration.

Let’s start with Financial Ratios by looking at the Income Statement and its ratios.

Income Statement:

The Income Statement gives you a good overview of your Expenses in relation to your Revenue.  It can also help to pinpoint potential problems.

As the dollar value of Sales changes, the dollar values of Costs of Goods and Expenses should also change.   By tracking the changes in dollar values in terms of percentages of sales, you can more easily evaluate whether changes in dollar amounts are reasonable.

The percentages are based on a Percentage of Sales.  So, Gross Profit Margin = Gross Margin/Sales, Net Profit Margin = Net Income(Profit)/Sales etc.

Know your percentages. Watch your trends over time, both as they accumulate throughout the fiscal year, and as they compare month to month and year to year. Percentages can also be compared to industry ratio standards to measure your results against others in your industry.

Some expenses like wages and payroll taxes, or general office expenses are more meaningful when grouped together to find a percentage of the group rather than as a single line item.

This is the Income Statement that developed through the progressive post entries.

Income Statement % of Sales
Sales $50,000
Cost of Goods Sold $0 0%
————
Gross Margin $50,000 100% Gross Profit Margin %
Rent $3,000 6%
Office Supplies $150
Subscriptions $300
Utilities $125
Fuel $275
Repairs & Maintenance $500
Credit Card Interest $50
———–
Operating Expenses $4,400 9%
———–
Operating Income $45,600 91% Operating Profit Margin %
Other Revenues and Expenses $0
Net Income $45,600 91% Net Profit Margin %

This is a very limited Income Statement Example built from very few entries, but even with the information available, it gives useful information.  There is also obviously a problem with this Income Statement, it has no Cost of Goods Sold to relate to Sales.  In this case, we’re either missing information or we’re violating the Revenue Principle and recording Sales before they’ve been earned.  (Pinpointed Problem)

Gross Margin is also called Gross Profit or even Gross Profit Margin and the terms Income and Profit are also often used interchangeably.  Just be consistent in your terminology so that users will not be wondering if there is a difference in meaning if you use a different term.

**Comparing your business against other businesses in your industry is called Benchmarking.  There are a number of free or fee based benchmarking services online.

Remember that the Income Statement is a Yearly Statement, all its accounts are reset to zero at the end of each year and the difference (Net Income) is transferred to the Equity section of the Balance Sheet as either Retained Earnings (for Corporations) or as Owners Capital (for all other types of entities).

Balance Sheet Ratios:

The Balance Sheet gives you a good overview of your financial position at any point in time.  The Balance Sheet is not a Yearly Statement, it is a cumulative statement whose accounts retain their balances from the beginning to the end of the entity.

All Assets and Liabilities on the Balance Sheet should contribute to increasing the value of the entity.  If they are not contributing, they might need to be liquidated.

The “Current” sections of the Balance Sheet are important to keep track of because it will be Current Assets which will pay off Current Liabilities, you want to make sure you have at least as many Current Assets as Current Liabilities.  The items in the Current Sections are considered to be the most liquid, that is, they are the most likely to be able to convert to cash at (or close to) their stated value.

Two Assets to pay particular attention to are Accounts Receivable and Inventory.  Receivables are an essential tool in doing business, they finance purchases for your customers but it is important to watch their aging and balances to make sure you are not extending credit to customers who are unable to pay.  Watch Inventory turnover to make sure you that your inventory is selling and that you are not carrying obsolete or otherwise unsellable items.

Purchases that your Vendors finance for you are liabilities called Payables.  Payables and other Liabilities are essential for financing current operations and growth but keep close track of their related interest and fees to make sure their costs do not exceed their benefits.

Balance Sheet
Assets
Current Assets
1000 Checking Account $44,350
Fixed Assets
1500 Office Equipment $1,300
1520 Office Furniture $1,650
————
Total Fixed Assets $2,950
————
Total Assets $47,300
Liabilities and Equity
Current Liabilities
2000 Accounts Payable $1,700
————
Total Liabilities $1,700
Equity
Net Income $45,600
————
Total Liabilities and Equity $47,300

Some important financial ratios to keep track of are:

Current Ratio which is Current Assets/Current Liabilities this ratio should always be at least 1

Quick Ratio = Current Assets - Inventory/Current Liabilities this ratio removes Inventory from Current Assets because Inventory is usually the least liquid of the Current Assets.

The next ratios are approximations, they give you a good idea about what they are measuring.  They are general enough to give you an idea about where to look for trouble items but they are not specific enough to be fool proof.

Inventory Turnover = Sales/Inventories this ratio gives you a rough idea of how many times your inventory is sold and restocked.  Of course, it does not specifically identify inventory items so there may be items that are not selling but it does tell you how well your sales are covering your costs.

Days Sales Outstanding = Receivables/(Sales/360) this ratio gives you a number that represents aging of your receivables.  If your terms are net 30 days and this ratio gives you a number of 45 or more, then it is a good indicator that you should watch your collections carefully.

Fixed Asset Turnover = Sales/Net Fixed Assets (Fixed Assets - Accumulated Depreciation) this ratio provides an idea of how effectively your Fixed assets are contributing to operations.   This ratio can be slightly misleading because Assets are carried at book value rather than market value which might scew this ratio depending on the age of the Assets.

Total Assets Turnover = Sales/Total Assets this ratio provides an idea of how effectively your total assets contribute to operations and increases in entity value.  Although this ratio will have the same problems as the Fixed Asset Turnover ratio both of these ratios are still important to recognize and watch for trends.

As I said at the beginning of this post, know your percentages (ratios) watch them carefully.  You should use them to your advantage for predictions, corrections and budgets for your current and future operations and policies.

© 2008 - 2010 Erin Lawlor

<< Accounting System Structure - Quick Reference

**disclaimer: All information posted on this blog is from my own experience and training. The guidelines I present are general and in my experience, standard practice. I do not write with authority from any Accounting Standards Boards.

Comments Off

Accounting Structure - Quick Reference

Posted in 1. Accounting Overview by Erin Lawlor on the September 23rd, 2008

<< Accounting Journals and Ledgers How to Use Financials and Ratios >>

This post is a quick overview of subjects covered in more detail in other posts. I usually like to see a quick version so I am trying to present that option to others as well.

The Double Entry Accounting System collects, organizes, summarizes and reports on Financial Transaction data.

Financial Transactions: Exchanges of things of value.

There are three basic questions that must be answered for each financial transaction, they are:

  • Question 1. How much money changed hands? What is the value of this exchange?
  • Question 2: How was the money used?  What was either gained or paid for by this exchange?
  • Question 3: Where did the money come from? What is the source of funds in this exchange?

Example:

  • Answer 1: 3,000.00
  • Answer 2: Rent
  • Answer 3: Checking Account

The answers for each of the financial transaction questions are recorded in Journals.   Journals have a grid format with a varying number of columns but to start, we’ll use three columns.

The descriptions that answer questions 2 and 3 are always entered on separate lines to the left of the two numeric columns.

The amount associated with question 2 is entered on the same line as its description and it is always answered in the left (debit) numeric column. The amount associated with question 3 is entered on the same line as its description and it is always answered in the right (credit) numeric column.

General Journal Example:

Description Debit Credit
Rent $3,000
Checking Account $3,000

To ensure that both sides of the transactions are recorded, Total Debits must always equal Total Credits.

Chart of Accounts: The Chart of Accounts is basically a list of the descriptions used to answer Transaction Questions 2 and 3.   Each unique description is called an account.  One of the best features of the Chart of Accounts is that when you have a new type of transaction you can just add a new description (account).

To keep the Chart of Accounts manageable and meaningful, it is important to strike a balance between having a long specific list and a short general list.  To accomplish this objective, the Chart of Accounts should have descriptions for types of things, and not for specific things.  You want the Accounts to be specific enough to be useful but not too specific because the fewer accounts you have the better overall picture you can have.

Chart of Accounts Organization: The Chart of Accounts is organized using three different methods.

  • First:  Accounting Types
  • Second:  Order of Liquidity - the ease of converting to cash
  • Third: Account Numbers

The listing below shows the Chart of Accounts organization along with sample Account Number Ranges.

  • Assets: 1000’s
    • Current Assets 1000 - 1499
    • Fixed Assets 1500 -1999
  • Liabilities: 2000’s
    • Current Liabilities 2000 - 2499
    • Long Term Liabilities 2500 - 2999
  • Equity: 3000’s
  • Revenue: 4000’s
  • Costs of Goods Sold: 5000’s
  • I leave the 6000’s open to allow for a Cost of Goods Sold Subtype
  • Expenses: 7000’s
  • Other Revenue: 8000’s
  • Other Expenses: 9000’s

Journals and Ledgers:

There are two types of Ledgers and Journals in the system, General and Subsidiary.   If you recall from above, I said that Accounts should only be created in the Chart of Accounts/General Ledger to describe types of things not individual things themselves. Well, in some cases especially in the case of cash substitutes like Accounts Payable and Accounts Receivable more detail is required. So, to maintain the summary nature of the Chart of Accounts/General Ledger and to provide more detail, a Subsidiary System of Journals and Ledgers was developed.

General Ledger: The General Ledger is the combination of the Chart of Accounts, Account Balances and Accounting Periods.  The General Ledger maintains the summary balances of ALL financial transactions.

The General Ledger adds the essential organizational element of Time (Accounting Periods) to the Accounting System, so in addition to the original three organizational methods of the Chart of Accounts, the General Ledger is organized in four ways.

  • 1. Accounting Type
  • 2. Order of Liquidity
  • 3. Account Number
  • 4. Accounting Periods

Accounting Periods are generally date/time intervals of Months, Quarters and Years. The element of time is essential to accounting.  It provides the ability to report balances for any given accounting period as well as the ability to compare the results of different accounting periods against each other.

If the system is going to organize around accounting periods, then we need to add dates to the data we gather with transactions.  There can be a variety of dates that are relevant to a transaction, the transaction date, the invoice date, the due date, the expiration date etc. but for purposes of this post, the date we’ll focus on is the transaction date.

The Journal transaction grid introduced in the previous section needs to be expanded to 5 columns to accommodate the new data requirements of date and account number.

General Journal Example:

Transaction Date Account Description Debit Credit
9/01/08 7000 Rent $3,000
1000 Checking Account $3,000

Subsidiary Journals and Ledgers: The two most common Subsidiary Systems are:

  • Accounts Payable
  • Accounts Receivable

All financial transactions that involve a general ledger account with an associated subsidiary ledger must be recorded in that subsidiary ledger first.

Subsidiary Journal:

Accounts Payable Journal
Subledger Account Invoice # Transaction Date Ref GL Account Description Debit Credit
ACEC 123_908 9/01/08 55 2000 Ace Credit Card Corp. $1,700
1520 Chair $750
1520 Desk $900
7300 Credit Card Interest & Fees $50

Notice that the Subsidiary Journal uses more columns than the General Journal.  It uses the extra columns to track data that is specific to the Subsidiary Ledger as well as to the General Ledger.

General Journal:

The system requires that all financial transactions have an entry in the General Journal as well as in the General Ledger.  So, once the entries are posted to the Subledger Journals, they are then summarized and posted to the General Journal.

General Journal
Transaction Date Jrnl Ref Account Description Debit Credit
9/01/08 AP 55 1520 Furniture & Fixtures $1,650
9/01/08 AP 55 7300 Credit Card Interest & Fees $50
9/01/08 AP 55 2000 Accounts Payable $1,700

Notice the new columns in this General Journal example, they are cross referencing entries to show where the transaction was originally recorded.  The Jrnl in this example says AP = Accounts Payable and the Ref (55) is the same as in the AP Journal example above.  The Ref is the transaction reference number and will increment for each transaction.

Ledger Examples:

Each financial transaction is recorded in the appropriate Journals and then summarized and posted to the Ledger Accounts.

Accounts Payable Subledger Account: ACEC
Transaction Date Jrnl Ref Description Debit Credit Balance
Beginning Balance $0
8/01/08 AP 23 123_0808 (invoice) $2,500 $2,500
8/31/08 CD 37 123_0808 (payment) $2,500 $0
9/01/08 AP 55 123_0908 (invoice) $1,700 $1,700
General Ledger Account: 2000
Transaction Date Jrnl Ref Description Debit Credit Balance
Beginning Balance $0
8/01/08 AP 23 Accounts Payable Invoices $2,500 $2,500
8/31/08 CD 37 Cash Disbursements $2,500 $0
9/01/08 AP 55 Accounts Payable Invoices $1,700 $1,700

The Subsidiary Ledger (Subledger) is like the General Ledger/Chart of Accounts in that it contains a list of Accounts specific to its purpose.  The Accounts Payable SubLedger contains a list of AP Accounts and their balances.

General Ledger
Account Description Debits Credits
1000 Checking Account $44,350
1200 Accounts Receivable $0
1500 Office Equipment $1,300
1520 Office Furniture $1,650
2000 Accounts Payable $1,700
4000 Sales $50,000
7000 Rent $3,000
7020 Office Supplies $150
7040 Subscriptions $300
7060 Utilities $125
7100 Fuel $275
7200 Repairs and Maintenance $500
7300 Credit Card Interest and Fees $50
Totals $51,700 $51,700
Accounts Payable Subledger
Account Description Balance
ACEC Ace Credit Card Corp. $1,700
JOHN Johnson Management $0
SHEL Shelton Oil $0
Totals (see GL Account 2000) $1,700

The Total Balance of each Subledger must equal the balance of its related General Ledger Account Balance.  All financial transactions are recorded in the General Journal and the General Ledger and only the transactions with a gl account that has a related Subledger are posted to a Subsidiary Journal and Ledger.

If the Subledger does not Balance with its related account on the General Ledger, it means that there may be entries in either the Subledger or the General Ledger that are not in the other.  They should each have matching entries and there should be no entries made to the General Ledger for an Account with a related Subledger that are not also made to the Subledger and vice verse.

© 2008-2010 Erin Lawlor

Next: How to Use Financial Statements and Ratios >>

<< Accounting Journals and Ledgers

**disclaimer:  All information posted on this blog is from my own experience and training.  The guidelines I present are general and in my experience, standard practice.  I do not write with authority from any Accounting Standards Boards.

Accounting Journals and Ledgers - Transaction Posting

Posted in 4. Ledgers and Journals by Erin Lawlor on the September 19th, 2008

<< Percentage of Completion and WIP Statement Accounting Structure -Quick Ref >>

The process of gathering and storing Financial Transaction data in the Accounting System is accomplished through the use of both:

  • Ledgers: which maintain Account Balances
  • Journals: which maintain the line by line detail of each Transaction.

Ledgers:

I’m starting with Ledgers because we’ve gone through the basic organization of the Accounting System from Double Entry (debit/credit) Transaction Posting, to the Chart of Accounts and finally the General Ledger.  I’ll stay on the topic of the General Ledger first and then back up to the Journals where each transaction is originally posted.

In Accounting, there are two types of Ledgers, the General Ledger (Book of final entry) and Subsidiary (Sub) Ledgers. The Accounts for the General Ledger come from the Chart of Accounts. The Accounts for the Subledgers depend on the specific purpose of the Subledger.

If you remember in the “Chart of Accounts - Basics”, I said that Accounts should only be created to describe types of things not individual things themselves. Well, in some cases especially in the case of cash substitutes like Accounts Payable and Accounts Receivable more detail is required. So, to maintain the summary nature of the Chart of Accounts/General Ledger and to provide more detail, Subsidiary (Sub) Ledgers were developed.

Everything that is posted into Subledgers is also posted into the General Ledger and they act together to provide progressive levels of detail/summary.

The two most common Subledgers are:

  • The Accounts Payable Subledger: which maintains a list of Vendors (or creditors) and their individual Account Balances.  Each individual Vendor represents a Subledger (Accounts Payable - Vendor) Account.
  • The Accounts Receivable Subledger: which maintains a list of Customers and their individual Account Balances.   Each individual Customer represents a Subledger (Accounts Receivable - Customer) Account.

Each Subledger relates directly to a General Ledger Account that requires more detail than the General Ledger can offer.  These GL Accounts are often referred to as control accounts. The Balance of a Control Account should always be equal to the total of its related Subledger Account Balances. As you can see, the total of the Accounts Payable Subledger below equals the Balance of the related General Ledger Accounts Payable Account.

General Ledger
Account Description Debits Credits
1000 Checking Account $44,350
1200 Accounts Receivable $0
1500 Office Equipment $1,300
1520 Office Furniture $1,650
2000 Accounts Payable $1,700
4000 Sales $50,000
7000 Rent $3,000
7020 Office Supplies $150
7040 Subscriptions $300
7060 Utilities $125
7100 Fuel $275
7200 Repairs and Maintenance $500
7300 Credit Card Interest and Fees $50
Totals $51,700 $51,700
Accounts Payable Subledger
Account Description Balance
ACEC Ace Credit Card Corp. $1,700
JOHN Johnson Management $0
SHEL Shelton Oil $0
Totals (see GL Account 2000) $1,700

The listings above are Ledger Account summaries. Both the General Ledger and the Subledgers actually have a more detailed section for each Account. Those sections include summarized entries and balances along with references indicating which journals those entries originated in.

The tables below show an example of a Subledger Account and an example of the corresponding General Ledger Account.

Accounts Payable Subledger Account: ACEC
Transaction Date Jrnl Ref Description Debit Credit Balance
Beginning Balance $0
8/01/08 AP 23 123_0808 (invoice) $2,500 $2,500
8/31/08 CD 37 123_0808 (payment) $2,500 $0
9/01/08 AP 55 123_0908 (invoice) $1,700 $1,700

General Ledger Account: 2000
Transaction Date Jrnl Ref Description Debit Credit Balance
Beginning Balance $0
8/01/08 AP 23 Accounts Payable Invoices $2,500 $2,500
8/31/08 CD 37 Cash Disbursements $2,500 $0
9/01/08 AP 55 Accounts Payable Invoices $1,700 $1,700

Because there can be multiple Subledgers, there are also multiple Journals. The Jrnl field indicates which journal the entry came from. The AP’s in the jrnl field mean that those entries came from the Accounts Payable Journal and the CD entry came from the Cash Disbursements Journal which is the journal that maintains detail for Cash Outflows. The Jrnl and Ref field together give a cross reference that enable the user to access more detail about each entry.

Journals:

All financial transactions are recorded in Journals. The Journal maintains each individual transaction line by line. Just as there are two types of Ledgers, there are also two types of Journals: The General Journal and the Subsidiary Journals. Most entries will originate in Subsidiary Journals, however, if none of the GL Accounts affected by an entry have a related subsidiary journal, the entry will originate in the General Journal.

Everything that is posted into Subsidiary Journals is also posted into the General Journal. Journals act together with Ledgers to provide progressive levels of detail/summary.

Subsidiary Journal:

The format for Transactions in the the Subledger Journals is similar to the format for the General Journal that I’ve used in previous posts except they require at least three more columns in the grid. One for the Subledger Account, one for an Invoice Number and one for a Reference Number. This entry in the Accounts Payable Journal shows the detail for the both of the Ledger entries above that indicate Jrnl = AP and Ref = 55.

This entry records A Credit Card Statement into Accounts Payable, which includes the purchase of a Chair and a Desk along with Credit Card charges.

Accounts Payable Journal
Subledger Account Invoice # Transaction Date Ref GL Account Description Debit Credit
ACEC 123_908 9/01/08 55 2000 Ace Credit Card Corp. $1,700
1520 Chair $750
1520 Desk $900
7300 Credit Card Interest & Fees $50

Note that the Vendor Account, the Invoice #, Transaction Date and Ref# are not re-entered for each line. It is assumed that those three items remain the same for each of their balancing entries.

** Important: Individual transactions for each Subledger Account must have a unique identifying number, in this case, its an Invoice Number. That number combined with the Subledger Account creates a unique pair that prevents duplicate payments and provide a way for each party to reference the transaction for payments or if disputes or questions arise.

General Journal:

Since the system requires that all financial transactions have an entry in the General Ledger, they must also have an entry in the General Journal. This requires some duplication of effort but it is necessary. So, once the entries are posted to the Subledger Journals, they are then summarized and posted to the General Journal after which the Balances in the General Ledger are updated.

General Journal
Transaction Date Jrnl Ref Account Description Debit Credit
9/01/08 AP 55 1520 Furniture & Fixtures $1,650
9/01/08 AP 55 7300 Credit Card Interest & Fees $50
9/01/08 AP 55 2000 Accounts Payable $1,700

The Path of entries for Financial Entries:

Transactions containing a GL Account that is related to a subsidiary journal start with the Subsidiary Journal otherwise they start with the General Journal

Subsidiary Journal –> Post to Subsidiary Ledger by its Account –> Post to General Journal —-> Summarize and post to General Ledger by GL Account.

© 2008 -2010 Erin Lawlor

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**disclaimer: All information posted on this blog is from my own experience and training. The guidelines I present are general and in my experience, standard practice. I do not write with authority from any Accounting Standards Boards.

General Ledger Accounts on Financial Reports

Posted in 5. Financial Statements by Erin Lawlor on the September 17th, 2008

<< General Ledger >> Financials - Trial Balance

This Post is a listing of which General Ledger Accounts are used by which Financial Statement.

Trial Balance: All Accounts

Account Description Debits Credits
1000 Checking Account (Cash) $44,350
1200 Accounts Receivable $0
1500 Office Equipment $1,300
1520 Office Furniture $1,650
1590 Accumulated Depreciation $496
2000 Accounts Payable $1,700
4000 Sales $50,000
7000 Rent $3,000
7020 Office Supplies $150
7040 Subscriptions $300
7060 Utilities $125
7100 Fuel $275
7200 Repairs and Maintenance $500
7240 Depreciation Expense $496
7300 Credit Card Interest and Fees $50
Totals $52,196 $52,196

Trial Balance: Income Statement Accounts Only

The Income Statement uses the Accounts for Accounting Types:

  • Income
  • Costs (of goods sold)
  • Expenses
  • Other Income and Expenses
Account Description Debits Credits
4000 Sales $50,000
7000 Rent $3,000
7020 Office Supplies $150
7040 Subscriptions $300
7060 Utilities $125
7100 Fuel $275
7200 Repairs and Maintenance $500
7240 Depreciation Expense $496
7300 Credit Card Interest and Fees $50
Totals $4,896 $50,000
Difference = Net Income $45,104

Trial Balance: Balance Sheet Accounts Only

The Balance Sheet uses Accounts for Accounting Types:

  • Assets
  • Liabilities
  • Owners (Stockholders) Equity

These example accounts do not have beginning balances and no equity contributions.  If there had been equity contributions the equity accounts would also be included in this section of the trial balance.

Account Description Debits Credits
1000 Checking Account $44,350
1200 Accounts Receivable $0
1500 Office Equipment $1,300
1520 Office Furniture $1,650
1590 Accumulated Depreciation $496
2000 Accounts Payable $1,700
Totals $47,300 $2,196
Difference = Net Income $45,104

Statement of Cash Flows: This Statement documents both the change in Cash Position and the change in Financial Position.  The Statement of Cash Flows is essentially a Yearly Balance Sheet with an emphasis on Cash.

Notice that debits and credits are presented in the way that they contribute to cash.  This report might take some adjusting to as the +/- of all debit and credit accounts except Cash are reversed.

Statement of Cash Flows
Cash Flows From Operating Activities
Net Income $45,104
(add back expenses that did not involve cash or cash substitutes)
Depreciation (see Bal Sheet Account 1590) $496
Increase in Payables (see Bal Sheet Account 2000) $1,700
————
Net Cash Provided by Operating Activities $47,300
————
Cash Flows From Investing Activities
Increase in Fixed Assets (see Bal Sheet Accounts 1500 & 1520) -$2,950
————
Net Cash Used by Investing Activities -$2,950
————
Cash Flows From Financing Activities
(no increase in long term liabilities or equity) $0
————
Net Cash Provided by Financing Activities $0
————
Increase in Cash and Cash Equivalents (Net Cash Flow)
$44,350
Cash and Cash Equivalents at Beginning of Year
$0
————
Cash and Cash Equivalents at End of Year (see bal sheet acct 1000) $44,350

© 2008 - 2010 Erin Lawlor

Next up: >> Financials - Trial Balance

<< General Ledger

**disclaimer:  All information posted on this blog is from my own experience and training.  The guidelines I present are general and in my experience, standard practice.  I do not write with authority from any Accounting Standards Boards.

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