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Accounting UnpluggedDouble Entry System | Accounting Unplugged
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Accounting Unplugged


Accounting System Overview

Posted in 1. Accounting Overview by Erin Lawlor on the August 30th, 2008

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>>Double Entry Accounting Basics

The Accounting System we use today, The Double Entry System, was first published in Venice, Italy in 1494 by a mathematician named Luca Pacioli but it has been traced back at least as far as the 12th century and there is a good reason why it has endured.  It is based on the idea of a balanced financial picture.  That is, we should not only know how money has been spent, we should also know where it came from.

The basic rules and structure of the system are standard and simple, they do not attempt to predict the details of any given set of books, instead they provide the structure and functionality around which any set of books can be constructed.  Because of that, the double entry accounting system is universally relevant and successful as a Financial Accounting System, and preparation in the accounting field is important as well, studying accounting has never been more convenient. You can take your online course in your own time, without the hassle of having to physically attend a classroom. Regardless if you’re just getting started or an experienced accountant looking to expand their knowledge base, there are courses available for everyone!

Accounting is a valuable resource that is relevant to individuals as well as to business. It provides the feedback that can make all the difference in securing and managing your own finances and investments as well as those of businesses, and if you want to find good investments doing trading could be one of the best options for this and site like day-traders.net is really useful for this purpose.

The One reason to use the Accounting System is for the Feedback in the form of Financial Reports and the One reason to learn the Accounting System is to learn how to put those Financial Reports to work for You and your Business, every business needs accounting and there’s even medical accounting services. Having said that, let’s start with the basics of the system.

Two Functions of the Accounting System are:

  • To Collect Financial Transaction Data
    • Financial transactions are exchanges of things of value.  Transaction data is collected using the Double Entry principle of describing and recording both the use and source of money.
  • To Organize and Summarize Financial Transaction Data
    • Financial data is organized and summarized using The Chart of Accounts which is essentially a list of the descriptions used in recording transactions and is organized around the principles of Double Entry Accounting.

Once you understand the basic structure and principles of accounting, you will have a good, functional knowledge and be able to understand financial statements and reports.  Basic Accounting concepts and principles are universal.  Specific industries have their own unique differences and rules but with a basic understanding, the differences are easier to navigate.

Note:  There are two different aspects of the Accounting System, the two aspects are Structural and Content.  The aspect of the Accounting System that I address in the blog is Structural.  I will add Content for demonstration but the purpose of the information in the blog is related to Structure, not Content.

****My posts are written for the Accrual Method of Accounting.

Accrual accounting is the most common system used in business and the greatest difference between Accrual Based Accounting and its alternative, Cash Based Accounting relates to time, and there are different businesses you can find from the best online directory which  have several options of different businesses.  At this point, I will not be presenting Cash Based Accounting alternatives in my posts except to say that in Cash accounting, accounts such as Accounts Receivable and Accounts Payable are not used because the related Sales and Expense transactions are not posted until Cash changes hands.

In accrual accounting, transactions are posted when goods have been received (or ownership of the goods has transferred) or services have been performed.  That concept works in both cases of being the recipient or the provider of goods and services.  If cash is neither disbursed nor received at the time of the exchange, a substitute such as an invoice or note (payable or receivable) is posted in place of cash.

The first post in my series explains the Double Entry Transaction system.

**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.

© 2008 – 2010 Erin Lawlor

Double Entry Accounting – Transaction Basics

Posted in 2. Double Entry Transactions by Erin Lawlor on the August 27th, 2008

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<< Accounting Overview >>Double Entry Accounting – More Transactions

The Double Entry System has endured since at least the 12th century because it is a simple, consistent and reliable system of gathering and organizing information and producing financial reports for financial management and for tax and reporting purposes.

The first task of the system is to gather balanced data from financial transactions – to record both what was gained or paid for and the source of funds.  Financial transactions are exchanges of things of value. Even if money is not part of the exchange, a dollar value must be used to represent the exchange.  Since a dollar value must represent the value of each exchange, I’ll often use the terms “money” or “funds” when referring to the value of each financial transaction.

In this post, I’ll explain the method of collecting and posting financial data in the Double Entry Accounting System.  The entire Double Entry System is built around the concept of balance, recording both the Use and the Source of funds.  Once the Double Entry concept is understood, the whole system of data collection, organization and summary is easily understood.  This method is standard and works the same way each time, no exceptions.

There are three basic questions that must be answered for the double entry accounting transactions, 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 the money in this exchange?

Example:

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

The answers for each of these questions are recorded in a journal that has a grid format. The columns of the grid collect a variety of information but for the purpose of this discussion, we’ll use three columns. One column for descriptions and two numeric columns for amounts. The left numeric column is called the “debit” column and the right numeric column is called the “credit” column.

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.

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

You see that the amount from question one is entered twice (double entry), once in the Debit Column and once in the Credit Column.  If you have answered all three questions for each transaction and both columns always add up to the same number, your books are in balance. This brings us to the most basic rule of accounting.

Rule # 1: Total Debits = Total Credits

To recap: Accounting requires that for each financial transaction, the basic questions of how much money is involved, where the money went and where the money came from are answered.

In order to ensure that these questions are always answered for each transaction, the Double Entry System is used.  The Double Entry Transaction System is a multi-line, two numeric columned system. The left numeric, or “debit” column is always the “where did the money go – what was gained or paid for” column and the right numeric, or “credit” column is always the “where did the money come from – what is the source of money” column. The total of one column must always equal the total of the other.

Double Entry does Not refer to the number of Accounts or Lines required to record a transaction.  Double Entry refers to Debits and Credits (two sides = double).  If you have fully described both the Use and the Source of Funds, you have accomplished the objectives of Double Entry.

© 2008 – 2010 Erin Lawlor

Next up: >>Double Entry Accounting – More Transactions

<< Accounting Overview
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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 Analysis – Accounting Periods

Posted in 4. Ledgers and Journals by Erin Lawlor on the September 3rd, 2008

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<< Chart of Accounts – Accounting Types >>Financial Statements – Trial Balance

This is where the Double Entry System starts to Pay Off.  The time element introduced in this post completes the basics of how to organize and operate this system.  From this point forward, you will start to experience nothing but increasing rates of return on your investment of time in learning it.  The next few posts will introduce Financial Statements and how to put them to work for you and will complete the basics.

The General Ledger is more than just another important element in the Accounting System, it is where the goods are.  The General Ledger is the combination of the Chart of Accounts, Financial Transactions, Account Balances and Accounting Periods.  In practice, once the Chart of Accounts has been established, the term “Chart of Accounts” is considered more in terms of a report than as an object.  From this point forward, Accounts from the Chart of Accounts will be called General Ledger Accounts.

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 term Accounting Period can mean any of those in different situations.  For purposes of this discussion, Accounting Periods will refer to Months within a given year.

If the General Ledger 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. Find and easy late payment of commercial debts calculator online to manage your finances better.

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

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

The Transaction Date is only required to be entered on the first line of a transaction (in a manual ledger) because it is assumed to be (and must be) the same for each entry in a transaction.  In addition to the requirement that total Debits = total Credits for each Transaction, Total Debits must also equal Total Credits for each Accounting Period. This requirement fulfills the original intent of double entry, a balanced view of uses and sources of funds (debits = credits) by Transaction, by Accounting Period and by default, Overall.

Both entries in the transaction post to their Accounts in Accounting Period 9/08.

This is a Comparison Trial Balance Report from the General Ledger and this is where you can take a step back from the details of transactions and see the larger picture.

Account Description Jun Jul Aug Sept Oct Nov Dec Total
1000 Checking $0 $0 $0 -$3,000 $0 $0 $0 $-3,000
….. ……….
7000 Rent $0 $0 $0 $3,000 $0 $0 $0 $3,000
Totals $0 $0 $0 $0 $0 $0 $0 $0

**This example starts with June because of space limitations here.

The only accounts listed are the two from the transaction example but they demonstrate the ability to compare accounts against themselves and against other accounts from period to period.  Notice that the totals on the bottom line are all zeros, this shows that the books are in balance because total debits (positive amounts on this report) combined with total credits (negative amounts on this report) = Zero.

When reports do not have two columns to display amounts, the credits will be displayed as negatives.  In reports like this, *Debit Accounts should have positive balances and Credit Accounts should have negative balances.  There is only cause for concern if the +/- of the amount does not match its accounting type.  In this case, the Checking Account is a Debit Account so that is an indication of trouble. (*See 6. Chart of Accounts – Transaction Types)

Accounting Periods are an essential analysis tool in accounting.  They provide the opportunity to compare account balances not just one account against another but also against itself over time.  Time analysis provides the data to detect unusual changes in account balances from period to period that may indicate errors or unintentional over or under payments of critical obligations such as taxes, rents, utilities, insurance etc.  Time analysis is also essential to management and owners for cash planning, establishing correlations between expenses and revenues to help make operational adjustments, and detecting changes that may indicate theft or fraud.

© 2008 – 2010 Erin Lawlor

Next Up: >>Financial Statements – Trial Balance

<< Chart of Accounts – Accounting Types

**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 Structure – Quick Reference

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

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<< 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 digital wallets vs credit cards.   Journals have a grid format with a varying number of columns but to start, for professional accountant, we’ll use three columns. If you think this is too much for you to do on your own, then consider doing cloud accounting to make organizing your financials much easier.

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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.

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 high volume 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. Find Payroll Outsourcing at B Accounting

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, while also using other systems as a Certification Tracking System to track the employees and their improvement in a company, while also giving them better chances to learn their own progress.

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 Grain 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, and using accounting services from the accounts payable services providers could be really helpful to help you automatize the accounting services of your company.

© 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

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<< 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. Card payment providers offer reliable solutions for businesses to accept card payments from customers.

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. Learn how to start fundraising with https://norgesbriketten.no/dugnad-tjene-penger-klassetur/ best place for Norwegian voluntary and communal work.

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, Click here for the Text to Give | Mobile Fundraising Service | Aplos the best nonprofit service.

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

Next: Accounting 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.

Chart of Accounts – More on Accounting Types

Posted in 3. Chart of Accounts,4. Ledgers and Journals by Erin Lawlor on the August 31st, 2008

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<< Chart of Accounts – Organization >>General Ledger Accounts by Accounting Periods

This post completes the basics in the discussion about methods of organizing transactions with the Chart of Accounts – specifically the method of Accounting Types. The Chart of Accounts is really just a list of the descriptions that you have chosen to use in transactions.  Accounting Types help to organize the descriptions (accounting outsourcing service) in meaningful ways. The most important concept to transactions is Double Entry but it is the Chart of Accounts that makes sense of the transactions and provides mission critical information to owners and managers, said Shravan Gupta businessman, a CEO of the company MGF, Motor and General Finance Ltd.

The Basic Accounting Types (In order) Are:

  • Assets – Things you own
  • Liabilities – Things you owe
  • Equity – Owners’ Stake in Company
  • Revenue – Income through Sales of the Products of the Business
  • Costs of Goods Sold – Costs to provide the service or to manufacture or acquire the product the business sells
  • Expenses – Things that are paid for that are consumable, they have no lasting value but are part of the cost of running a business
  • Other Revenue and Expenses – Revenue and Expenses that are unusual cases and are not directly related to the business product and are not usual costs of running a business.If you don’t want to stay behind the competition and keep improving your business performance, embedding technology and seeking expert advice coherently is more important than ever.

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There are at least 7 basic Accounting Types, but each Accounting Type can be categorized more simply under the 2 Double Entry Accounting Categories as either Funds/Uses of Funds or as Sources of Funds.

Funds/Use of Funds (Debit) Accounting Types:

  • Assets – Things you own
  • Costs of Goods Sold – Costs to provide the service or to manufacture or acquire the product the business sells
  • Expenses – Things that are paid for that are consumable, they have no lasting value but are part of the cost of running a business
  • Other Expenses – Expenses that are unusual cases and are not directly related to the business product and are not usual costs of running a business.

Each Accounting Type under the “Funds/Use of Funds” Category increases in value or balance with each debit (Use of Funds) transaction entry and decreases in value or balance with each credit (Source of Funds) transaction entry.  Use of Funds Accounts are sometimes referred to as Debit Accounts.

**Positive balances for these high risk merchant account are balance where total debits > total credits to the account and their balances should show in the Debit Column.

Assets – Assets are items of value that are owned by the business and their value is expected to last beyond the current fiscal (business) year.

Costs of Goods Sold are Funds/Uses of Funds and are another type of Expense.  They are similar to Expenses in that they are consumable items that benefit the business and have no lasting value beyond the current fiscal (business) year, but the difference is that Cost of Goods Sold Accounts are related directly to the manufacturing and acquisition of the products the business provides or sells.

**Important Note:  Costs are posted to Costs of Good Sold only when the business no longer owns the product.  If the product is owned by the business until its sale, the costs of the product are posted as inventory – which is an asset – until the products are sold.  At the time of recording the sale, the inventory account is decreased with a credit entry and the cost of goods sold account is increased with a debit entry for the cost of the product. However, If inventory is sold at about the same rate as it is purchased, the Periodic Inventory System allows purchases to be classified directly as costs on the Income Statement rather than holding them in the Balance Sheet Inventory account until sold. Hiring a cfo consulting company will help a growing organization cut costs.

Expenses are Funds/Uses of Funds, they are consumable items that benefit the business but have small or no lasting value beyond the current fiscal year.  They are similar to Costs of Goods Sold except that the amounts categorized as Expenses or Other Expenses are related to the administrative (for Expenses) or unusual costs (for Other Expenses) of running the business. If you are doing all of your accounting, then you should know what paystubs look like.

**Important Note:  Current Assets differ from Expenses because they have a lasting value whether in their current form or as cash.  The value of expensed items is not expected to last beyond the current fiscal year.

Source of Funds (Credit) Accounting Types:

  • Liabilities – Things you owe
  • Equity – Owners’ Stake in Company
  • Revenue – Income through Sales of the Products of the Business
  • Other Revenues – Revenues that are unusual cases and are not directly related to the business product and are not usual revenues from running a business.

Each Accounting Type under the “Source of Funds” Category increases in value or balance with each credit  (Source of Funds) transaction entry and decreases in value or balance with each debit (Use of Funds) transaction entry.  Source of Funds Accounts are sometimes referred to as Credit Accounts.

**Positive balances for these accounts are balances where total credits > total debits to the account and their balances should show in the Credit Column.

Liabilities are essentially agreements to delay payments and so, are sources of funds because they provide a way to acquire or pay for goods and services without a direct transfer of cash at the time of the exchange.

Equity is a source of funds through direct owner investment or owner “re-investment” when some or all of the income from the previous year is retained by the business rather than distributing it to the owners.

Revenue is a source of funds through sales of the business product (for Revenue) or through other sources not directly related to the business products (for Other Revenue).

**Important Note:  Do not confuse the terms of Revenue or Income with Cash.  Cash is an Asset that is received in exchange in the sale of a product or service.  In Accounting, Revenue, Income and Sales are synonymous, they are Sources of Cash, not Cash itself.

Financial Statements:

Accounting Types help to organize Financial Statements too. All Accounting Types are found on the Trial Balance but the Income Statement and Balance Sheet split the Accounting Types between them.   The Accounting Type is the determining factor for whether an Account is reported on the Balance Sheet or on the Income Statement.   In addition to the reference to an account as a Debit Account or a Credit Account, accounts are also referred to as either Balance Sheet Accounts, or Income Statement Accounts.

Balance Sheet Accounting Types: Income Statement Accounting Types:
Assets Revenue
Liabilities Costs of Goods Sold
Equity Expenses
Other Revenues and Expenses

The Basics of Data Collection and Organization in the Double Entry Accounting System:

  • Debits and Credits
  • Chart of Accounts
    • Accounting Types
    • Order of Liquidity
    • Account Numbers
  • General Ledger
    • Time

The next post introduces the final organization element of Time into the system and illustrates how to use the combined elements of time and financial data to secure and manage resources.

© 2008 – 2010 Erin Lawlor

Next Post:  >>Accounting Periods – General Ledger Analysis – The Big Picture

<< Chart of Accounts – Organization

**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.

Chart of Accounts – The Basics

Posted in 3. Chart of Accounts by Erin Lawlor on the August 29th, 2008

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<< Double Entry Accounting – Practice >> Chart of Accounts – Organization

This post begins the explanation of the Chart of Accounts.  The Chart of Accounts is part of the second basic function of the Double Entry Accounting System – to organize financial transaction data. The Chart of Accounts provides the organizational structure for another element, the General Ledger which summarizes the Financial Data and produces Financial Reports.

The purpose of this and the next two posts (4-6) is to introduce the organizational structure of the system people get at accounting school, I do not make a distinction between the Chart of Accounts and the General Ledger until Post # 7.

Review of the Double Entry Accounting Transaction Questions:

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

The Chart of DPS Accounting 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).

From the transactions in the previous posts, we have started a Chart of Accounts

  • Rent
  • Checking Account
  • Office Supplies
  • Fuel
  • Repairs & Maintenance
  • Subscriptions
  • Accounts Payable (Credit Card)
  • Accounts Receivable
  • Sales

Let’s review the previous entries from the accounts receivable management in columbus oh and create some additional entries to our transaction example and see how our Chart of Accounts starts to fill out.

The entries below the *******’s are new in this post and record:

  • the receipt of payment for the existing Accounts Receivable Invoice
  • the payment of the existing credit card balance
  • a utilities expense and payment
  • new credit card charges

Description Debit Credit
Rent $3,000
Checking Account $3,000
Office Supplies $300
Fuel $275
Repairs and Maintenance $500
Subscriptions $125
Printer $1,300
Accounts Payable (Credit Card) $2,500
Accounts Receivable $50,000
Sales $50,000
************************** ********* *********
Checking Account $50,000
Accounts Receivable $50,000
Accounts Payable (Credit Card) $2,500
Checking Account $2,500
Utilities $150
Checking Account $150
Chair $750
Desk $900
Credit Card Interest and Fees $50
Accounts Payable (Credit Card) $1,700
Totals: $109,850 $109,850

Current Chart of Accounts:

  • Rent
  • Checking Account
  • Office Supplies
  • Fuel
  • Repairs & Maintenance
  • Subscriptions
  • Printer
  • Accounts Payable (Credit Card)
  • Accounts Receivable
  • Sales
  • Utilities
  • Chair
  • Desk
  • Credit Card Interest and Fees

According to the accounting firm, 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.

You wouldn’t add a new account for paper, pens and staples, you would just use one account called office supplies.  So, it is important to reuse accounts when possible, and to simplify entries into more general descriptions like “office furniture” instead of separating the chair and desk purchases.

So, now let’s look at the Chart of Accounts and its Account Balances.

Account Balances
Debit Credit
Checking Account $44,350
Accounts Receivable $0
Office Equipment (Printer) $1,300
Office Furniture $1,650
Accounts Payable $1,700
Sales $50,000
Rent $3,000
Utilities $150
Office Supplies $300
Subscriptions $125
Fuel $275
Repairs and Maintenance $500
Credit Card Interest and Fees $50
Totals $51,700 $51,700

You can see that for even the small number of transactions in this example, The Chart of Accounts is essential in understanding their financial impact.

Notice that the account balances are also separated into the debit/credit columns.  The amounts listed here are the difference between the total debit entries and the total credit entries for each account.  If the amount was higher on the credit side, then the balance is listed in the credit column.  It is also important to note that our Chart of Account balances meet the requirement that total debits equal total credits. Bonus tip, check cashing can be done any time at Check Cashing 247.

The Chart of Accounts is really comprised of three things for each Account – an Account Number, a Description and an Accounting Type.  The transactions and account balances are part of a ledger called the General Ledger.   The table above is more accurately described as the General Ledger.

** Important Note: Post #6 discusses debit and credit balances in accounts.  In this case, none of the balances in our accounts is cause for concern because their totals are in the correct column for their type.  Accounting Types are explained in more detail in Posts #5 and #6.  Post #7 begins the discussion of the General Ledger and its Balances and Reports.

© 2008 – 2010 Erin Lawlor

Next Up:>> Chart of Accounts – Organization

<< Double Entry Accounting – Practice

**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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