Accounting in a Simple World

Accounting in a Simple World

In this lesson, you’re expected to learn about:
– the basics of an accounting system
– setting up your accounting software
– purchase invoices, sales invoices, and cash payments

What is an Accounting System?

An accounting system is an organized set of manual and computerized accounting methods, procedures, and controls established to gather, record, classify, analyze, summarize, interpret, and present accurate and timely financial data for management decisions.

[Optional] What is an accounting system?
Check out this article to learn more:

Setting Up Your Accounting Software

When you first start using your accounting system, there are many set-up tasks you could do but there are only two that you really need to do before you can get started.

The rest of them you can do as you go along or when you are more familiar with the system.

1) Financial Year 

You need to tell your accounting system the start and end dates of your financial year. This is done so that it knows how to calculate your year to date figures.

2) Opening Balances

If your company has been trading for a while before you start using an accounting system and you are not planning to enter every individual transaction since the company started, then you have to deal with this by entering ‘opening balances’.

Before you start entering transactions, you would need to look at the balance sheet of the company and enter the relevant balance for every nominal account that makes up that balance sheet.

When you start entering your transactions, they will ‘add’ to the historic balances so your TB and hence your balance sheet in the accounting system will reflect the balances from every transaction the company has ever made.

For example, suppose your year-end is 31 March however you want to start entering transactions with effect from 1 July.

You need to get the balances for each of your nominal accounts as of 30 June and enter them as ‘opening balances’ in the system (dated as 30 June).

1) Nominal Accounts 

You can set up all your nominal accounts yourself if you want. However, there are lots that are the same for every company – e.g. share capital, trade debtors etc.

Most accounting systems therefore offer you a choice from several standard sets of nominal accounts according to different types of companies which you can then add to as and when you want.

2) VAT Rate 

If you are VAT-registered, you might want to set the ‘default’ rate of VAT in the system because the rate at any given time is the same for most goods and services (but not all!).

By setting this default rate, whenever you enter a sale or purchase invoice into the system, it will assume the VAT rate is the default rate and thus calculate the amount, saving you time. You can also override both the percentage and the amount if needed.

[Optional] Best Accounting Software for Small Business 2017
Accounting in a simple world

 Assume that you have a purchase invoice from the supplier of each of your purchases and the date on each document corresponds to the month in which you want the purchase to appear in your accounts.

 Similarly, you’ve issued a sales invoice for each of your sales and the date on each document corresponds to the month in which you want the sale to appear in your accounts.

Purchase Invoices

For each invoice, you simply have to: 

• Choose the right supplier account (or create it if it doesn’t exist yet).
• Enter the relevant details of the invoice.
• Choose the nominal account in which you want the expense to appear.
• Check that the VAT has been calculated properly by the system.
• Make sure you mark the physical invoice when you’ve entered it, so that you don’t enter it twice.

After completing these steps, the accounting system will: 

• Save all these details in the supplier account in the purchase ledger.
• Enter the following in the nominal ledger:
– increase trade creditors
– decrease VAT liability
– decrease retained profit
• Record the transaction in the audit trail.*

Audit Trail: a system that traces the detailed transactions relating to any item in an accounting record.
[Optional] Purposes of Audit Trail Reports

Sales Invoices

Entering all your sales invoices is exactly the same as the process described above except that it is the sales ledger that records the details of each invoice.

The entries it makes on the nominal ledger will be:
• Increase trade debtors
• Increase VAT liability
• Increase retained profit

 Your balance sheet is not completely accurate though because it currently says that you are still owed all the money for all your sales and you still owe your creditors for all your purchases.

However, in practice, you would have already paid some suppliers and received some money from customers.

Cash Payments

How do you enter payments received from customers? 

• Choose the right customer account.

• Enter the amount of the remittance and tell the system which invoice(s) the remittance is paying (since you may have several invoices for any given customer).

The accounting system will then: 

• Record the details of the payment in the relevant customer account in the sales ledger.
• Enter the following on the nominal ledger:
– increase cash
– decrease trade debtors
• Record the transaction in the audit trail.

The same applies when you enter payments made to suppliers, which you do in exactly the same way.

Now, your trial balance would be complete. Assuming that you’ve got your chart of accounts set up, you could get your actual balance sheet and P&L statement.

Jim Rohn Sứ mệnh khởi nghiệp