Business accounting grounds in a single article

Publications: Business accounting grounds in a single article Learning the business accounting in three or four hours, in an hour for someone. The article is written for those who are beginning to learn the accounting systems and do not know the business accounting grounds.

Instead of introduction

This guide allows learning the basics of accounting for the minimum time. The guide is written in simple and accessible language and is composed so that anyone can easily master the material that is taught at the institute for two or more years. During the testing this material was read by the people who are not familiar with business accounting at all, but after reading they could read the report and make themselves the accounting operations. The author of this guide has worked as a programmer for many years and participated in the development of software products for accountants, financiers, managers of Back and Front offices and, as he gained the experience during communication with customers and programmers, has come to the conclusion that there is a barrier between the understanding of people with different professions. The author had to finish a lot of courses for accounting and financial competence, read a lot of very thick books. This prompted to create the guide where all of this is described easily, and the main thing, especially, in our information age, is that it took a little time. The guide has undergone several revisions and now, in its final form, is presented for you, dear reader.

Contents

  1. Chart of accounts or the basis of accounting thinking.
  2. Operations and conductings – general understanding
  3. Reporting. How to prepare report and how to read report prepared not by you.
  4. Instead of conclusion.

1. Chart of accounts or the basis of accounting thinking.

The whole business accounting is based on the chart of accounts. Let’s see what a scary concept is a Chart of Accounts. In fact, there is nothing scary here. The chart of accounts is just a list in which the bookkeeping accounts are contained. Then what is the account? After this question it is wanted to get into jungle of any kind of terms and concepts that nobody understands and, therefore, are useless, but we will do differently. In a simple example we will construct a small chart of accounts and will examine what is taken from where. So, let’s begin. First, you need to remember that the account of business accounting (BA) consists of code, name and several flags. For example:

Code Name
001 Cash Desk
002 Receivables turnover
003 Liabilities to vendors
004 Income
005 Expenditure
006 Goods

In this example we created several accounts, assigned to these accounts the codes and names.

- And what is it for? – you ask.

This is where the fun begins. Each account, in addition to the code and name, has the Debit and Credit side. this is very similar to the swing. On the one hand Debit, on the other hand Credit. In what direction the swing will swing, in that direction the balance will increase (the accounting balance is called Account balance).

- So what are the accounts for?

- To create the accounting records.

- And what are the flags?

- The account flags are an arrangement on how we perceive this account. Again an example: we have created an account Cash Desk, assign the code to it, but suddenly it became necessary to keep on this account the records for several currencies, that is, our cash desk, in addition to the national currency, will receive money in other currencies, for example in Euro or pounds. What do we need? The answer is simple: let’s make a flag for the accounts, call this flag Currency and will indicate whether this is a currency account or not.

Then our chart of accounts will look as follows:

Code Name Currency Active/Passive
001 Cash Desk Yes Active
002 Receivables turnover No Active
003 Liabilities to vendors No Passive
004 Income No Passive
005 Expenditure No Active
006 Goods No Active

That is, we specified in our chart of accounts that Cash Desk will be considered for variety of currencies, and al other accounts will be considered only for the national currency.

As you noticed, I added another flag: Active/Passive. Active accounts are the accounts for which the balance is always a debit. Passive accounts are the accounts for which the balance is always a credit. Do not bother too much on this for now. A little later, we will examine it in detail.

We can add other flags. For example, we have an account Goods, where we will store the data of incoming goods. In this case, we may be interested to know how many items of goods have come. To do this, we can add the flag Quantitative and specify for which accounts we will take into account the quantity and for which not. If you want, you may compose yourself the Chart of Accounts with quantitative flag. And we proceed to the second section.

2. Operations and conductings – general understanding

In the first chapter we have created our own Chart of Accounts. Each account of this Chart of accounts has the name and code. The name of each account allows you to clearly define for what each account is intended. For example, we have an account Cash Desk, that is, when we created it, we meant that all of our cash will be stored on this account. In the account Goods we organized the storage of Incoming goods. In the account Receivables turnover we will store the arrears of clients. And so on.

Each accounting action is called operation. Operations consist of conductings. Conducting is one row of accounting record and it is written as follows:

Date | Debit | Credit | Amount

In the column debit and credit we specify the codes of accounts that participated in the conducting. In the column amount we specify the conducting amount, in the column Date specify the conducting date. In principle, we could place the names of accounts in the columns Debit and Credit instead of codes, but the codes are more convenient to place, the accountants do so.

Consider an example: we buy goods from the Vendor in the amount of $20000, then, a week later, the goods are sold to the Buyer in the amount of $10000 and cash desk receives money from the buyer with amount of $5000, then the conductings will look as follows:

Date Debit Credit Amount Currency Description
02.02.09 006 003 20000 - receive goods from vendor

In this case, an amount of $20000 is written on the debit of account 006 (Goods) and at the same time the same amount of $20000 is written on the credit of account 003 (Liabilities to vendors).

Date Debit Credit Amount Currency Description
07.02.09 002 004 2000 - admit income
07.02.09 002 006 8000 - write off the goods
Date Debit Credit Amount Currency Description
08.02.09 001 002 5000 USD receive money from the buyer

What is going on here? we have three operations:
1. Receive the goods from Vendor
2. Sell the goods to the buyer.
3. Accept payment from the buyer.

The second operation consists of two conductings. I will explain why. in the first operation we received the goods. The debit of account Goods has increased by $20000. In the second operation we sell the Goods to the Buyer. Let’s think. if we will sell the goods at the same price as purchased, for example, $100 apiece, then it means that we have not won anything from the sale. Therefore, we sell the Goods priced at $120 apiece. the difference between the purchase price and selling price is our income. In this case, $20 apiece. Based on this, we accept income of $2000 and write off the Goods with purchase price (or, as the accountants say, with accounting price, that is, with price we store them). The third operation writes cash proceeds to the Cash Desk. Note that the currency name we write only for the account Cash Desk, because this account has the flag Currency.

Now we return to the flags of accounts Active/Passive. Note that in the active accounts the receipt is written on the Debit and write off from these accounts is performed on the Credit. If we write the goods arrival, and this is an active account, then the account of goods we will write in the Debit. If we sell the goods, then the account Goods will be in the column Credit. It is the opposite for the passive accounts, the receipt to account is written in the Credit and write off from account - in the Debit. Now let’s look at why the active account cannot have the credit balance? For on simple reason, we cannot sell more assets than we really have. And why the passive accounts cannot have the Debit balance? Let’s first define what are the passive accounts. These are usually the accounts of arrears and liabilities, and if our balance of arrears is negative, it means that not we owe, but we are owed. By the way, if you noticed, the our account of Income is also Passive. This due to the fact that the accounts of incomes are written with active accounts and if we make the Incomes active, we will not be able to write conducting.

There is another important note. The accounts that are in the same row of conducting are called corresponding and the record is called correspondence. This record with support of correspondence is accepted in the continental accounting system. There is another accounting system in the world – Anglo-Saxon. The conductings are written there without correspondence, that is, firstly, the debit conductings are written, then the credit ones.

If you have constructed the chart of accounts with qualitative flag, you can modify the conductings subject to the quantity. And we proceed to the third chapter.

3. Reporting. How to prepare report and how to read report prepared not by you.

In previous chapter we made three operations and wrote them in the accounting journal. Now imagine a situation: you need to know how much money do you have in the Cash Desk? How much do we owe vendor? Do we have the debtors, if there are, then how much do they owe us? The answers to all these questions we can get by analysing the state of accounts or, as is customary, using the reporting. reporting in the accounting can be of two kinds: Analysing remains (Balance) and Analysing turnovers (Working). If we talk about the remains, then they are related to a specific point in time. If we examine the turnovers, then here the relation is to the time period (interval). That is, answering to the question about remains, we say that we have so much of this or that in such a time. And the turnovers allows you to see how much of something has passed through the accounts for some time. Now let’s answer our questions. What do we need to know how much money there is in the Cash Desk at the moment? To do this, we take the account Cash Desk (001) and look at its debit balance. It is equal to $5000. The debt to vendor (003) is $20000, since the account is passive, the balance of credit is considered. Now try to determine yourself, how much the buyers owe us.

Let’s try to consider the situation with turnovers. For this, find out how much product we sold this week and how many goods we bought during the same period? To do this, we take the account Goods and see what happened to it during the period from 02.02.09 to 09.02.09

For debit 006 (goods) the turnover was $20000, that is, we have received the goods on $20000, for credit 006 the turnover totalled $8000, that is we sold the goods on $8000.

The attentive reader can se that it was sold to the buyer the goods in the amount of $10000. Then why we wrote off from the account Goods (006) only $8000? Then I will also ask the reader, where to put the margin on the goods?

The continental accounting system has another big plus, we can analyse the turnovers by correspondences. To understand this, let’s continue with our example. We decided to pay the money to the vendor. The conducting will look as follows:

Date Debit Credit Amount Currency
09.02.09 003 001 3000 USD

Then we paid loader and decided to include this amount into the charge.

Date Debit Credit Amount Currency
09.02.09 005 001 1000 USD

Now, if we will analyse the account Cash Desk, then we will see that the money is gone. But where? The correspondence analysis will help us to answer this question. If we take the account Cash Desk and track all the correspondences with account Liabilities to vendors, we will see that we have the payment to the Vendor in the amount of $3000. If to track all the correspondences with account Cash Desk, you can see where the money has gone.

Now, I want to show you a few reporting forms which occurs almost in every accounting:

Balance. Considering Account balance.
Balance at 09.02.09

Code Name Debit Credit
001 Cash Desk 1000 -
002 Receivables turnover 5000 -
003 Liabilities to vendors - 17000
004 Income - 2000
005 Expenditure 1000 -
006 Goods 12000 -
TOTAL - 19000 19000

In this report it is possible to see what remains we have at 09.02.09. So, we have in the cash desk $1000. The buyers owe us $5000. We owe Vendor $17000. We have income $2000. Expenditure, by this time, was $1000. And we have the Goods on $12000.

Turnover balance sheet.
Turnover balance sheet for the period from 01.02.09 to 10.02.09

Account Initial balance Dt Initial balance Ct Turnover Dt Turnover Ct Final balance Dt Final balance Ct
001(Cash desk) - - 5000 4000 1000 -
002(Receivables turnover) - - 10000 5000 5000 -
003(Liabilities to vendors) - - 3000 20000 - 17000
004(Income) - - - 2000 - 2000
005(Expenditure) - - 1000 - 1000 -
006(Goods) - - 20000 8000 12000 -
TOTAL - - 39000 39000 19000 19000

According to the results of turnover balance sheet: in cash desk we had revenues of $5000. And $4000 was issued from the cash desk, final balance is $1000.

The buyer took the goods for $10000, returned $5000 and $5000 left to owe us.

The vendor gave us the goods for $20000, we returned him only $3000 and $17000 owed him.

We accepted income for this period $2000 and defrayed costs for $1000.

We have received the goods for $20000 of which we have sold for $8000, the balance at the end of period is $12000. By the way, if you look at the line Total, you will see that the total turnover of all accounts was $39000. Here there is one subtlety, in the business accounting, like in the rest of the world, the so-called law operates (the physicists call it the Law conservation of matter), if we had lost in one place, then we have got elsewhere. Or, if to say like an accountant, if we write off something from one account, then surely add it to another account, hence there is the correspondence of accounts. And if suddenly your Debit turnover does not agree with Credit one, it means that there is a mistake somewhere.

Chess table
During the period from 01.02.09 to 10.02.09

Account 001 002 003 004 005 006 Total
  Dt Ct Dt Ct Dt Ct Dt Ct Dt Ct Dt Ct Dt Ct
001     5000     3000       1000     5000 4000
002   5000         2000       8000   10000 5000
003 3000                     20000 3000 20000
004       2000                   2000
005 1000                       1000  
006       8000 20000               20000 8000
Total 4000 5000 5000 10000 20000 3000 2000      1000 8000 20000 39000 39000

According to the results of this report, you can see what happened with each account, that is, to see its correspondence for the period. According to this report, you can also check your distribution over the accounts. If in this report to calculate the totals by rows and separately by columns and then add up all these totals, each separately, then the amount of totals by rows must match the totals by columns.

Analysis of account 001(Cash Desk)
Account analysis for the period from 01.02.09 to 10.02.09

Corr. Account Initial balance From account credits To account debits
002   5000  
003     3000
005     1000
Turnovers   5000 4000
Final balance   1000  

This report consider in detail the traffic on a particular account, in our case this is a Cash Desk. Here we see that from the credit of account 002 (Receivables turnover) we received $5000 and to the debit of accounts 003 (Liabilities to vendors) and 005 (Expenditure) the amount of $3000 and $1000 has gone. In the row Turnovers we see the total revenue of $5000 and total payments of $4000. The row final balance shows that we have as a result – balance of $1000 in cash desk.

Or course, there are other reporting forms, but usually they extend the range of reports we examined and it would be easy to deal with them.

4.Instead of conclusion.

I am glad, dear reader, that you reached these lines. In conclusion, I would like to tell a little about accounting systems currently adopted in the world. This information is not essential and ignorance of it does not prevent you to know the basics of business accounting. But for your mental outlook it can be very useful.

Accounting systems.
Accounting system is a set of rules according to which the actions with resources a taken into account. Resources are any values, for example, money, goods, real estate, manpower, trademark, etc.

Currently two accounting systems are adopted in the world: Anglo-Saxon and Continental. What does it mean? Going a bit further in history, you will find that in one countries the main capital invested in the economy were the credits of banks (or other financial structures or even government), while in the other countries it was the capital of individuals and large investors. Therefore, the laws of these countries are created and customized under the protection of either the banks or individuals. Thereafter, the requirements to the accounting systems were different. For example, in the credit (continental) system the main requirement for accounting is repayment of credit. And in the Anglo-Saxon system, where the money of individuals was invested, the main requirements – reliability of enterprise in which the investor invests money. In the USA – Anglo-Saxon. Each of these systems has its advantages and disadvantages. Continental system takes into account the result of activities for a certain period (assume, one year), and Anglo-Saxon - the result for a certain point in time (for example, at the end of the year). That is, in the continental system you can see what revenue was obtained for some period of time and what the costs the enterprise defrayed. Comparing the income and expenditure part, we can judge how the enterprise has worked for a given period of time. In the Anglo-Saxon system you can estimate the company at some point in time and find out how richer or poorer we became comparing with the moment when we invested the money. This can be explained with an example: you bought a house for ten thousand. One year later, the price of real estate in this district has doubled, now you have potentially twenty thousand, that is, you became richer. Later the price has risen again and you became richer one more time, then again…. However, this wealth can be somewhat of a course. Your so-called capitalization increases, that is, you have somewhat more capital, so, you have to pay more takes. Although, on the other hand, if you sell the house, you can get a good profit.

Analytical or synthetic?
Now, I would like to talk about such concepts as analytical and synthetic accounts. Usually the accountants work with some programs.
So, the developers proposed to use such a concept as subcount. Subcount is a particular analytical section for BA account. Example:

We received the goods and wrote the conductings only on the accounts, at the same time, we did not see what goods received, from whom they came. Now let’s write the same conducting with subcount. To do this, put on the account Goods the subcount called Product and on the account а на счет Liabilities to vendors add subcount Client. Look what happened:

Analytical record

Date Dt SubcountDt Ct SubcountCt Amount
02.02.09 005 TV set 003 LLC “Camomile” 8000
02.02.09 005 Refrigerator 003 LLC “Camomile” 10000
02.02.09 005 Vacuum cleaner 003 LLC “Camomile” 2000

Compare

Synthetic record

Date Dt Ct Amount
02.02.09 005 003 20000

Analytical section allows you to see in detail the account records, while the synthetic one combines (synthesizes) data. Now, if you hear suddenly something like synthetic accounting, know that it is somehow assembled data, if analytical accounting, then detailed according to some accounting sections.

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