Accounting cheat sheet¶

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

Assets represent the company’s wealth and the goods it owns. Fixed assets include buildings and offices, while current assets include bank accounts and cash. The money owed by a client is an asset. An employee is not an asset.
Liabilities are obligations from past events that the company will have to pay in the future (utility bills, debts, unpaid suppliers). Liabilities could also be defined as a source of financing which is provided to the company, also called leverage.
Equity is the amount of the funds contributed by the owners of the company (founders or shareholders) plus previously retained earnings (or losses). Each year, net profits (or losses) may be reported as retained earnings or distributed to the shareholders (as a dividend).

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

A difference is made between assets and expenses:

An asset is a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit. Assets are reported on a company’s balance sheet. They are bought or created to increase a firm’s value or benefit its operations.
An expense is the costs of operations a company bears to generate revenues.

The profit and loss (P&L) report shows the company’s performance over a specific period of time, usually a quarter or a fiscal year.

The revenue refers to the money earned by the company by selling goods and/or services.

The cost of goods sold (COGS, or also known as “Cost of Sale”) refers to the sale of goods’ costs (e.g., the cost of the materials and labor used to create the goods).

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

Operating expenses (OPEX) include administration, sales and R&D salaries, rent and utilities, miscellaneous costs, insurances, and anything beyond the costs of products sold or the cost of sale.

Assets = Liabilities + Equity

Chart of accounts¶

The chart of accounts lists all the company’s accounts: both Balance sheet accounts and P&L accounts. Every transaction is recorded by debiting and crediting multiple accounts in a journal entry. In a way, a chart of accounts is like a company’s DNA!

Every account listed in the chart of accounts belongs to a specific category. In SotaERP, each account has a unique code and belongs to one of these categories:

Equity and subordinated debts
- Equity is the amount of money invested by a company’s shareholders to finance the company’s activities.
- Subordinated debts are the amount of money lent by a third party to a company to finance its activities. In the event of the dissolution of a company, these third parties are reimbursed before the shareholders.
Fixed assets are tangible (i.e., physical) items or properties that a company purchases and uses to produce its goods and services. Fixed assets are long-term assets. This means the assets have a useful life of more than one year. They also include properties, plants, and equipments (also known as “PP&E”) and are recorded on the balance sheet with that classification.
Current assets and liabilities
- The current assets account is a balance sheet line item listed under the Assets section, which accounts for all company-owned assets that can be converted to cash within one year. Current assets include cash, cash equivalents, accounts receivable, stock inventory, marketable securities, prepaid liabilities, and other liquid assets.
- Current liabilities are a company’s short-term financial obligations due within one year. An example of a current liability is money owed to suppliers in the form of accounts payable.
Bank and cash accounts
- A bank account is a financial account maintained by a bank or other financial institution in which the financial transactions between the bank and a customer are recorded.
- A cash account, or cash book, may refer to a ledger in which all cash transactions are recorded. The cash account includes both the cash receipts and the cash payment journals.
Expenses and income
- An expense is the costs of operations a company bears to generate revenues. It is simply defined as the cost one is required to spend on obtaining something. Common expenses include supplier payments, employee wages, factory leases, and equipment depreciation.
- The term “income” generally refers to the amount of money, property, and other transfers of value received over a set period of time in exchange for services or products.

Example¶

*: Customer Refund and Customer Payment boxes cannot be simultaneously selected as they are contradictory.

Balance = Debit - Credit

Journal entries¶

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

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

examples of accounting entries for various transactions. (see entries.js)

Reconciliation¶

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

Its primary purpose is to link payments to their related invoices to mark them as paid. This is done by doing a reconciliation on the accounts receivable account and/or the accounts payable account.

Reconciliation is performed automatically by the system when:

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

Customer Statement Example

Accounts Receivable	Debit	Credit
Invoice 1	100
Partial payment 1/2		70
Invoice 2	65
Partial payment 2/2		30
Payment 2		65
Invoice 3	50

Total to pay	50

Bank Reconciliation¶

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

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

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

Checks Handling¶

There are two approaches to managing checks and internal wire transfers:

Two journal entries and a reconciliation
One journal entry and a bank reconciliation

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

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

Account	Debit	Credit	Reconciliation
Undeposited funds		100	Check 0123
Bank	100

A journal entry is created by registering the payment on the invoice. When reconciling the bank statement, the statement line is linked to the existing journal entry.

Account	Debit	Credit	Reconciliation	Bank Statement
Account Receivable		100	Invoice ABC
Bank	100			Statement XYZ