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Agent Only - Accounting 101

Overview

This article is designed as an agents (Support Staff) overview of basic accounting principles and how they apply to transactions and exports from Retail Express to Accounting packages.

There will also be a customer facing version of this information available here: #insert article here#

What is Double-Entry Accounting?

Double-entry accounting is based on the fact that every financial transaction has equal and opposite effects in at least two different accounts. Double-entry Accounting is governed by the Accounting Equation.

If revenue equals expenses, the following basic equation must be true:

Accounting Equation: assets = liabilities + equity

For the accounts to remain in balance, a change in one account must be matched with a change in another account. These changes are made by debits and credits to the accounts.

Important note: the usage of 'debit' and 'credit' in accounting terms is not identical to their everyday usage.

	Debit	Credit
Asset	Increase	Decrease
Liability	Decrease	Increase
Income (Revenue)	Decrease	Increase
Expense	Increase	Decrease

Two main ways to report on the company position:

Balance Sheet: Assets (things you own) are the opposite of Liability (things you owe)
Profit/Loss: Expenses (money you spent) are the opposite of Revenue (money you earnt)

Whether one uses a debit or credit to increase or decrease an account depends on the normal balance of the account.

Assets and Expenses accounts (on the left side of the equation) have a normal balance of debit. Therefore, a debit will increase the value of the account [negative (balance) + negative (movement) = increase]
Liability and Revenue accounts (on the right side of the equation) have a normal balance of credit. Therefore, a debit will decrease the value of the account [positive (balance) + negative (movement) = decrease]

The easiest way to think of this is that a negative of a negative is a positive. Therefore, a debit movement on a debit balance increases.

On a general ledger, debits are recorded on the left side and credits on the right side for each account. Since the accounts must always balance, for each transaction there will be a debit made to one or several accounts and a credit made to one or several accounts.

The sum of all debits made in each day's transactions must equal the sum of all credits in those transactions.

After a series of transactions, therefore, the sum of all the accounts with a debit balance will equal the sum of all the accounts with a credit balance.

What this looks like for transactions within Retail Express.

Stock Receipts

Trade Creditors is a Liability Account because the business owes the supplier money.

Credits increase the value of a liability account
Credit $577.50 ($500 + $50 GST stock + $25 + $2.50 GST Freight)

Freight Paid is an Expense Account as this is an expense incurred by the business in trading.

Debits increase the value of an Expense Account
Debit $25 Ex cost of freight

Inventory is an Asset Account as the stock owned by the business is an asset that can be sold .

Debits increase the value of an Asset Account
Debit $500 ex cost of stock

Tax is a liability account. It represents money you owe the government.

Debits decrease the value of a liability account. Because this is GST paid, which we can claim, it reduces the liability we owe the government
Debit $52.50 ($50+$2.50) for GST

From this grid showing each transaction, we can see that the balance is zero.

	Debit	Credit
Trade Creditors		$577.50
Freight Paid	$25.00
Inventory	$500.00
Tax	$52.50
Total	$577.50	$577.50

Stock Transfer

Dispatch of Stock

Inventory is an Asset Account as the stock owned by the business is an asset that can be sold.

Credits decrease the value of an Asset Account
Credit $250 for cost of stock dispatched to the warehouse inventory account

In Transit is an Asset Account as the stock in transit is still owned by the company.

Debits increase the value of an Asset Account
Debit $275 for cost of stock + GST charged to store to the in-transit account

Tax is a liability account. It represents money you owe the government.

Credits Increase the value of a liability account. Because this is GST being received from the other store, it increases the liability we owe the government
Credit $25.00 for GST at the warehouse

Receipt of Stock

In Transit is an Asset Account as the stock in transit is still owned by the company.

Credits Decrease the value of an Asset Account
Credit $275 for cost of stock + GST charged to store to the in-transit account

Inventory is an Asset Account as the stock owned by the business is an asset that can be sold.

Debits Increase the value of an Asset Account
Debit $250 for cost of stock received to the store inventory account

Tax is a liability account. It represents money you owe the government.

Debits Decrease the value of a liability account. Because this is GST being charged, it decreases the liability we owe the government
Debit $25.00 for GST at the store.

You can see that in this scenario, even though GST is charged on stock transfers, it has a zero net effect on the accounts. If this was a transfer between two different trading entities, the two transactions would happen in different accounting files. In this case the GST would impact the GST account and the balance in the In-Transit account would need to be journaled to the correct account.

If the total stock wasn?t received at the store i.e. perishable goods, damaged in transit etc. The store can receive a partial value and the discrepancy can be dealt with out of the in-transit account.

From the below grid showing each transaction, we can see that the balance is zero.

	Debit	Credit
Warehouse Inventory		$250
In Transit	$275	$275
Tax	$25	$25
Store Inventory	$250
Total	$550.00	$550.00

Stock Adjustments

Inventory is an Asset Account as the stock owned by the company is an asset that can be sold.

Credits decrease the value of an Asset Account
Credit $50 for cost of stock written off to the inventory account

Stock Adjustment is an Expense Account as it?s an expense to the company of doing business.

Debits increase the value of an Expense Account
Debit $50 for cost of stock to the stock adjustment account

Note: positive adjustments i.e. stock found that was previously written off would have the reverse movements i.e. Debit Inventory and Credit Stock Adjustment.

From the below grid showing each transaction, we can see that the balance is zero.

	Debit	Credit
Inventory		$50
Stock Adjustment	$50
Total	$50	$50

Petty Cash

Petty Cash relates to the Money In/Out function of POS

Bank Accounts are an Asset to the company. They represent money that the business can spend. For cash, most companies will use a cash clearing account as the banking is not done every day and it allows them to account for discrepancies.

Credits decrease the value of an Asset Account
Credit $5 for cost of milk to the cash clearing account

Petty Cash is an Asset Account. This is an allocation of money set aside for expenses. The items purchased with the petty cash are expenses and paid for out of this account.

Debits increase the value of an Asset Account
Debit $5 for cost of milk to the Petty Cash account

When the invoice for the milk is entered in the accounting package, this will credit petty cash and debit the expense account. At this point tax will also be allocated.

Note: Money In/positive adjustments i.e. change from a petty cash purchases have reverse movements i.e. Debit Cash Clearing and Credit Petty Cash

From the below grid showing each transaction, we can see that the balance is zero.

	Debit	Credit
Cash Clearing		$5
Petty Cash	$5
Total	$5	$5

Cash and Carry Sale

Inventory is an Asset Account as the stock owned by the business is an asset that can be sold.

Credits decrease the value of an Asset Account
Credit $50 for cost of stock sold

Cost of Goods is an Expense Account as it?s the cost to the business for being able to sell the stock.

Debits increase the value of an Expense Account
Debit $50 for cost of stock sold

Sales is an Income account. This is the revenue the business has received by making the sale.

Credits Increase the value of an Income Account
Credit $120 for the GST Exclusive value of the sale

Bank Accounts are an Asset to the company. They represent money that the business can spend.

Debits increase the value of an Asset account
Debit $132 for the total paid by the customer for the goods

Tax is a liability account. It represents money you owe the government.

Credits Increase the value of a liability account. Because this is GST being received from the customer, it increases the liability we owe the government
Credit $12.00 for GST the customer paid

From the below grid showing each transaction, we can see that the balance is zero.

	Debit	Credit
Inventory		$50
Cost of Goods	$50
Sales		$120
Bank	$132
Tax		$12
Total	$182	$182

Layby Sale

Receiving Payments

Bank Accounts are an Asset to the company. They represent money that the business can spend

Debits increase the value of an Asset account
Debit $132 for the total paid by the customer for the goods (this would usually happen in multiple transactions)

Layby Accounts are a Liability to the company. Laybys may be cancelled or collected at any time therefore the payments received represent either money or goods owed to the customer.

Credits Increase the value of a Liability account
Credit $132 for the total paid by the customer to the liability account (this would usually happen in multiple transactions)

From the below grid showing each transaction, we can see that the balance is zero.

Payment	Debit	Credit
Layby		$132
Bank	$132
Total	$132	$132

When collecting goods

Inventory is an Asset Account as the stock owned by the business is an asset that can be sold.

Credits decrease the value of an Asset Account
Credit $50 for cost of stock sold

Cost of Goods is an Expense Account as it?s the cost to the business for being able to sell the stock.

Debits increase the value of an Expense Account
Debit $50 for cost of stock sold

Sales is an Income account. This is the revenue the business has received by making the sale.

Credits Increase the value of an Income Account
Credit $120 for the GST Exclusive value of the sale

Tax is a liability account. It represents money you owe the government.

Credits Increase the value of a liability account. Because this is GST being received from the customer, it increases the liability we owe the government
Credit $12.00 for GST the customer paid

Now that the sale is completed, the total paid to date is no longer a liability and needs to be removed from the Liability account.

Debits decrease the value of a liability account.
Debit $132 for the total paid by the customer to the layby account

From the below grid showing each transaction, we can see that the balance is zero.

Sale	Debit	Credit
Inventory		$50
Cost of Goods	$50
Sales		$120
Layby	$132
Tax		$12
Total	$182	$182

Debtor Sale

In an Account Customers (debtors) sale, the customer takes the goods and payments are made later.

When collecting goods

Inventory is an Asset Account as the stock owned by the business is an asset that can be sold.

Credits decrease the value of an Asset Account
Credit $50 for cost of stock sold

Cost of Goods is an Expense Account as it?s the cost to the business for being able to sell the stock.

Debits increase the value of an Expense Account
Debit $50 for cost of stock sold

Sales is an Income account. This is the revenue the business has received by making the sale.

Credits Increase the value of an Income Account
Credit $120 for the GST Exclusive value of the sale

Tax is a liability account. It represents money you owe the government.

Credits Increase the value of a liability account. Because this is GST being received, it increases the liability we owe the government
Credit $12.00 for GST the customer paid

Debtors are an asset to the company as they are a promise of future income.

Debits increase the value of an Asset account.
Debit $132 for the total that will be paid by the customer

From the below grid showing each transaction, we can see that the balance is zero.

Sale	Debit	Credit
Inventory		$50
Cost of Goods	$50
Sales		$120
Debtors	$132
Tax		$12
Total	$182	$182

Receiving Payments

Bank Accounts are an Asset to the company. They represent money that the business can spend.

Debits increase the value of an Asset account
Debit $132 for the total paid by the customer for the goods

Now that the promised income is received and the asset is sitting in the bank account, the asset needs to be transferred out of the Debtors Account.

Credits Decrease the value of an Asset account
Credit $132 for the total paid by the customer to the debtors account

From the below grid showing each transaction, we can see that the balance is zero.

Payment	Debit	Credit
Debtors		$132
Bank	$132
Total	$132	$132

Vouchers

Gift vouchers can be sold, redeemed or expire.

Voucher Sale

Bank Accounts are an Asset to the company. They represent money that the business can spend.

Debits increase the value of an Asset account
Debit $110 for the total paid by the customer for the voucher

Voucher Accounts are a Liability to the company. Vouchers could be redeemed at any time therefore the payments received for a voucher represent either money or goods owed to the customer.

Credits Increase the value of a Liability account
Credit $110 for the total voucher value to the liability account

From the below grid showing each transaction, we can see that the balance is zero.

Payment	Debit	Credit
Gift Voucher		$110
Bank	$110
Total	$110	$110

Voucher Redemption

When redeemed, vouchers are treated as a regular payment except instead of debiting the Bank account, they debit the Gift Voucher account. See sales sections for more information.

Debits decrease the value of a liability account.
Debit $110 for the total redeemed by the customer to the voucher account.

Voucher Expiry

When a voucher expires, the company needs to take up the income and declare tax. In this example the voucher has $55 balance remaining.

Sales is an Income account. This is the revenue the business has received by making the sale.

Credits Increase the value of an Income Account
Credit $50 for the GST Exclusive value remaining on the voucher

Tax is a liability account. It represent money you owe the government.

Credits Increase the value of a liability account. Because this is GST being received, it increases the liability we owe the government
Credit $5.00 for GST

Now that the voucher is expired, the value can no longer be redeemed so there is no longer a liability and this needs to be removed from the Liability account.

Debits decrease the value of a liability account.
Debit $55 for the total paid by the customer to the layby account.

From the below grid showing each transaction, we can see that the balance is zero.

Sale	Debit	Credit
Sales		$50
Gift Voucher	$55
Tax		$5
Total	$55	$55

Cash Variances

Cash variances relate to discrepancies between the money expected and money counted during a cash up.

Credits decrease the value of an Asset Account
Credit $0.05 for cash discrepancy to the cash clearing account

Cash Variance is an Expense Account as it?s an expense to the company of doing business.

Debits increase the value of an Expense Account
Debit $0.05 for the cash discrepancy to the cash variance account

Note: positive adjustments i.e. too much money in the register will have reverse movements i.e. Debit Cash Clearing and Credit Petty Cash.

From the below grid showing each transaction, we can see that the balance is zero.

	Debit	Credit
Cash Clearing		$.05
Cash Variance	$.05
Total	$.05	$.05

Reconciling

General Ledger

The general ledger gives a summary of the change in value of accounts over a given period.

Cheque Account $390.95 Received:

$396 payments received from customers
$5 Petty Cash
$0.05 cash variance

Rex Petty Cash - $5 received

$5 allocated for petty cash. (This will later be expensed)

REX Debtors ? 0 Net Movement

$132 worth of stock sold
$132 payments received

REX In-Transit ? 0 Movement

$250 worth of stock dispatched