931c1c8ec3
After discussion with fp this probably isn't the direction (ish), but want to checkpoint this in order to work on other stuff earlier in the document, but not commit a single gigantic blob of stuff.
383 lines
16 KiB
ReStructuredText
383 lines
16 KiB
ReStructuredText
:classes: stripe
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==========================================
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Understanding Accounting For Entrepreneurs
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==========================================
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Financial accounting is used to know the situation of a company (its balance
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sheet) and its performance (Profit and Loss, P&L). It is set up by reporting
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every financial transaction in the relevant accounts of a Chart of Accounts.
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**P&L** is always analysed on a specific period rather than since the
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company's founding (e.g. 2014, Q3 2012, …).
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Gross profits is revenues (sales, interest, royalties) minus cost of goods
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sold (raw materials, storage costs, production labor costs).
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Operating expenses include administration, sales and R&D salaries as well as
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rent and utilities, legal costs, insurance, ... anything beyond fabrication
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itself.
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**Balance sheet** is a snapshot of the situation at a specific moment, listing
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the company's assets and its liabilities at that point.
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**Assets** represent the company's wealth. A person's assets would be a house
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or car ("fixed" or "tangible" assets), bank accounts or cash ("liquid" or
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"current" assets). For a company, a client owing money is an asset. An
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employee is not an asset as it is not owned by the company (slavery being
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illegal under the International Covenant on Civil and Political Rights's
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article 8).
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**Liabilities** are obligations from past events resulting in future use or
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transfer of current assets (utility bills, debts, payroll, unpaid suppliers).
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**Equity** is assets which have no liability counterpart: shares, other stocks
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and surplus.
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Assets have necessarily been financed via liabilities or equity: a company can
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buy work space through profits, borrowing money or injected capital (for
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shares).
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A difference is made between assets (e.g. a building) and expenses (e.g. fuel)
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in assets having intrinsic value over time, versus expenses having value in
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them being consumed for the company to "work".
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.. rst-class:: force-right
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.. figure:: images/accounts.png
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:align: center
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Assets = Liabilities + Equity
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What is owned has been financed through debts to reimburse or acquired
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assets (profits, capical).
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Journals
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========
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Accounting journals record business financial transactions as *journal
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entries* before posting entries to account-specific ledgers.
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To each financial document (invoice, bank statement, receipt, loan agreement)
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corresponds a *journal entry*.
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Each journal entry is composed of multiple *journal items*.
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Each journal item represents a single change (debit or credit) to a single
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account.
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In *double-entry bookkeeping*, a journal entry must be balanced by having the
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sum of all its debits be equal to the sum of all its credits. A journal entry
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is thus composed of at least two *journal items*, a debit and a credit, and
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involves at least two accounts.
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Conventionally, all *debits* in journal entries are written first, with the
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account name flush with their column, followed by all *credits* indented
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slightly (to match the position/offset of the corresponding amount
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column). Journal entries can include a note providing context for the
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transaction.
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A journal entry almost always corresponds to a separate justifying document:
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invoice, pay slip, …. Financial audits may include matching "hard" evidence to
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journal entries.
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Journal entries are generally triaged into accounting journals based on their
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classification or frequency. Common accounting journals are:
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* Sales journals with all client transactions
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* Purchase journals with supplier transactions
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* Bank journals with bank statements
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* Cash journals for each cash account or post
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.. rst-class:: force-right
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Transactions
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------------
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.. h:div:: journals
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needs javascript
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Ledgers
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=======
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Where journals are general transaction logs (usually contextual on transaction
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type or frequency), ledgers are change logs for a single account (or as a
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central repository for all account changes when it comes to *general
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ledgers*).
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.. todo:: is there a concept of ledger in Odoo?
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Ledgers are collections of T-accounts which summarize operations affecting a
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specific account. T-accounts are shaped thus because they are shaped as a T,
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with debits under the left arm and all credits under the right arm of the T:
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T-accounts can also be used as temporary scratch space when preparing
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transactions by hand.
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.. rst-class:: force-right
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T-accounts for the transactions
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-------------------------------
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.. h:div:: t-accounts
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needs javascript
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Chart of Accounts
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=================
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The **chart of accounts** lists all balance sheet (assets, liabilities) and
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P&L (revenue, expense) accounts. These accounts are used to organize and
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classify the finances of the company to better understand the company's
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financial state, and the chart can be used to get a snapshot of a company's
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financial period.
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.. rst-class:: force-right
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Balance = debit - credit
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------------------------
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.. h:div:: chart-of-accounts
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Requires javascript
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Debit and credit
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================
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Accounting debit and credit don't necessarily match non-accountant intuition:
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whether a credit may increase or decrease the amount in the account depending
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on the account's nature, same for the debit: debits will increase debit
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accounts and decrease credit accounts while credits will increase credit
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accounts while decreasing debit accounts.
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A way to find out what is debit and what is credit is to start from a known
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operation.
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For instance to know the entries associated to a client's invoice, remembering
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that adding money to a bank account is a *debit* (in accounting terms):
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* when the invoice is paid, money is added to the bank account -> debit on the
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bank account
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* the bank statement on payment will thus be a debit on the bank account and a
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credit on the receivable
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* the invoice must thus be a debit on receivable and a credit on income.
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.. rst-class:: force-right
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Follow the money
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----------------
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1. Customer Payment: Increase bank account, it's a Debit. Thus, the receivable
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is a credit.
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+---------------------+-----+------+
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| |Debit|Credit|
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+=====================+=====+======+
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|Bank Account | 109 | |
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+---------------------+-----+------+
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|| Account Receivable| | 109 |
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+---------------------+-----+------+
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|| Payment by customer XXX |
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+---------------------+-----+------+
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2. As the invoice should compensate the receivable
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+---------------------+-----+------+
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| |Debit|Credit|
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+=====================+=====+======+
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|Account Receivable | 109 | |
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+---------------------+-----+------+
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|| Income | | 100 |
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+---------------------+-----+------+
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|| Taxes | | 9 |
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+---------------------+-----+------+
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|| Invoicing of customer XXX |
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+---------------------+-----+------+
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→ The income should be negative (a credit)
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Closing Fiscal Years
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====================
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While the balance sheet is a snapshot of the company's situation at a specific
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moment (taking in account all events since the company's founding) P&L is
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always analysed over a period.
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In most jurisdictions, a fiscal year is a mandatory P&L report during which
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profits and losses are tallied and committed: the P&L is reset to 0, and the
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net income (revenue - expenses) is either distributed to shareholders (as
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*dividends*) or moved to *retained earnings*. If the company loses money,
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retained earnings may be negative (aka retained losses, accumulated losses or
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accumulated deficit).
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E.g. if a company had 1000€ revenue and 600€ expenses it had a 400€ net
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income. At FY closure the following closure operation is applied: net income
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(debit 400) to retained earnings (credit 400).
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.. rst-class:: force-right
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Ledger for a fiscal year
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------------------------
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.. h:div:: fiscal-year-closing
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+--------------------------+-------------------------+-------------------------+
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| |Debit |Credit |
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+==========================+=========================+=========================+
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|Cash | 800 | |
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+--------------------------+-------------------------+-------------------------+
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|Accounts Receivable | 200 | |
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+--------------------------+-------------------------+-------------------------+
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|| Revenue | | 1000 |
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+--------------------------+-------------------------+-------------------------+
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|| Consolidation of revenues |
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+--------------------------+-------------------------+-------------------------+
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| | | |
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+--------------------------+-------------------------+-------------------------+
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|Revenue | 1000 | |
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+--------------------------+-------------------------+-------------------------+
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|| Income Summary | | 1000 |
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+--------------------------+-------------------------+-------------------------+
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| | | |
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+--------------------------+-------------------------+-------------------------+
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|Expenses | 600 | |
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+--------------------------+-------------------------+-------------------------+
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|| Cash | | 100 |
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+--------------------------+-------------------------+-------------------------+
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|| Accounts Payable | | 500 |
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+--------------------------+-------------------------+-------------------------+
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|| Consolidation of expenses |
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+--------------------------+-------------------------+-------------------------+
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+--------------------------+-------------------------+-------------------------+
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|Income Summary | 600 | |
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+--------------------------+-------------------------+-------------------------+
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|| Expenses | | 600 |
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+--------------------------+-------------------------+-------------------------+
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| | | |
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+--------------------------+-------------------------+-------------------------+
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|Income Summary | 400 | |
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+--------------------------+-------------------------+-------------------------+
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|| Retained Earnings | | 400 |
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+--------------------------+-------------------------+-------------------------+
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| | | |
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+--------------------------+-------------------------+-------------------------+
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|Retained Earnings | 200 | |
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+--------------------------+-------------------------+-------------------------+
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|| Dividends Payable | | 200 |
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+--------------------------+-------------------------+-------------------------+
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Reconciliation
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==============
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Operations in a company's account are independent e.g. the invoices a company
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emits and the payments it receives are separate journal entries and the
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account operations are not correlated.
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It's thus easy to know how much was sold (income account) and how the company
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is still owed overall (receivables) but not how much a specific client owes
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or which specific invoices are still unpaid (e.g. to send reminders).
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Reconciliation is the process of correlating and linking journal items,
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matching the credits and debits of a specific account.
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The reconciliation process is thus: look for non-reconciliated items for an
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account, and link debits with credits, possibly with multiple items on one
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side. For instance a 121€ invoice (debit to the receceivable) with two
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payments for 50€ and 71€ (credit to the receivable).
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The system can then use reconciliation to automatically mark invoices as paid,
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prepare and send reminders, flag accounting issues, …
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.. h:div:: force-right
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An invoice is sent:
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+---------------------+-------------------------+------+
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| |Debit |Credit|
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+=====================+=========================+======+
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|Accounts Receivable |.. h:div:: arrow | |
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| | | |
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| | 100 | |
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+---------------------+-------------------------+------+
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|| Sales | |100 |
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+---------------------+-------------------------+------+
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|| Sale to XXX |
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+------------------------------------------------------+
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A payment is received:
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+-------------------------+-----+-------------------------+
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| |Debit|Credit |
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+=========================+=====+=========================+
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|Cash |90 | |
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+-------------------------+-----+-------------------------+
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|Rebate |10 | |
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+-------------------------+-----+-------------------------+
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|| Accounts Receivable | |.. h:div:: arrow |
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| | | |
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| | | 100 |
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+-------------------------+-----+-------------------------+
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|| Payment by XXX |
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|| Advance payment rebate |
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+---------------------------------------------------------+
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Bank Reconciliation
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===================
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Bank reconciliation is the process of finding and explaining the differences
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between the bank statements provided by banks and the company's own
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accounting. It is used to both import the bank's operations into the internal
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books (e.g. banking or overdraft fees) and discover issues (missing records,
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checks not passed to banks, operation inversions, …).
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There are two main ways to perform bank reconciliation:
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Intermediate account
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--------------------
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Bank statements can be encoded in a dedicated "bank" account, which is then
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reconciled normally.
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.. h:div:: force-right
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Send a check:
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+--------------------+-----+------+
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| |Debit|Credit|
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+--------------------+-----+------+
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|Accounts Payable |121 | |
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+--------------------+-----+------+
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|| Emitted Checks | |121 |
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+--------------------+-----+------+
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Get the bank statement and encode it:
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+-----------------+-----+------+
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| |Debit|Credit|
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+-----------------+-----+------+
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|Emitted Checks |121 | |
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+-----------------+-----+------+
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|| Bank | | 121 |
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+-----------------+-----+------+
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Then reconcile on the Emitted Checks account, it's a normal reconciliation
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process between two journal items.
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Bank reconciliation
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-------------------
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The operation can also be implemented specifically, this is used e.g. in the
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US. In that situation, each act having to do with a potential bank account
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operation (bank transfer, check, payment notification) is immediately encoded
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to a journal entry and when the bank statement is received its entries are
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correlated to the previously encoded entries.
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In that case, the bank statement does not generate entries, it only points
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to/validates previously created entries.
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.. note:: In Odoo, that would be Pay Invoice -> Import Bank Statement, only
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added to master mid-january.
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