General Ledger System > Understanding a General Ledger System

❑Double Entry Bookkeeping = The sum of all Debit entries must equal the sum of all Credit entries.

•This is the great mystery known and understood only by Accountants - well maybe not.

✓Just to dispel the mystery, a rudimentary version of Double Entry Bookkeeping was used by the Romans, and later a more advanced version by middle eastern countries, then most famously, by the Venetians in the 15th and 16th Century.

✓So, Double Entry Bookkeeping is not a new concept.

▪Double Entry Bookkeeping is simply a method used to make sure your Company's "books" stay properly balanced at all times.

▪It assumes that there are two columns of values (monies) - each with the same total value.

▪That value set says that when all the values in your Company's Assets and your Company's Expenses, if added together, will equal the same total as when all the values in your Company's Liabilities, Sales and Equity accounts are added together.

▪This is one of those "Rules" we warned you about before - so just accept it.

✓So, if that is true - and it must be because it is a "Rule" - whenever you make an entry into this "two column set of values", if you add to one column, you must add to the other column - and visa versa - if you subtract from one, you must subtract from the other.

▪You may also add to an account in one column and then subtract from another account in the same column - thus that column remains in balance with the other column.

▪In all of these cases, you make at least two entries to complete an update to your Company's financial records - those two columns.

▪In some cases, three or more entries may be made in the same Financial Transaction set, but the sum of all the entries in the first column (Debits) will equal the sum of all entries in the second column (Credits).

✓Debits and Credits - The column on the left is called the Debit column, the column on the right is called the Credit column.

▪This is also one of those "Rules" we warned you about - so just accept this one, also.

•The goal of Double Entry Bookkeeping is that your Company's General Ledger will always be Balanced; and that means the Balance Sheet (i.e., Assets = Liability + Equity), and Trial Balance (i.e., Assets + Expenses = Liability + Equity + Sales) are correct - and therefore "in-balance"

❑Transaction Examples:

•Here are some practical examples of Double Entry Bookkeeping where the "Debits equal the Credits":

➢Note: Once the General Ledger is properly Setup:

a)All of the Financial Transaction examples explained below would occur automatically within the General Ledger System.

b)The User does nothing extra when making an entry into any Accounting module (i.e., the Accounts Receivable, Accounts Payable, and Inventory Tracking modules).

c)The four examples below are presented here to enhance your understanding of the Double Entry Bookkeeping concept and process.

❖Posting a Sale to a Subscriber - Conversationally: this is easy to understand. If you make a Sale, to record it in your Company's "books" you should also make an entry that says your Company is owed the money for that sale.

▪The "sale" amount naturally would be the same as the "owed by the customer" amount.

oThis is the basic concept of posting a Sale using Double Entry Bookkeeping.

oAlso, in this example you will see that multiple Debit and Credit entries are required to fully "explain" this Financial Transaction.

▪The Sale amount (as a reminder: Sales are classified as a Credit Account Type) is added (a Credit action) to the General Ledger account number identified for that sold item in the Sale-Purchases Items Form.

▪That same Sale amount is also added (a Debit action) to the Accounts Receivable account (Accounts Receivable is an Asset account, which are classified as a Debit Account Type) - and represents the other half of this "Debits must equal Credits" Financial Transaction example.

1.To account for the Profit (or loss) on the Sale if the Sale item is not an Inventory item, a positive Sale amount will Debit (add to) the Earnings Posting Special Debit Account (the Net Income which results in an increase in Profit) and Credit (add to) the Current Earnings Equity Account - a negative Sale amount (i.e., a Credit Memo) requires exactly the opposite set of entries.

2.If the Sale item is an Inventory item, a different set of entries are required for tracking the Cost of the Goods that were Sold ("COGS"), because the Value of the COGS Financial Transactions must also be calculated and recorded:

a.COGS Amount - The current COGS Value of the Inventory Item (as currently stored on the Sale-Purchases Items Form) is multiplied by the Quantity of the Inventory Item that is being sold, to calculate the COGS Amount.

b.That COGS Amount is Credited (subtracted) from the Inventory Asset Account

c.That COGS Amount is Debited (added) to the COGS Expense Account

d.The Net Profit Amount of the Detail Line Item (i.e., The Net Profit Amount of the Detail Line Item does not include the Sales Tax charged (if any), nor the COGS Amount posted above) - is Credited (added) to the Current Earnings Equity Account.

e.That same Net Profit Amount is Debited (added) to the Earnings Posting Special Expense Account.

❖Charging Sales Taxes - Conversationally: this is not quite as easy to understand, but it does explains the process of making more than two entries to record a Financial Transaction in your Company's "books". If you make a Sale (Invoice) that has been charged sales tax, and record that sale in your "books" in addition to making an entry for the actual sale amount, you must make an entry that says you owe the sales tax that was charged on that Invoice to someone else, and you should, of course, also make an entry that says your customer owes the money to your Company for that sale and its sales tax, too. But this time, the "sale" amount would not be the same as as the "owed by the customer" amount, because the customer owes you for the sale (your money) and for the sales tax, as well (which initially is collected by you but ultimately must be sent to the governmental taxing authority).

▪First, the Sale (Sales are classified as a Credit Account Type) is added (a Credit action) to the General Ledger account number identified for that item in the Sale-Purchases Items Form.

▪That same amount is also added (a Debit action) to the Accounts Receivable account (Accounts Receivable is an Asset account and so is classified as a Debit Account Type)

▪But when you charge a Subscriber Sales Tax (local and/or national), you are technically holding that money until you file the appropriate Department of Revenue's Sales Tax Return and actually send that money to the governmental (local and/or national) taxing authority .

▪So, the Sales Tax amount is added to a Sales Tax Liability Account (you Credit this Credit Account Type) because you are obligated to pay that sales tax money to someone else in the near future.

oYou must have defined a Sales Tax Liability Account - a Mandatory Account - to accept this Sales Tax entry.

▪In addition to the Sale Amount you posted above, you must also add that Sales Tax amount to your Accounts Receivable account (you Debit a Debit Account Type) which represents the other half of the Sales Tax Financial Transaction

oIts held in the Accounts Receivable account because you have Invoiced the Subscriber for the Sales Tax (as well as the Sale itself), but have not yet received that revenue.

❖Posting a Bill from a Vendor - Conversationally: this is also easy to understand. If you make a Purchase, and record it in your "books" you should also make an entry that says you owe someone money for that Purchase. The "purchase" amount naturally would be the same as the "owed to the vendor" amount. This is the basic concept of recording a purchase using Double Entry Bookkeeping.

▪The Purchase (an Expense - which is a Debit Account Type) is added (Debited) to the General Ledger account number identified for that item in the Sale-Purchases Items Form.

▪That same amount is added to the Accounts Payable account (a Liability - which is a Credit Account Type) representing the other half of the Financial Transaction.

▪To post the resulting Profit & Loss (Loss) information for the Purchase: the Amount of the Purchase will be Credited to the Special Earnings Account (which results in a decrease in Profit) and Debited to the Current Earnings Equity Account (which also results in a decrease in Profit).

▪To post the resulting Profit & Loss (Profit) information for a negative Purchase (Vendor's Credit Memo): the Amount of the Credit Memo will be Debited to the Special Earnings Account (which results in an increase in Profit) and Credited to the Current Earnings Equity Account (which also results in an increase in Profit).

❖Paying Sales Taxes - When you are being charged Sales Tax (Local and/or National) by a Vendor, you are incurring an Expense.

▪The Purchase (including the Sales Tax) is added (Debited) to the Expense Account (a Debit Account Type) identified for that Purchase in the Sale-Purchases Items Form.

▪That amount (including the Sales Tax) is also added to your Accounts Payable account (a Credit posted to a Credit Account Type) representing the other half of the Financial Transaction.

▪When that Bill is Paid, it will decrease (Debit) the Accounts Payable account and decrease (Credit) the balance of the Bank Account from which the Payment (Check) was issued..

•So, aren't you glad that the MKMS General Ledger System enters all of these Financial Transactions for you, automatically!