General Ledger System > Understanding a General Ledger System

❑This General Ledger System posts - with no procedural changes - virtually all Financial Transactions - automatically in the background - including all Sales, Receipts, Bills, Payments and Inventory related Financial Transactions when entered through the Accounts Receivable, Accounts Payable, Service Tracking and/or Inventory Tracking & Job Costing modules.

•You do not have to be a CPA to use this General Ledger module

✓However, if you are just now planning the Start Up of this General Ledger System, you may need to confirm some information with your Company's CPA.

•Although this Understanding a General Ledger System chapter is not intended to be a course in Accounting, it will discuss some important Accounting Concepts.

✓So, those person(s) who are using the Accounts Receivable, Accounts Payable, Service Tracking and/or Inventory Tracking & Job Costing modules do not really need to know this information.

✓But, the person who is actually setting up the General Ledger System must have a working knowledge of the Accounting Concepts presented below.

✓This is also the case for any Employee who has been granted Accounting Administrator privileges.

❑Accounting Terms and Types of Reports - There are certain Accounting Concepts and Terminology used within these General Ledger System chapters, that once you understand them, will make the process of starting this General Ledger System much clearer and easier:

•Account Division - Identifies the purpose of the predefined Primary and Secondary Financial Transaction Types - referred to here as Account Divisions - which represent the general Types of Financial Transaction that are maintained by, and reported on, using this (and virtually all other) General Ledger Systems

•Account Groups - Identifies sub-categories which are used to sub-divide the five Primary Account Divisions (i.e., Assets, Liabilities, Equity, Sales and Expenses), and/or Secondary Account Divisions into more finely-tuned user defined Groups of Accounts - see "General Ledger Accounts" immediately below - for improved General Ledger Reporting.

•General Ledger Accounts - Identifies each specific Category of/for a Financial Transaction - defined with an Account Number, and Account Title, and must include assignment to an Account Group (and therefore that Account Group's associated Account Division) which is then used to specify where, how, and why this Type of Financial Transaction will be listed in various General Ledger Reports (e.g., Balance Sheet, Income Statement, Trial Balance)

✓Simply speaking, a General Ledger Account is a member of a list of "Accounts" - each of which is identified with an Account Name (called its Title), a number (the Account Number), and a General Ledger Group (that "holds" and so may report the sum of the dollar Values of each member of that group).

✓All - or some of those Account's or Group's Values - are able to be listed and included/excluded in the various General Ledger Financial Statements and Reports.

•Trial Balance - Provides a view of each General Ledger Account's Balance and is used to Confirm that your Company's General Ledger is in balance, or report that it is not.

✓In Balance = The Total Value posted to all of the Debit Accounts must equal the Total Value posted to all of the Credit Accounts (see the Understanding Debits & Credits chapter for more information).

•Income Statement (sometimes referred to as a Profit & Loss Statement) - Provides a list of your Company's Revenue Accounts with a subtotal, then a list of your Company's Expense Accounts with a subtotal, and the net difference between them (i.e., if your Company's Revenue is greater than your Company's Expenses, there is a Profit, otherwise there is a Loss).

•Balance Sheet - Provides a list of Asset Accounts with a subtotal, then Liability Accounts with a subtotal, and (what is actually) the net difference between them which is the Company's (Stockholders) Equity.

•General Journal - Provides a method for making special adjustment entries that may be posted directly into the General Ledger without using the Accounts Receivable, Accounts Payable and/or Inventory Tracking & Job Costing modules.

❑Understanding Debits & Credits - Perhaps you have heard this expression before:

•In Accounting: "Debits must equal Credits"

✓The sum of all Debit entries must equal the sum of all Credit entries.

✓The rules for Debits & Credits (as outlined below) are Rules.

✓Just remember them - don't question them.

•This may be the most difficult concept for you to understand when first getting involved with any General Ledger Accounting System - manual or automated.

✓This is because the Terms "Debits and Credits" is actually used to describe two very different things.

✓The two definitions for Debits and Credits are stated simply and clearly below. They are:

1.An Account Type Classification: (a noun) - A classification for each Type of Account (i.e., Assets, Liabilities, Equity, Revenue, Expenses)

a.Assets represent the things your Company Owns which have monetary Value

b.Liabilities represent the monetary Values your Company Owes

c.Equity is the Value of your Company (i.e., Assets - Liabilities)

d.Revenue represents the Sales made by your Company (usually reported based on a specified Accounts Period)

e.Expenses represents the Purchases made by your Company (usually reported based on a specified Accounts Period)

2.An Action on an Account Type: (a verb) - The action of actually posting Financial Transaction Amounts to one of those Type of Accounts.

a.Adding a Value to the current balance of any Type of Account

b.Subtracting Value from the current balance of any Type of Account

✓Continuing with the "Debits must equal Credits" discussion, the sum of all Debit entries must equal the sum of all Credit entries.

▪This means that you can never make one entry, you will always make a minimum of two (a Debit entry and a Credit entry of the same Value) when entering a Financial Transaction.

▪By internally obeying this "Debits must equal Credits" methodology (rule), the General Ledger automatically stays "in-balance".

▪This is what's known as "Double Entry Bookkeeping" (see below, and read a more complete explanation in the related Double Entry Bookkeeping chapter which provides detailed information).

❑Double Entry Bookkeeping

•When recording any Financial Transaction, the sum of all Debit entries must equal the sum of all Credit entries, and each Financial Transaction must have at least one Debit and one Credit entry..

✓Double Entry Bookkeeping is simply a method used to make sure your "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 your Assets and your Expenses - when added together, will equal the same total as when your Liabilities, Sales and Equity accounts are added together.

•So, because that is true (it's the rule!), whenever you make an entry into one of these two column's set of Values, if you add to one, you must add to the other - and visa-versa - if you subtract from one you must subtract from the other.

✓Debits and Credits - The column on the left of a Double Entry Bookkeeping journal is called the Debit column, the column on the right is called the Credit column.

✓What?! See the Double Entry Bookkeeping chapter.

❑What's Next?

•Read the Accounting Terminology, Understanding Debits & Credits, and Double Entry Bookkeeping chapters for more detailed information about the concepts presented above.

•Then, if your Company is new to the MKMS General Ledger System, read the General Ledger Start Up Overview chapter.

•Otherwise, if your Company is upgrading from a previous version of the MKMS General Ledger System, read the General Ledger Upgrade Overview chapter.

•Finally, Complete all of the recommended Maintenance Entries.