Use of, and Purpose for Mandatory Accounts

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Use of, and Purpose for Mandatory Accounts

This Help File Page was last Modified on 03/10/2018

Understanding how General Ledger Financial Transactions are Posted

 

In the Financial Transaction examples described below:

1.When discussing a Debit  Account Type: the term Debit means "to add to that Account's balance", and Credit  means "to take away from that Account's balance"  

2.When discussing a Credit  Account Type: the term Credit may means "to add to that Account's balance", and Debit  means "to take away from that Account's balance"  

 

If these example Financial Transaction entries confuse you (and initially they very well may), consider reviewing  the Understanding the General Ledger System chapter and its associated Debits & Credits sub-chapter.

 

Mandatory Accounts are required for posting the following types of Financial Transactions

Mandatory Accounts are identified as part of the required data entries for the General Ledger Wizard Setup - specifically in the Account Declaration Form are:

1.Current Earnings - This must be created as the Equity Account for Current Earnings.

2.Retained Earnings - This must be created as the Equity Account for Retained Earnings.

3.Earnings Posting - This must be created as the Special Expense Debit  Account for Posting Earnings.

4.Accounts Receivable - This must be created as the Asset Account for Accounts Receivable.

5.Accounts Payable - This must be created as the Liability Account for Accounts Payable.

6.Undeposited Funds - This must be created as the Asset Account for Undeposited Receipts

7.Inventory - This must be created as the Asset Account for Inventory. 

8.Inventory Adjustments - This must be created as the Expense Account for Inventory Adjustments 

9.WIP Inventory - This must be an Asset Account for the Inventory Items that have been identified as part of a Work In Progress.

10.Inventory Purchases -  This must be created as the Liability Account for Inventory Purchases

11.COGS (Cost of Goods Sold) - This must be created as the Expense Account for Cost of Goods Sold.

12.Local Tax (Liability) - This must be created - regardless of whether or not you must charge that tax - as the Liability Account for Local Sales Tax Liability.

13.National Tax (Liability) - This must be created - regardless of whether or not you must charge that tax - as the Liability Account for National Sales Tax Liability.

14.Customer Deposit (Liab) - This must be created as the Liability Account for Advance Deposits.

 

Canadian Sales Tax:

1.(15.) HST/GST (Asset) - Only required when the CanadaTax option is set to True ("T") in the Company Settings list, this field must be the Asset Account designated for HST/GST tax collections.

2.(16.) PST (Expenses) - Only required when the CanadaTax option is set to True ("T") in the Company Settings list, this field must be the Expense Account designated for PST tax charges.

 

Earnings related Financial Transactions which use one or more Mandatory Accounts:

Current Earnings - This is the Equity Account that stores your Company's Current Earnings balance and it is a Credit  Account type.

Current Earnings - Recorded Current Earnings (for the purpose noted above) as follows: Credited (added) to this Equity Account if this Financial Transaction is recording a Sale; and Debited (subtracted) from this Equity Account if this Financial Transaction is recording a Purchase

The Current Earnings Account (which, if you are using the recommended Numbering Range, will be an Equity Account type numbered between 3000 and 3999)

It is used to record your Company's Profit (or Loss) in real-timenot as a result of Closing a Month procedure as most other General Ledger software packages attempt to do.

The "Earnings Posting" discussion immediately below covers this concept in more detail.

 

Earnings Posting - This is the Special "Earnings Posting" Account that also stores your Company's Earnings balance and it is a Debit  Account type.

Closing a Month - Your Company's Profit (or Loss) is recorded in real-timenot as a result of Closing a Month (which typically ends access to an Accounting Period).

Current Earnings - Recorded as they occur in the Current Earnings Equity Account (one of the Mandatory Accounts as noted above) - Credited (added) to this Equity Account if the Financial Transaction is recording a Sale; and Debited (subtracted) from this Equity Account if this Financial Transaction is recording a Purchase - the Current Earnings Account (which is an Equity Account type (numbered between 3000 and 3999, if you are using the recommended Numbering Range), and 

Earnings Posting - Recorded as they occur in the Earnings Posting Special Debit  Account (one of the Mandatory Accounts as noted above) - Debited (added) to this Special Account if the Financial Transaction is recording a Sale; and Credited (subtracted) from this Special Account if this Financial Transaction is recording a Purchase - the Earnings Posting (which is an Debit  Account type (numbered 9999, if you are using the recommended Numbering Range).

 

Profit (or Loss) - The Current Earnings Equity Account, and Earnings Posting Special Account entries are automatically posted each time a Sale and/or Purchase entry is recorded!

Therefore, no Profit (or Loss) entry is required during any regular Month Closing process.

About the 9999 Account - if you are using the recommended Numbering Range The "9999" Earnings Posting Special Debit  Account referred to above must be created as the Account that will be used for Earnings Posting.

oIt must be identified as an Expense Type of Account (see the Account Divisions chapter for more information about Types of Accounts).

oTypically, it is given the Last Number within your Company's adopted Numbering Range for Expense Accounts.

 

Closing a Year - When the Fiscal Year is to be Closed:

A.As part of the Year Closing process, the Value for each Sale and Expense General Ledger Account - for the Fiscal Year that is being Closed - will automatically be reset to 0.00 which includes the Earnings Posting Account (9999 or whatever Number is being used by your Company for this Earnings Posting Account).

B.All other Financial Transaction Balances associated with the Balance Sheet - which may have been posted to any future Period(s) - are preserved. 

C.Only your Company's Year-end final Profit (or Loss) must be posted manually to the Retained Earnings Equity Account  

D.Therefore, immediately after Closing a Year ( meaning all Year-end General Journal entries from your Company's CPA have been made, and no other changes to Financial Transactions will be required for that Fiscal Year), a General Journal Entry must be created to move the Balance of the Current Earnings Equity Account (one of the Mandatory Accounts) for the Fiscal Year that was just Closed, to the Retained Earnings Equity Account (another one of the Mandatory Accounts). This is usually done on done (dated) on the first day of the next Fiscal Year.

1.To do so, examine the Balance Sheet report for the Fiscal Year that was just closed to determine whether there was a Profit or a Loss reported for Current Earnings. 

2.Note the Amount of that reported Profit or Loss

3.Use the General Journal to move that specific Profit or Loss Amount from the Current Earnings Equity Account to the Retained Earnings Equity Account following the instructions below:

 

Important: 1. Date the Financial Transactions outlined below on the first day of the Fiscal Year immediate following the Fiscal Year that is being Closed:

 2. The Current Earnings Account Balance may include other Earnings from (future) Accounting Periods beyond the Fiscal Year being closed.

 3. Therefore, use the Balance Sheet created with the appropriate As Of Date for the Fiscal Year being closed to determine the Current Earnings Amount which must be moved to the Retained Earnings Account

 

i.If there was a Profit reported in the Current Earnings Equity Account for the Fiscal Year that was just closed:

a)Debit (reduce) the Current Earnings Equity Account by the full Amount of those Current Earnings Profit (thus returning it to $0.00).

b)Credit (increase) the Retained Earnings Equity Account by the same Amount.

ii.If there was a Loss reported in the Current Earnings Equity Account for the Fiscal Year just closed:

a)Credit (increase) the Current Earnings Equity Account by the full Amount of those Current Earnings Loss (thus returning it to $0.00). 

b)Debit (decrease) the Retained Earnings Equity Account by the same Amount.

 

Purchases related Financial Transactions:

Accounts Payable - This is the Liability Account that stores your Company's Accounts Payable balance due.

Posting a Bill from a Vendor - With the exception of Inventory related Detail Line Items which follow the posting process described in "Inventory related Financial Transactions" #1 and #3 below, the Purchase (e.g., each Detail Line Item entered on a Bill) is Debited (added) to the General Ledger Account Number identified for that Purchase in the Purchases Items Form, and the Credited (added) to the Accounts Payable Account which completes the other half of that Financial Transaction (also see the  "Paying Sales Taxes" discussion below).

Posting the Profit (Loss) - As each Detail Line Item on a Bill is entered, that Amount (including the Sales Tax) is posted to the Current Earnings Account as follows: 

oDebited (subtracted) from the Current Earnings Account if this is a Bill; but Credited (added to) the Current Earnings Account if this is a Credit Memo

The similar process is used to post to the Earnings Posting Account.

oCredited (subtracted) from the Earnings Posting Account if this is a Bill; but Debited (added) to the Earnings Posting Account if this is a Credit Memo

Inventory related Detail Line Items follow a different Profit (Loss) posting process 

oSee the "Inventory related Financial Transactionsdiscussion below and the "Posting Inventory Purchase Transactions" discussion in the Understanding Inventory related Counts & Financial Transactions chapter for that information.

 

Paying Sales Taxes - When your Company is being charged Sales Tax by a Vendor, your Company is just incurring another Expense.

Therefore, the Sales Tax Amount on a Purchase is added to and included in the Amount that is posted to the Expense Account of the Purchase itself (it represents part of the cost of what was purchased, just as much as the product itself).

The Accounts Payable Account represents the other half of the Financial Transaction because you must eventually pay that Vendor for the Sales Tax - as well as the Purchase.

Therefore, the Sales Tax Amount is included as part of the Accounts Payable Account posting Amount (see "Posting a Bill from a Vendor" above).

 

Providing Deposits to Vendors - All monies paid to a Vendor are posted as Payments.  

If a Vendor requires the payment of an advance Deposit for future Product or Service (e.g., Rent, Electric, Telephone), that Deposit must be recorded as an Asset

They - the Vendor who received the Deposit - owes that Deposit's Value to your Company and must eventually return it, or provide an equivalent Value of Products or Services for it.

When you record that Deposit to that Vendor, you do not (yet) have a Bill from them.

oSo, that Deposit is still your Company's money.  

oThe Vendor is just holding it for a while, and eventually will give it back (either as Cash, or as a Product or Service).

The Amount of that Deposit to a Vendor is Credited (subtracted) from the General Ledger Account Number of the selected Bank from which the Deposit is taken, and Debited (subtracted) from the Accounts Payable Account.

When the Bill is created for those products or services for which the Deposit was provided, the General Ledger Account Number for Expense Account identified in the Purchases Items Form for those Products or Services will be Debited; and the Accounts Payable Account will be Credited (Accounts Payable was previously reduced in anticipation of this Bill, and so will now be increased - thus completing that Deposit transaction).

 

Sales related Financial Transactions:

Accounts Receivable - This is the Asset Account that stores the balance of the monies owed to your Company by your Subscribers and so represents your Company's Accounts Receivable.

Posting a Sale to a Subscriber - A Sale (e.g., each Detail Line Item entered on a Sales Invoice) is Credited (added) to the General Ledger Account Number identified in the Sale-Purchases Items Form which represents the Sales Category for what was sold, and also Debited (added) to the Accounts Receivable Account which represents the other half of that Financial Transaction.

Posting the Profit (Loss) for a Sale - As each Detail Line Item on an Invoice is entered, that Amount (not including Sales Tax - see the "Local Tax (Liability) and National Tax (Liability)" discussion below) is Credited (added to the Current Earnings Account), and the Amount (not including Sales Tax - see the "Local Tax (Liability) and National Tax (Liability)" discussion below) is Debited (added) to the Earnings Posting Account.

Posting the Profit (Loss) for a Credit Memo - As each Detail Line Item on a Credit Memo is entered that Amount is Debited (subtracted from) the Current Earnings Account, and that Amount is Credited (subtracted) from the Earnings Posting Account. 

 

Sales of Inventory Items on Detail Line Items follow a different Profit (Loss) posting process as described in the "An Overview of the various Inventory Tracking System Processes" section of the Tracking Inventory Values & Quantities as Assets, Liabilities, Sales & Expenses chapter.

When any Detail Line Item on an Invoice represents the Sale of Inventory Item(s), these additional Financial Transactions (performed automatically) are required for tracking the Change of the Cost of Goods Sold Expense and Inventory Asset Values, and recording any resulting Profit/Loss:

1.Calculate the COGS Amount - The current COGS Value of the Inventory Item (as currently recorded on the Sale-Purchases Items Form) is multiplied by the Quantity of the Inventory Item that is being Invoiced becomes the calculated COGS Amount.

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

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

4.The Net Amount of the Detail Line Item - excluding the COGS Amount (i.e., The Quantity x Price of that Detail Line Item - but not including any Sales Tax charges - minus the calculated COGS Amount = Net Amount) - becomes the Profit for that Sale (Amount of Profit)

5.Posting the Profit

a)That Amount of Profit is Credited (added) to the Current Earnings Equity Account.

b)That same Amount of Profit is Debited (added) to the Earnings Posting (the Special Debit  Account for Posting Earnings).

 

Local Tax (Liability) and National Tax (Liability) - These are the Liability Accounts (two of the Mandatory Accounts) that store your Company's Local and National Sales Tax Liability balance.

Charging Sales Taxes - When you charge a Subscriber for Sales Tax (local and/or national), your Company is simply holding those funds until you file the associated Department of Revenue's Sales Tax Return and actually send those funds to the State (or who ever is the appropriate governmental authority).  

Internally, the Sales Tax entry is posted to the appropriate Sales Tax Liability Account because you are liable for the payment of those funds to someone else in the near future.

So, you must define a Local Tax (Liability) Account, and a National Tax (Liability) Account Mandatory Account - even if you don't need it - to accept this Sales Tax entry, when and if necessary.

The Accounts Receivable Account represents the other half of the Tax (Liability) Financial Transaction because you have also Invoiced the Subscriber for that Sales Tax, but have not yet received it

oTherefore, the Amount of the Sales Tax that was charged is also Debited (added) to the Accounts Receivable Account as described above in Posting a Sale to a Subscriber.

 

Receipts related Financial Transactions:

Undeposited Funds - This is the Asset Account that stores the Value of your Company's Undeposited Receipts.

Receipts - Normally, when a Receipt from a Subscriber is entered, the Amount is initially Debited (added) to the Undeposited Funds Asset Account; and that same Amount is Credited (subtracted) from the Accounts Receivable Asset Account which represents the other half of that Financial Transaction (unless the Receipt has been designated as a Customer Deposit which is explained in the "Customer Deposit (Liab)" discussion immediately below).

Receipt record may be Edited and/or Deleted until it is identified as having actually been Deposited into a Bank (see the "Bank Deposit - The Bank Deposit Form" discussion later in this chapter).

Once it is Deposited, that Amount is Debited (added) to the appropriate Bank Asset Account and Credited (subtracted) from the Undeposited Funds Asset Account.

 

Customer Deposit (Liab) - This is the Liability Account that stores the Value of any Deposit that your Company's accepts in advance of an anticipated Sale.

Customer Deposit - When you accept a Receipt from a Subscriber that is meant to be a Deposit paid in Advance for a future Sale, an Invoice does not yet exist.

Therefore, when a Subscriber pays a Salesperson a Deposit for future work, that Deposit is a Liability (i.e., your Company owes them a product or service for that Deposit - typically an installation - but your Company has not yet provided it, nor have you actually invoiced them for it).

If the Amount of the Receipt from a Subscriber is accepted as an Advance Deposit that's being provided in anticipation of a future Sale to that Subscriber: the acceptance of those funds is not actually affecting your Company's Accounts Receivable Account balance.

When the Customer Deposit box is Checked on the Receipts Form (thus identifying it as an Advance Deposit), that Receipt Amount will be:

a.Credited (added) to the Customer Deposit (Liab) Account, and

b.Debited (added) to the Undeposited Funds Account.

This Deposit Amount is not available to apply (Allocate) to any Sale (Invoice) until it is converted to an actual Receipt (i.e., re-identified as Money to be applied to - as a payment for - a specific Sale (Invoice).

oIdentifying a Receipt as a Customer Deposit will also activate the Make Receipt option (see below) on the Receipts Form.

 

Make Receipt option - At some point a Customer Deposit will be converted to an actual Receipt.

To do so, Click the Make Receipt option on the Receipts Form 

a.The Amount of the Customer Deposit will be Debited (subtracted) from the Customer Deposit (Liab) Account, and 

b.That same Amount will be Credited (subtracted) from the Accounts Receivable Account - which represents the other half of that Financial Transaction.

 

Allocating a Receipt - Any Receipt - which is not identified as a Customer Deposit - may be allocated to any Open Invoice(s), all of which will be displayed in the Open Invoices section at the bottom of the Receipts Form and will also be accessible from the Receipt Allocations Form.

General Ledger System - No Financial Transaction entries are required when a Receipt is allocated to a specified Invoice because the required Financial Transactions have already been, and/or will be posted as needed, when the Receipt is actually Deposited into a Bank (see the "Understanding how other Financial Transactions are Posted - Bank Deposit" discussion immediately below).

oHowever, to properly identify which Receipts "paid" for what Invoices (on certain reports and the Subscriber's Ledger Card), eventually all Receipts do need to be appropriately Allocated to the correct Invoices.

Pay - Within the Open Invoices section at the bottom of the Receipts Form, Check the Pay box of any Open Invoice record listed in the Open Invoices section to indicate the current Receipt is to be allocated to those selected Invoice(s).

Post - Click the Post button and confirm the Allocation Date (if requested) to complete this allocation action.

 

Understanding how other Financial Transactions are Posted - When using the following special purpose Forms, this section discusses when and how these special purpose Forms should be used (except for what is discussed below, all other Receipts and Invoice related General Ledger Financial Transactions (i.e., Accounts ReceivableCustomer Deposit (Liab)Posting the Profit (Loss)) are updated, as needed, during the other Receipt and Invoice associated posting steps as documented previously in this chapter):

Receipts Posting Form - The Receipts Posting Form is designed for rapidly entering multiple Receipts and posts the Financial Transactions to the General Ledger System as follows:

a)Debits (adds) the Receipt Amount to the Undeposited Funds Asset Account (a Mandatory Account), and 

b)Credits (subtracts) that Amount from the Accounts Receivable Asset Account (also a Mandatory Account) which represents the other half of that Financial Transaction.

These Receipts are also Allocated to the proper Invoice(s) automatically - but this action has no associated Financial Transactions.

Once Receipts are recorded, they must be specifically identified as Deposited (see the "Bank Deposit" discussion immediately below).

 

Bank Deposit - The Bank Deposit Form is used to document the actual process of depositing these Receipts.

The Bank Deposits Form may be used to (1) Choose that all listed Receipts are to be identified as deposited; or (2) to Select from the list Receipts (grouped by Batch Number, by default) which have not yet been deposited, and now need to be selectively identified as deposited.

The Asset Account assigned to the Bank into which these Receipts are being Deposited is Debited (added to) for the Gross Amount of all of the Receipts included in that selected Bank Deposit - regardless of whether they represented Receipts identified as Customer Deposits or Receipts which had been designated for paying Invoice(s)

That same Amount will be Credited (subtracted) from the Undeposited Funds Asset Account.

See the Defining your Company's Batch Numbers discussion in the E-Payments chapter for detailed information; and the "Batch Number Assignment" discussion in the Receipts chapter for more information about Batch Numbering.

 

Auto Draft - The Post Auto Draft procedure executes multiple functions:

Debits (adds) the Draft Amount to the General Ledger Account assigned to the Bank (an Asset Account) [note that there is no need to record these as Undeposited Funds because Auto Draft is a direct deposit action], and 

Credits (subtracts) that Amount from the Accounts Receivable Asset Account which represents the other half of that Financial Transaction.

These Drafts are also Allocated to the proper Invoice(s) automatically - but this action has no associated Financial Transactions.

 

Bounce a Receipt - Your Bank has notified you that a previously posted Receipt has Bounced

The Bounce option on the Receipts Form will become active only after the Receipt has actually been Deposited using the Bank Deposit Form.

a.When the Amount of the Receipt - which was for the payment of one (or more) Invoices - has been recorded as Bounced (i.e., the Customer Deposit box was not Checked):

i.The Bounced Amount will be Debited (added back into) the Accounts Receivable Asset Account and 

ii.The same Bounced Amount is Credited (subtracted from) the Bank's Asset Account. 

iii.If that Bounced Amount had been Allocated - that Allocation will be reversed (i.e., Unallocated).

iv.Unallocating that Receipt will have no effect on the General Ledger.

b.However, when the Amount of the Receipt from a Subscriber - that was identified as a Customer Deposit - has Bouncedit does not affect your Company's Accounts Receivable Account balance, but instead:

i.The Bounced Amount will be Debited (subtracted) from the Advanced Deposits Liability Account balance.

ii.The same Bounced Amount is Credited (subtracted) from the Bank's Asset Account

 

Refunding a Receipt - For whatever reason, your Company has decided to Refund a previously Deposited Receipt.

The Refund option on the Receipts Form will become active only after the Receipt has actually been Deposited using the Bank Deposit Form.

When a Refund is entered:

i.The Amount of that Refund will be Debited (added) to the Accounts Receivable Asset Account.

ii.The same Amount will be Credited (subtracted) from the Bank's Asset Account

 

Next, Hand Write a Check to that Subscriber for Amount of the Refund.

oNo other General Ledger Account Transactions are required.

oHowever, the Check Number should be Voided and a note made on the Cash Receipts Report which lists the Refund identifying the Check Number which was used to make that payment.

oThis information will be needed when performing the Bank Reconciliation process.

 

Finally, if an Invoice was Unallocated as part of this Refund process, a Credit Memo must be Issued for that Refund Amount, and that Credit Memo must be applied to the appropriate Invoice.

oThis procedure will Debit (reduce) the appropriate Sales Account balance(s) and Credit (reduce) the Accounts Receivable Asset Account for that Refund Amount.

 

Deferred Revenue related Financial Transactions (See the "An Overview of Earned and Deferred Revenue Tracking" discussion at the beginning of the Deferred Revenue Start Up chapter for more in formation):

Deferred Revenue - This is the Liability Account that stores the balance (Value) of your Company's Deferred Revenue (i.e., the portion of any Sale that has not yet been Earned)

If your Company will be tracking Earned versus Deferred Revenue (as it should), a Deferred Revenue Liability Account must be identified as part of executing the Deferred Revenue Setup procedure.

Therefore, the Deferred Revenue Liability Account must be defined prior to executing that Deferred Revenue Start Up Procedure.

 

When Earned and Deferred Revenues are being tracked:

1.The Gross Amount (including Sales Tax, if charged) of each Recurring Revenue Sale is Debited (added) to the Accounts Receivable Asset Account (a Mandatory Account).

2.The Net Amount (not including any Sales Tax) is Credited (added) to the associated Deferred Revenue Liability Account

3.If Sales Tax was charged, the Amount of that sales tax is Credited (added) to the appropriate Sales Tax Payable Liability Account (i.e., Local, National, or both, as needed).

4.Then, once each month, the Post Deferred Revenue dialog is used to calculate portion of previously Deferred Revenue that may now be considered Earned Recurring Revenue for a selected Accounting Period.

This Deferred Revenues posting process executes the following Financial Transactions:

a)The Deferred Revenue Liability Account is Debited (reduced) by the Value of the Recurring Revenue that was Earned during the designated Accounting Period

b)The Sales Account assigned to the Recurring Revenue Item is Credited (increased) by the Value of the Recurring Revenue that was Earned during the designated Accounting Period

c)The Current Earnings Equity Account (a Mandatory Account) is Credited (increased) by the Value of the Recurring Revenue that was Earned during the designated Accounting Period

d)The Earnings Posting Special Debit  Account (a Mandatory Account) is Debited (increased) by the Value of the Recurring Revenue that was Earned during the designated Accounting Period

 

Inventory related Financial Transactions:

First, the recommended Inventory Valuation Methodology (it is now set as the default valuation method in the latest version of MKMS) is the LIFO method, and is the required Inventory Valuation Method when using the General Ledger System in conjunction with Inventory Tracking.

 

There are five Inventory Tracking System related General Ledger Accounts which must be defined (for later use when tracking the Value and Usage of your Company's Inventory)

1.Inventory - This is the Asset Account that stores the Value of your Company's Inventory when it is initially received via a Purchase Order.

2.Inventory Adjustments - This is the Expense Account that stores your Company's positive and/or negative Inventory Adjustments.

3.WIP Inventory - This is the Asset Account that stores the Value of your Company's Inventory Items which have been identified as part of a Work In Progress.

4.Inventory Purchases -  This is the Liability Account that temporarily stores your Company's Inventory received via Purchase Orders until a Bill is created.

5.COGS (Cost of Goods Sold) - This is the Expense Account that stores your Company's Cost of Goods Sold when an Inventory Item in Invoiced to an end-user.

 

See the "An Overview of the various Inventory Tracking System Processes" section of the Understanding how Inventory Values & Counts are Calculated chapter for this information.