..of Duane & Eva's Old Kentucky Home PageDuane Bristow (duane@kyphilom.com)
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POSTING HINTS
TYPE AMOUNT ACCOUNT
Sales posting cash or rec. + sales
Rec. on Account cash + accounts receivable
Checks written bank account - expense account if expense
bank account - asset account if equipment etc.
bank account - liability account if paid on
debt or payable if paid on
accounts payable
Bills received accts payable - inventory asset account
or expense account
Bank deposits bank account + cash OR
Bank deposits cash - bank account
cost of sales inventory account - cost of sales expense account
Check # can be used for check number or invoice number.
Vendor # is required for accounts payable and accounts receivable but is
optional otherwise.
The most fundamental report in an accounting system is the
balance sheet. The balance sheet reports the financial status
of a business at a given point in time. It lists the value of
all assets and of all liabilities. Assets less liabilities is
the owner's equity in the business which is also listed, usually
in terms of current earnings, previous earnings and capital
investment. Total assets equals total liabilities plus equity.
Analysis of a business' financial situation usually begins by
comparing balance sheets from two points in time such as the
beginning and end of a year or at the end of this month vs. the
end of last month. The next step in such analysis is to
determine why the changes in the balance sheet occurred. This
is done by means of a profit and loss statement for the time
period between the two balance sheets. The profit and loss
statement shows the totals of revenue accounts and expense
accounts for that time period.
In general asset and expense accounts carry debit balances and
liability and revenue accounts carry credit balances. If the
business is making a profit then equity accounts will carry a
credit balance. If the business is losing money then equity
accounts will carry a debit balance. Usually equity accounts
are of two types, Current and Previous Earnings which are
automatically changed by the accounting system and Capital
Investments, Owner's Draw, and accounting adjustments which
must be manually posted by the bookkeeper.
Errors in accounting can be of two types. One type is an error
affecting asset or liability accounts which makes the subsequent
balance sheets wrong. The other type does not involve asset or
liability accounts and only makes the P & L statement incorrect.
An example of the first type of error would be a check from the
bank posted twice or posted for the wrong amount. An example of
the second type of error would be a payment for telephone
charges which was posted as a payment for electric charges.
Errors are usually found when it is found that a total in a
balance sheet is wrong. The bank account amount may not agree
with the balanced bank statement. A customer may point out an
error in his bill. A physical inventory may not agree with the
totals from the inventory accounts. This means that errors of
the first type above are more likely to be found than errors of
the second type. Fortunately though, errors of the first type
are generally much more serious than errors of the second type.
If an accounting system is to be valid, errors must be found and
corrected as soon as possible. It is also true that errors are
more easily found and corrected on a short term basis such as
daily than if found after a longer period of time such as a
month or a year has elapsed.
Due to the way the PGAS system works any error in the balance
sheet must first manifest itself as an error on the trial
balance. Therefore most, if not all, serious errors in the
system can be prevented if the trial balance is carefully
analysed and any errors corrected before any transactions are
posted to the main accounts.
If this is not done then it may be very time consuming and,
perhaps, impractical to find the source of an error if much time
has elapsed in which the error could have occurred. An
alternative way to correct such errors is to simply adjust the
balance sheet to correct totals by making adjustment
transactions of asset or liability accounts offset to a P & L
account such as adjustments or miscellaneous revenues or
miscellaneous expenses. A sure sign of poor bookkeeping is the
presence of large totals in such catch-all accounts.
Analyzing the Balance Sheet:
The bookkeeper's responsibility is to be sure reports produced
by the accounting system are accurate. A fundamental step in
ensuring this is analysis of the Balance Sheet.
First check the current earnings figure. Is it correct as to
showing profit (credit or negative balance) or loss (debit or
positive balance)? Does the amount of the profit or loss seem
reasonable for this business?
Next look at cash accounts and bank accounts. Check their
accuracy against bank statements and a cash count.
The Cash on Hand account is increased (debited) when cash
is received usually by sales of goods which is offset to
a sales revenue account or by payments on accounts receivable
which is offset against accounts receivable balances for that
customer. The Cash on Hand account is decreased (credited)
when cash is deposited to a Bank Account. At that point
check Cash on Hand balances against a cash count.
Bank Accounts are increased (debited) by deposits from Cash
on Hand or by automatic payments received. Bank Accounts are
decreased by checks written to credit an Expense Account or
to credit a Liability Account such as Accounts Payable.
Check accounts receivable and accounts payable against the
aged accounts report and against bills received from creditors
and bills sent to debtors and their responses if any.
Prepays and gift certificates should be entered into the system
as a credit (minus) to Accounts Receivable and a debit to
Advertising Expenses or to cash in the case of prepays.
Inventory values must be checked against an actual inventory
count and evaluation as must values of all other physical
assets.
Inventory received must be added to each computer inventory
item record and then the invoice received for that inventory
item must be posted as a debit to Inventory Value asset
accounts and a credit to Accounts Payable. When the check
is issued to pay inventory suppliers it must be a credit to
the Bank Account and a debit to the proper Accounts Payable
account.
Inventory Asset Accounts are increased (debited) only when
new inventory is received. Inventory Asset Accounts are
decreased (credited) when goods are sold or when inventory
is adjusted due to a physical inventory count to account for
decreases due to breakage, theft, etc. Postings decreasing
inventory accounts are offset to Cost of Sales expense
accounts. If a physical inventory count is done during a
period in which sales are occurring errors will result if
those sales made during the inventory period are not taken
into account.
The only postings to Cost of Sales expense accounts must come
from actual sales postings or from corrections to inventory
due to a physical inventory count.
Liability Accounts tend to become zero. They are increased
(credited) when a liability is incurred usually by loans
received or by invoices for inventory or goods or services
received or by payroll withholdings. They are decreased
(debited) when a payment is made usually by a check from a
Bank Account. If a payment is made for something that has
never been posted to a Liability Account then that payment
must be posted to an Expense Account, not to a Liability
Account. This is a common accounting error that results
in errors in Liability Account balances.
Increases (credits) to Liability Accounts are increases
(debits) to Expense Accounts or increases (debits) to
Asset Accounts.
Decreases (debits) to Liability Accounts are decreases
(debits) to Asset Accounts.
Increases (credits) to Revenue Accounts are increases
(debits) to Asset Accounts.
Increases (debits) to Expense Accounts are increases (credits)
to Liability Accounts or decreases (credits) to Asset
Accounts.
Try to think of an example of each of the above and then try
to think of a transaction that would not be posted by the
above general rules. (hint: barter?)
Check notes payable against statements received from creditors.
Be sure that payments on notes are broken down and posted to
note liability accounts and interest expense accounts properly.
Check payroll taxes payable against payroll reports.
Be sure that when payroll taxes are paid amounts are broken
down and posted to the proper liability accounts.
Be sure that any money distributed to owners of the business
is posted as either a payroll check, a loan, or a draw.
Depreciation of Assets must be posted periodically as a
credit to the proper asset account and as a debit to the
proper Depreciation Expense account.
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Last revised May 2, 2008.
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Duane Bristow (duane@kyphilom.com)
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