USING ACCOUNTING SYSTEMS
Each accounting system is made up of a collection of ledgers.
They are linked to a central General Ledger, and to each other.
Some links are simple, some are more complex.
Each ledger has an important role in your accounts.
They are linked to a central General Ledger, and to each other.
Some links are simple, some are more complex.
Each ledger has an important role in your accounts.
In this section, each ledger is looked at in turn, explaining what each is for, what it does and
how it relates to your business accounting.
how it relates to your business accounting.
For ease of understanding, where GST is mentioned it, of course, only applies if your business is GST registered.
SALES LEDGER
WHAT IS A SALES LEDGER?
The sales ledger is one of the main ledgers in an accounting system. It is sometimes referred to as being one of the Primary Ledgers. It collates the records of sales made to clients and invoices that have been raised.
That information then links to other ledgers such as the bank ledger (when money is received), and the general ledger. In the general ledger it links in several places: to record the sale as income to the company, to record the invoice as a debt and to record the GST transaction.
If you have charged GST, the sales ledger information also links to your GST module that collates and calculates your GST return.
That information then links to other ledgers such as the bank ledger (when money is received), and the general ledger. In the general ledger it links in several places: to record the sale as income to the company, to record the invoice as a debt and to record the GST transaction.
If you have charged GST, the sales ledger information also links to your GST module that collates and calculates your GST return.
WHAT DOES A SALES LEDGER DO?
The sales ledger records the invoices that have been issued to your clients. The ledger will be split into individual client accounts so that each invoice can be referenced to a client and the client's position can be easily seen.
Each time a sale is recorded to a client, the sales value is recorded in the general ledger and becomes part of the profit and loss report at that point in time. This is part of accrual accounting.
Under double-entry bookkeeping, the unpaid invoice also become a debt, and the client becomes a debtor. Until such time as the invoice is paid, and the debt is settled, the value of the debt sits on the balance sheet as a current asset (something that the business can convert to cash within a short time).
Each time a sale is recorded to a client, the sales value is recorded in the general ledger and becomes part of the profit and loss report at that point in time. This is part of accrual accounting.
Under double-entry bookkeeping, the unpaid invoice also become a debt, and the client becomes a debtor. Until such time as the invoice is paid, and the debt is settled, the value of the debt sits on the balance sheet as a current asset (something that the business can convert to cash within a short time).
Alternate names for sales ledger
The term sales ledger has been around for decades. But technology has given rise to alternate terms and words to describe it. This may be due to space issues (numbers of pixels available) or an attempt to be more user-friendly.
In MYOB, the sales ledger is in a Command Centre called Sales.
In XERO, it is called Invoices.
In Hnry, it is part of the Invoicing section.
In Solo, it is part of Invoicing.
In MYOB, the sales ledger is in a Command Centre called Sales.
In XERO, it is called Invoices.
In Hnry, it is part of the Invoicing section.
In Solo, it is part of Invoicing.
sales invoices
An invoice is a document that records a sale and provides details of how the buyer can pay for that sale at a future time.
The basic information that it contains serves several purposes:
- it confirms to the buyer what they bought, when and for how much (proof of purchase)
- it gives the buyer information about how to pay for the sale
- it records the details of the sale, when it was and for how much for the company issuing it
It may contain additional information for the buyer, such as:
- due date for payment
- purchase order number or contact name of the person buying the item/service
- contact details for remittance advices
For regulatory purposes (company requirements or tax requirements), the invoice may contain more details.
For NZ taxation requirements, please refer to the Inland Revenue website.
The basic information that it contains serves several purposes:
- it confirms to the buyer what they bought, when and for how much (proof of purchase)
- it gives the buyer information about how to pay for the sale
- it records the details of the sale, when it was and for how much for the company issuing it
It may contain additional information for the buyer, such as:
- due date for payment
- purchase order number or contact name of the person buying the item/service
- contact details for remittance advices
For regulatory purposes (company requirements or tax requirements), the invoice may contain more details.
For NZ taxation requirements, please refer to the Inland Revenue website.
raising sales invoices
If you are using a bookkeeping software system, the format of the invoice will be created by a template. You can amend the template to include additional information, and/or you can add additional information into the fields available on the template.
Once the information related to the sale is entered, the next issue to address is the account coding.
Your company chart of accounts and how your company operates will determine which specific code to use.
Some systems will allow you to select the coding by entering words or having a dropdown list.
Be sure to select the correct word or dropdown that relates to your sale. Some words can be used in multiple places in your chart of accounts and you may end up miscoding your sales invoice.
If that happens, it's not too difficult to fix, but it will take up time (potentially incurring accounting fees).
If you are not using software, an invoice template should be followed. Remember to include all the necessary information and meet compliance requirements.
Once the information related to the sale is entered, the next issue to address is the account coding.
Your company chart of accounts and how your company operates will determine which specific code to use.
Some systems will allow you to select the coding by entering words or having a dropdown list.
Be sure to select the correct word or dropdown that relates to your sale. Some words can be used in multiple places in your chart of accounts and you may end up miscoding your sales invoice.
If that happens, it's not too difficult to fix, but it will take up time (potentially incurring accounting fees).
If you are not using software, an invoice template should be followed. Remember to include all the necessary information and meet compliance requirements.
sales credit notes
Sometimes a sale doesn't go ahead, or the amount is adjusted, or an item is returned and the buyer is entitled to a refund.
In these circumstances, it is necessary to raise a sales credit note.
Note that the term credit note applies to both sales ledgers and purchases ledgers. When you raise a credit note, make sure that it is in the correct ledger.
Sales credit notes are raised in the sales ledger and follow the same processes as raising the original invoice.
Generally, it is expected that the same account coding will be used as the original sale.
In software systems, the accounting entries - that is, to reduce the sales income and to reduce the debtor value - will be automatically taken care of.
The sales credit note can be offset against the original invoice, to remove or reduce the debt.
It is good practice to raise credit notes and not to cancel original sales invoices.
This is particularly in cases where the original invoice and the credit note are in different reporting periods.
In these circumstances, it is necessary to raise a sales credit note.
Note that the term credit note applies to both sales ledgers and purchases ledgers. When you raise a credit note, make sure that it is in the correct ledger.
Sales credit notes are raised in the sales ledger and follow the same processes as raising the original invoice.
Generally, it is expected that the same account coding will be used as the original sale.
In software systems, the accounting entries - that is, to reduce the sales income and to reduce the debtor value - will be automatically taken care of.
The sales credit note can be offset against the original invoice, to remove or reduce the debt.
It is good practice to raise credit notes and not to cancel original sales invoices.
This is particularly in cases where the original invoice and the credit note are in different reporting periods.
DEBTORS
WHAT ARE DEBTORS?
Simply put, debtors are clients who owe your business money. They can be individual people or other businesses and organisations.
They will have received an invoice from the sales ledger and now owe payment of the invoice.
Timing is important with debtors, as we'll see below.
They will have received an invoice from the sales ledger and now owe payment of the invoice.
Timing is important with debtors, as we'll see below.
reporting to find your debtors details
As your sales ledger accumulates data about your sales which become your income value in your profit and loss account , it also accumulates data about your debtors (those who owe you money in settlement of those sales) which form the total of debt in your balance sheet.
Software systems will allow you to easily see the breakdown of your debtors. This is usually called an accounts receivable report or may be called a debtors report or receivables report. It may be in the reports section of your system or with the sales ledger.
These reports can be analysed into due date - what is known as ageing - so you can see which of your debtors haven't paid you and how old the debt is. Usually ageing is done in months and this would match invoice due dates that allow a month for payment. If your invoice due date is earlier than that - say, within a week - check to see if your software can report in weeks to give you a good idea of how old the debts are getting.
Software systems will allow you to easily see the breakdown of your debtors. This is usually called an accounts receivable report or may be called a debtors report or receivables report. It may be in the reports section of your system or with the sales ledger.
These reports can be analysed into due date - what is known as ageing - so you can see which of your debtors haven't paid you and how old the debt is. Usually ageing is done in months and this would match invoice due dates that allow a month for payment. If your invoice due date is earlier than that - say, within a week - check to see if your software can report in weeks to give you a good idea of how old the debts are getting.
Effects of sales credit notes
Sales credit notes don't generally have a due date on them, so when they are reported in the accounts receivable reports they will show without any ageing. They show in the Current column.
It is important to bear this in mind when reviewing your debtors list.
For example, an outstanding debt showing in the three month aged column may have a credit note applied which shows in the current column. The net debt is obtained by taking both columns into account.
It is important to bear this in mind when reviewing your debtors list.
For example, an outstanding debt showing in the three month aged column may have a credit note applied which shows in the current column. The net debt is obtained by taking both columns into account.
WHAT IS ACCOUNTS RECEIVABLE?
Accounts Receivable is a term that is used in relation to the debtors of a sales ledger. The ledger is made up of accounts - usually your clients - and the invoices that are sent to them are recorded next to their client account reference. The outstanding debt needs to be received from the client and this is money that is due to the business.
The term Accounts Receivable is often interchangeable between it being an individual account/invoice/amount that is due to be received or it may be used as the whole sales amount that is due to be received.
Large finance teams may have an Accounts Receivable team. They are the finance team members who are responsible for issuing invoices and collecting the payments, matching up the payments with the outstanding account/invoice.
The term Accounts Receivable is often interchangeable between it being an individual account/invoice/amount that is due to be received or it may be used as the whole sales amount that is due to be received.
Large finance teams may have an Accounts Receivable team. They are the finance team members who are responsible for issuing invoices and collecting the payments, matching up the payments with the outstanding account/invoice.
HOW DO you GET your CLIENTS TO PAY ON TIME?
A client who does not pay on time can upset your entire cashflow. Here are two ways of addressing them.
1 - The Legal Route
Ensure that you have contracts agreed and signed that clearly show the payment terms (e.g. 7 days after date of invoice). Then make sure that you include the same payment terms clearly on your invoice. If the payment deadline passes, follow up quickly, send reminders and get on the phone to them if necessary. The ultimate response is to refer the client to a debt collector or hand over the invoice to a debt factoring company (they buy the debt and give you a percentage of the value, they will then try to get the full value from your client for themselves.)
2 - The Income Forecasting route
Knowing how your client pays their bills, and planning your cashflow taking that into account, will save you a lot of stress. Ask the client before you do work with them what their policies are. You may need to reach certain milestones, or have work approved before it will be paid for. Money from public entities, especially, can come with specific requirements. So make sure you follow their rules.
For example, if they require a Purchase Order Number to be quoted on your invoice, then make sure you include the Purchase Order Number. If they require you to send it to a certain email address, then make sure you send it to that email address, and if it needs to be submitted before a certain cut-off date, then make sure you submit it before the cut-off date.
Many large organisations will pay on the 20th of the month following the date of your invoice regardless of the date you agree to in a contract with a departmental contact, or that you specify on your invoice.
Being prepared to receive payment when they will pay you, and budget accordingly.
1 - The Legal Route
Ensure that you have contracts agreed and signed that clearly show the payment terms (e.g. 7 days after date of invoice). Then make sure that you include the same payment terms clearly on your invoice. If the payment deadline passes, follow up quickly, send reminders and get on the phone to them if necessary. The ultimate response is to refer the client to a debt collector or hand over the invoice to a debt factoring company (they buy the debt and give you a percentage of the value, they will then try to get the full value from your client for themselves.)
2 - The Income Forecasting route
Knowing how your client pays their bills, and planning your cashflow taking that into account, will save you a lot of stress. Ask the client before you do work with them what their policies are. You may need to reach certain milestones, or have work approved before it will be paid for. Money from public entities, especially, can come with specific requirements. So make sure you follow their rules.
For example, if they require a Purchase Order Number to be quoted on your invoice, then make sure you include the Purchase Order Number. If they require you to send it to a certain email address, then make sure you send it to that email address, and if it needs to be submitted before a certain cut-off date, then make sure you submit it before the cut-off date.
Many large organisations will pay on the 20th of the month following the date of your invoice regardless of the date you agree to in a contract with a departmental contact, or that you specify on your invoice.
Being prepared to receive payment when they will pay you, and budget accordingly.
PURCHASE LEDGER
WHAT IS A PURCHASE LEDGER?
The purchase ledger is one of the main ledgers in an accounting system. It is sometimes referred to as being one of the Primary Ledgers. It collates the records of purchases made from suppliers and invoices that have been received.
That information then links to other ledgers such as the bank ledger (when money is paid), and the general ledger. In the general ledger it links in several places: to record the purchase as an expense to the company (based on categorisation/ coding), to record the invoice as a liability and to record the GST transaction.
If you are charged GST, the purchase ledger information also links to your GST module that collates and calculates your GST return.
That information then links to other ledgers such as the bank ledger (when money is paid), and the general ledger. In the general ledger it links in several places: to record the purchase as an expense to the company (based on categorisation/ coding), to record the invoice as a liability and to record the GST transaction.
If you are charged GST, the purchase ledger information also links to your GST module that collates and calculates your GST return.
WHAT DOES A PURCHASE LEDGER DO?
The purchase ledger records the invoices that have been sent to you by your suppliers. The ledger will be split into individual supplier accounts so that each invoice can be referenced to a supplier and the supplier's position can be easily seen.
Each time a purchase invoice is recorded from a supplier, the expenses value is recorded in the general ledger and usually becomes part of the profit and loss report at that point in time. This is part of accrual accounting.
Under double-entry bookkeeping, the unpaid invoice also become a liability/credit, and the supplier becomes a creditor. Until such time as you pay the invoice, and the bill is settled, the value of the purchase sits on the balance sheet as a current liability (something that the business needs to pay within a short time).
Each time a purchase invoice is recorded from a supplier, the expenses value is recorded in the general ledger and usually becomes part of the profit and loss report at that point in time. This is part of accrual accounting.
Under double-entry bookkeeping, the unpaid invoice also become a liability/credit, and the supplier becomes a creditor. Until such time as you pay the invoice, and the bill is settled, the value of the purchase sits on the balance sheet as a current liability (something that the business needs to pay within a short time).
ALTERNATE NAMES FOR purchase LEDGER
The term purchases ledger has been around for decades. But technology has given rise to alternate terms and words to describe it. This may be due to space issues (numbers of pixels available) or an attempt to be more user-friendly.
In MYOB, the purchase ledger is in a Command Centre called Purchases.
In XERO, it is called Bills.
Self-employed systems such as Hnry and Solo don't have purchases ledgers as they work on a cash accounting basis and only require details of expenses that have been paid out.
In MYOB, the purchase ledger is in a Command Centre called Purchases.
In XERO, it is called Bills.
Self-employed systems such as Hnry and Solo don't have purchases ledgers as they work on a cash accounting basis and only require details of expenses that have been paid out.
purchase INVOICES
An invoice is a document that records a purchase and provides details of how the company can pay for that purchase at a future time.
The basic information that it contains serves several purposes:
- it confirms to the company what they bought, when and for how much (proof of purchase)
- it gives the company information about how to pay for the purchase
- it records the details of the sale, when it was and for how much for the company issuing it
It may contain additional information for the purchaser, such as:
- due date for payment
- purchase order number or contact name of the person buying the item/service
- contact details for remittance advices
For regulatory purposes (company requirements or tax requirements), the invoice may contain more details.
For NZ taxation requirements, please refer to the Inland Revenue website.
The basic information that it contains serves several purposes:
- it confirms to the company what they bought, when and for how much (proof of purchase)
- it gives the company information about how to pay for the purchase
- it records the details of the sale, when it was and for how much for the company issuing it
It may contain additional information for the purchaser, such as:
- due date for payment
- purchase order number or contact name of the person buying the item/service
- contact details for remittance advices
For regulatory purposes (company requirements or tax requirements), the invoice may contain more details.
For NZ taxation requirements, please refer to the Inland Revenue website.
Recording purchase INVOICES
If you are using a bookkeeping software system, the format of recording the purchase invoice will be created by a template. You can add additional information into the fields available on the template as need be.
Once the information related to the purchase is entered, the next issue to address is the account coding.
Your company chart of accounts and how your company operates will determine which specific code to use.
Some systems will allow you to select the coding by entering words or having a dropdown list.
Be sure to select the correct word or dropdown that relates to your sale. Some words can be used in multiple places in your chart of accounts and you may end up miscoding your purchase invoice.
If that happens, it's not too difficult to fix, but it will take up time (potentially incurring accounting fees).
Once the information related to the purchase is entered, the next issue to address is the account coding.
Your company chart of accounts and how your company operates will determine which specific code to use.
Some systems will allow you to select the coding by entering words or having a dropdown list.
Be sure to select the correct word or dropdown that relates to your sale. Some words can be used in multiple places in your chart of accounts and you may end up miscoding your purchase invoice.
If that happens, it's not too difficult to fix, but it will take up time (potentially incurring accounting fees).
purchase CREDIT NOTES
Sometimes a purchase doesn't go ahead, or the amount is adjusted, or an item is returned and you will be getting a refund or credit against future purchases.
In these circumstances, you should receive a credit note from the supplier.
Note that the term credit note applies to both sales ledgers and purchases ledgers. When you record a credit note, make sure that it is in the correct ledger.
Purchase credit notes are recorded in the purchase ledger and follow the same processes as recording the original invoice.
Generally, it is expected that the same account coding will be used as the original purchase.
In software systems, the accounting entries - that is, to reduce the expense and to reduce the creditor value - will be automatically taken care of.
The purchase credit note can be offset against the original invoice, to remove or reduce the due payment.
It is good practice to received credit notes and not to delete the original purchase invoices.
This is particularly in cases where the original invoice and the credit note are in different reporting periods.
In these circumstances, you should receive a credit note from the supplier.
Note that the term credit note applies to both sales ledgers and purchases ledgers. When you record a credit note, make sure that it is in the correct ledger.
Purchase credit notes are recorded in the purchase ledger and follow the same processes as recording the original invoice.
Generally, it is expected that the same account coding will be used as the original purchase.
In software systems, the accounting entries - that is, to reduce the expense and to reduce the creditor value - will be automatically taken care of.
The purchase credit note can be offset against the original invoice, to remove or reduce the due payment.
It is good practice to received credit notes and not to delete the original purchase invoices.
This is particularly in cases where the original invoice and the credit note are in different reporting periods.
CREDITORS
WHAT are creditors?
Simply put, creditors are supplier who you owe money to. They can be individual people or other businesses and organisations.
You will have received an invoice from the supplier and now owe them payment.
Timing is important with creditors, as we'll see below.
You will have received an invoice from the supplier and now owe them payment.
Timing is important with creditors, as we'll see below.
REPORTING TO FIND YOUR crediTORS DETAILS
As your purchase ledger accumulates data about your purchases which become your expenditure values in your profit and loss account, it also accumulates data about your creditors (those who you owe money to) which form the total of creditors in your balance sheet.
Software systems will allow you to easily see the breakdown of your creditors. This is usually called an accounts payable report or may be called a creditors report or payables report. It may be in the reports section of your system or with the purchase ledger.
These reports can be analysed into due date - what is known as ageing - so you can see which of your creditors you haven't paid and how old the liability is. Usually ageing is done in months and this would match invoice due dates that allow a month for payment.
Software systems will allow you to easily see the breakdown of your creditors. This is usually called an accounts payable report or may be called a creditors report or payables report. It may be in the reports section of your system or with the purchase ledger.
These reports can be analysed into due date - what is known as ageing - so you can see which of your creditors you haven't paid and how old the liability is. Usually ageing is done in months and this would match invoice due dates that allow a month for payment.
EFFECTS OF purchase CREDIT NOTES
Purchase credit notes don't generally have a due date on them, so when they are reported in the accounts payable reports they will show without any ageing. They show in the Current column.
It is important to bear this in mind when reviewing your creditors list.
For example, an outstanding payment showing in the three month aged column may have a credit note applied which shows in the current column. The net amount due is obtained by taking both columns into account.
It is important to bear this in mind when reviewing your creditors list.
For example, an outstanding payment showing in the three month aged column may have a credit note applied which shows in the current column. The net amount due is obtained by taking both columns into account.
WHAT IS ACCOUNTS payable?
Accounts Payable is a term that is used in relation to the creditors of a purchases ledger. The ledger is made up of accounts - usually your suppliers - and the invoices that are received from them are recorded next to their client account reference. The outstanding amount needs to be paid to the supplier.
The term Accounts Payable is often interchangeable between it being an individual account/invoice/amount that is due to be paid or it may be used as the whole amount that is due to be paid.
Large finance teams may have an Accounts Payables team. They are the finance team members who are responsible for receiving invoices and making the payments, ensuring the expense is approved and matching up the payments with the account/invoice.
The term Accounts Payable is often interchangeable between it being an individual account/invoice/amount that is due to be paid or it may be used as the whole amount that is due to be paid.
Large finance teams may have an Accounts Payables team. They are the finance team members who are responsible for receiving invoices and making the payments, ensuring the expense is approved and matching up the payments with the account/invoice.
WHAT DOES A PAYROLL LEDGER DO?
As you'd expect, a payroll ledger records the transactions related to your payroll - that is, payments that you make to your staff and some contractors.
Some software systems have an inbuilt payroll ledger (module) which may cost extra but there are also specialised payroll software suppliers.
Some software systems have an inbuilt payroll ledger (module) which may cost extra but there are also specialised payroll software suppliers.
WHEN DO YOU NEED A PAYROLL LEDGER?
Payroll is a vast subject and not be be undertaken lightly.
Someone once told me that when you take on a member of staff, you are taking on 70 pieces of legislation. He didn't specify, but I expect that quite a few of them relate to payroll.
It is possible - but probably not advisable - to manage your payroll commitments manually.
Many bookkeeping/accounting software systems will have an inbuilt payroll ledger/module - which may cost extra - and they have their pro and cons.
If you have a complex staffing structure or work patterns, it may be better to choose a specialist payroll software. Once the basics of meeting payroll obligations are met, they often integrate or link across to accounting systems, reducing the human error of double handling of amounts.
Someone once told me that when you take on a member of staff, you are taking on 70 pieces of legislation. He didn't specify, but I expect that quite a few of them relate to payroll.
It is possible - but probably not advisable - to manage your payroll commitments manually.
Many bookkeeping/accounting software systems will have an inbuilt payroll ledger/module - which may cost extra - and they have their pro and cons.
If you have a complex staffing structure or work patterns, it may be better to choose a specialist payroll software. Once the basics of meeting payroll obligations are met, they often integrate or link across to accounting systems, reducing the human error of double handling of amounts.
THE BANK LEDGER and accounting
WHAT DOES THE BANK LEDGER DO?
The bank ledger records the transactions that you make that will pass through your bank account and/or cash balances.
It records transactions AS YOU MAKE THEM.
The bank ledger is not the same as your actual bank account.
The bank ledger's purpose is to be a record of what you expected to transact through your bank account.
Before direct bank payments, there would be timing delays as cheques needed to be posted and then processed by the banks.
However, with bank transactions now happening within the same day, this is less of an issue.
Checking that the entries from your accounting records did appear in the actual bank account is the basis of the process of your bank reconciliation.
It records transactions AS YOU MAKE THEM.
The bank ledger is not the same as your actual bank account.
The bank ledger's purpose is to be a record of what you expected to transact through your bank account.
Before direct bank payments, there would be timing delays as cheques needed to be posted and then processed by the banks.
However, with bank transactions now happening within the same day, this is less of an issue.
Checking that the entries from your accounting records did appear in the actual bank account is the basis of the process of your bank reconciliation.
Automatic bank feeds
The ability of software systems to receive bank transaction data direct from online banking systems has saved a huge amount of data entry time.
The process of linking the bank feed transaction to an open/unpaid invoice (whether sales or purchases) is creating the accounting transaction between the relevant ledgers, it is not undertaking a bank reconciliation - for more info, see below.
There are a couple of things to bear in mind when using automated bank feeds:
- like all systems, they can be subject to hiccups and errors. It is important to check your bank feed's data is accurate by periodically referring back to your actual bank account data (outside of doing your bank reconciliation).
- the time reduction is only as good as the data received. If you receive into your bank account payments that cannot be identified, or make payments without good information on them, it can be time consuming to match them with your accounting records.
The process of linking the bank feed transaction to an open/unpaid invoice (whether sales or purchases) is creating the accounting transaction between the relevant ledgers, it is not undertaking a bank reconciliation - for more info, see below.
There are a couple of things to bear in mind when using automated bank feeds:
- like all systems, they can be subject to hiccups and errors. It is important to check your bank feed's data is accurate by periodically referring back to your actual bank account data (outside of doing your bank reconciliation).
- the time reduction is only as good as the data received. If you receive into your bank account payments that cannot be identified, or make payments without good information on them, it can be time consuming to match them with your accounting records.
direct payments
Unless you buy everything on invoice or are extremely diligent in recording every transaction when it is made, you will encounter transactions in your bank feed that don't link across to an accounting transaction.
These are often referred to as direct payments by software systems.
The accounting transaction needs to be created, although it will likely by-pass the sales or purchases ledger.
The transaction will be between the General Ledger (GL) account code and the bank ledger.
These are often referred to as direct payments by software systems.
The accounting transaction needs to be created, although it will likely by-pass the sales or purchases ledger.
The transaction will be between the General Ledger (GL) account code and the bank ledger.
IDENTIFYING and resolving ISSUES
Sometimes there may be transactions in your bank account/bank feed that are wholly unexpected or unidentifiable.
Here is a checklist of ideas to resolving them:
- it is a straightforward 'missing details' income transaction. It may come from an unknown name without a corresponding invoice number or reference with it. If it is an amount that can be matched to an outstanding sales invoice, check that first. However, if it is an amount that is common amongst sales invoices, you may need to hang onto the transaction until more information (for example, from a client when they realise the amount has not been applied to their account) is received.
- it is an income transaction of an unusual amount and is not related to any expected amount. Without being alarmist, it could be an attempt at money laundering. Money is deposited in your account, then the 'owner' claims is was an error and asks for it to be paid back to them. The money has been laundered through your bank account. If you see anything like this, contact your bank immediately, explain your suspicions and ask them to reverse the transaction. Do not process it and repay it, ask the bank to reverse it.
- it is an unexpected payment to an online system. As we hand over our credit/debit card details to more and more online systems, the instances of errors or fraudulent transactions increases. It is important to keep close attention to what is paid for and when, so that unusual transactions can be identified. If there are a series of transactions in a short space of time (e.g. within seconds of each other), that's one of the hallmarks of attempted, or actual, fraud. Report it immediately to your bank.
- it is a genuine transaction, but the information isn't yet available in order to process it. If it's not possible to wait until the information is available (perhaps someone is away), it is feasible and acceptable to code the amount to the Suspense account in the General Ledger (GL). The suspense account is in your balance sheet and so the transaction does not adversely affect your profit and loss account. Once the information has been received, the transaction can be journalled out of the suspense account and to its correct GL account.
Here is a checklist of ideas to resolving them:
- it is a straightforward 'missing details' income transaction. It may come from an unknown name without a corresponding invoice number or reference with it. If it is an amount that can be matched to an outstanding sales invoice, check that first. However, if it is an amount that is common amongst sales invoices, you may need to hang onto the transaction until more information (for example, from a client when they realise the amount has not been applied to their account) is received.
- it is an income transaction of an unusual amount and is not related to any expected amount. Without being alarmist, it could be an attempt at money laundering. Money is deposited in your account, then the 'owner' claims is was an error and asks for it to be paid back to them. The money has been laundered through your bank account. If you see anything like this, contact your bank immediately, explain your suspicions and ask them to reverse the transaction. Do not process it and repay it, ask the bank to reverse it.
- it is an unexpected payment to an online system. As we hand over our credit/debit card details to more and more online systems, the instances of errors or fraudulent transactions increases. It is important to keep close attention to what is paid for and when, so that unusual transactions can be identified. If there are a series of transactions in a short space of time (e.g. within seconds of each other), that's one of the hallmarks of attempted, or actual, fraud. Report it immediately to your bank.
- it is a genuine transaction, but the information isn't yet available in order to process it. If it's not possible to wait until the information is available (perhaps someone is away), it is feasible and acceptable to code the amount to the Suspense account in the General Ledger (GL). The suspense account is in your balance sheet and so the transaction does not adversely affect your profit and loss account. Once the information has been received, the transaction can be journalled out of the suspense account and to its correct GL account.
THE BANK RECONCILIATION
WHAT IS A BANK RECONCILIATION?
A bank reconciliation is a key method to check that your accounts are up-to-date and accurate.
It brings together two separate sets of records and compares them.
It matches the transactions that you have recorded in your accounting system, with the transactions showing in your bank account.
If there are transactions in one system, but not in the other, those transactions are called Reconciling Entries.
It brings together two separate sets of records and compares them.
It matches the transactions that you have recorded in your accounting system, with the transactions showing in your bank account.
If there are transactions in one system, but not in the other, those transactions are called Reconciling Entries.
WHAT A BANK RECONCILIATION IS NOT
The bank reconciliation is NOT the process of linking your bank feed transactions to your unpaid sales invoices or purchases invoices.
The linking process is recording the transaction of payment to the open/unpaid invoice.
In accounting terms, it is crediting your sales ledger or debiting your purchases ledger and creating the opposite entry in the bank ledger.
The bank ledger then contains the resulting debits and credits, ready for reconciling to the actual bank account.
The linking process is recording the transaction of payment to the open/unpaid invoice.
In accounting terms, it is crediting your sales ledger or debiting your purchases ledger and creating the opposite entry in the bank ledger.
The bank ledger then contains the resulting debits and credits, ready for reconciling to the actual bank account.
Question 2
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checklist
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resources
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paid guidance
If anything in this section applies to your business and you'd like my specific help, please go the Paid Guidance section of this website, or contact me via the details below.
LEGAL STUFF
By the very nature of our profession, any advice or guidance given on this website or in open training resources are general and generic in nature. The majority of my focus is on better business practices and knowledge.
For detailed transactional or taxation advice relevant to your business, please ask your financial accountant or bookkeeper.
If you wish to replicate any advice, guidance or training for your own purposes, please have the good grace and manners to ask first.
I value politeness very highly.
For detailed transactional or taxation advice relevant to your business, please ask your financial accountant or bookkeeper.
If you wish to replicate any advice, guidance or training for your own purposes, please have the good grace and manners to ask first.
I value politeness very highly.
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