Table Of Contents
Table of Contents
Chapter 1 Accounting Succinctly
Chapter 2 Revenues and Expenses
Chapter 3 Revenue Recognition
Chapter 4 Organizing the Accounts
Chapter 5 Accounting Principles
Chapter 6 Accounting System Reporting
Chapter 7 Fixed Assets
Chapter 8 Accounts Receivable
Chapter 9 Accounts Payable
Chapter 10 Inventory
Chapter 11 Payroll
Chapter 12 Summary
Appendix
Detailed Table of Contents
Chapter 1 Accounting Succinctly
Chapter 1 Accounting Succinctly
Computer developers are frequently asked to create systems to assist a client in running his or her business. While the developer has the tools (e.g., SQL Server, C#, Visual Studio, etc.) to produce solid applications, the client has the knowledge of the business that needs to be computerized.
Unfortunately, most of the clients are not developers. (If they were, why would they hire programmers in the first place?)
The meeting of these two kinds of expertise is often fraught with miscommunication. The client explains his or her needs to the developer who, in turn, tries to convert those needs into a design and, eventually, into a running application. Often, after the client sees the finished program, he or she then has a clearer picture of what he or she wants the computer to do and, unfortunately, that picture frequently looks nothing like the program the developer wrote.
This disconnect (between the customer’s explanations of his or her needs and how they are seen by all of the other roles in development) has been known for a long time, as shown in Figure 1. The tree swing diagram has been used for years and, although the artwork has improved, the concept remains true to this day:
Figure 1: Tree swing diagram, courtesy of the Monolithic Dome Institute
What I will do in this book is introduce developers to some of the most common business applications he or she may run into. I will also identify some terms that have special meaning so that, when one client explains that the repair parts can be “LIFO” but the new cars better be “specific-id” and another client wants to convert from “weighted average” to “FIFO,” the developer will understand that the clients are actually talking about inventory reporting.
In the first chapter, I would like to explore some fundamental accounting concepts and definitions. While it is not my intent or desire to have developers study for the CPA exam, it is my hope to allow them to understand what the client means when terms such as debit, credit, and out of balance are discussed.
Basic Accounting Background
Basic Accounting Background
Accounting begins with one simple concept which is as fundamental to accountants as the DO WHILE loop is to programmers. This concept is that all businesses have assets which are funded by one of two sources: the business owners (equity) or the company’s creditors (liabilities). Another view of this concept is the equation:
ASSETS = LIABILITIES + OWNER'S EQUITY
An accounting system, therefore, provides a method of record keeping that allows the user to track business activity and to record each transaction's impact on the above equation. To achieve these objectives, the system uses two primary repositories of information: the Chart of Accounts and the journals.
Chart of Accounts
The Chart of Accounts is an itemized list of assets, creditor bills, and owner's equity in the business that need to be tracked by the system. Each item in the chart is generally assigned an account number and a descriptive name. In addition, each item has a dollar balance associated with it. The account numbers assigned usually designate some sort of grouping of the accounts. All assets, for example, might begin with the number one while current assets range from 1,000 through 1,500. For example, if the business owns a computer setup worth $5,000, then its entry in the chart of accounts might look as follows:
Table 1: Computer Asset in Chart of Accounts
Account #
Description
Type
Balance
1750
HP Server, Router, and two workstation computers
Asset
$5,000
Note: For example‘s sake, we are grouping several hardware component together; however, in most businesses, each hardware component would have its own entry in the chart of accounts.
If the business borrowed money for the computer system (say $4,000), then another entry in the chart would reflect that loan:
Table 2: Loan for Computer Purchase
Account #
Description
Type
Balance
2550
Computer Loan-HP Server and workstations
Liability
$4,000
Each item in the business will be listed in a similar fashion in the chart. This listing of accounts is sometimes called the General Ledger. The account type field is also important since we must be able to determine the account type to test that our basic equation stays true.
In our example above, the account type is part of the chart. In many accounting systems, the account number defines the account type. Whichever method is used, we can test the basic equation by the following construct:
- Is the SUM of all assets exactly equal to the SUM of all liabilities + the SUM of all owner's equity?
If the equation is true, then accounting books are in balance. A balance sheet is a financial statement that lists the assets on one side and the liabilities and equity on the other. Both sides are totaled and must be equal. It provides the business with an accurate picture on a given date of the net worth of the business (net worth is the sum of all of the assets minus the sum of all liabilities, which happens to be the same as the sum of the owner's equity accounts).
Journals
Journals are recordings of activity or business transactions that have occurred. Every journal entry will impact one or more of the accounts in the ledger—either increasing or decreasing that account's balance. Many accounting systems will group transactions into specialized journals such as a sales journal or a cash receipts journal. In addition to the specialized journals, almost all systems have a general journal in which transactions which don't fall into any group are recorded.
In computer terms, the chart of accounts is a master file and the journal is the activity file which affects items in the master. Usually, transactions are accumulated in the journal and, after a period of time, applied to or posted against the chart of accounts:
Figure 2: Transaction and master
Now that we have briefly reviewed the two main information sources for the systems, let's take a look at how these two work together to ensure that the key equation (shown below) always stays in balance:
- Assets = Liabilities + Equity
Double Entry Accounting
Double Entry Accounting
Double Entry Accounting is the most common method of accounting for business transactions. To understand how the method works, we need to introduce two new terms that are somewhat hard to define: debit and credit.
Each account in the chart has a balance and this balance is considered to be a debit or a credit. For the asset accounts, the debit represents a positive balance in the chart while the credit represents a negative balance. If the business checking account has $6,000 in it, we would say the account has a $ 6,000 debit balance. If they write a check which reduces the balance, that check will be credited to the account. Credit entries reduce the balance in an asset account.
The liability and equity accounts work in reverse; credits are considered positive balances and the debit represents a negative balance. If the sales tax liability for one state is $ 2,000, we would say we have a $2,000 credit balance in sales tax payable. As they pay the sales tax, that balance will be reduced by debiting the account.
The following chart summarizes debits and credits:
Table 3: Debit/Credit Summary
Description
Debit
Credit
Assets such as cash, inventory, computers, office supplies, etc.
Increase
Decrease
Liabilities such as phone bills, car loan, sales tax collected, etc.
Decrease
Increase
Equity such as owner’s contribution, common stock, etc.
Decrease
Increase
Every transaction that occurs must consist of at least one debit and one credit entry. The total of all debits and credits must equal. As long as this rule is followed, the books will never get out of balance.
Let's Review a Few Examples
- Business is started by the owner who contributed $10,000 into the business checking account.
- Business buys a computer system to do consulting work on. The system costs $6,000, which is paid for by a $1,000 check and a loan for $5,000.
- The owner buys three necessary items: a copy of Visual Studio, the Syncfusion library, and a subscription to a Web development magazine. Owner pays by check.
- The first installment of $1,000 is paid on the computer system.
To properly record the above events, the following items are entered in the chart of accounts:
Table 4: Chart of Accounts
Account #
Description
Type
Debit
Credit
1000
Cash-Checking Account
Asset
1100
Software
Asset
1200
Subscriptions
Asset
1600
Computer System
Asset
2000
Loan for Computer
Liability
3000
Owner’s Equity
Equity
In addition, the following journal entries are written into the general journal:
Table 5: General Journal
Account #
Description
Debit
Credit
A
1000
Cash-Checking Account
$10,000
3000
Owner’s Equity
$10,000
B
1600
Computer System
$6,000
1000
Cash-Checking Account
$1,000
2000
Loan for Computer
$5,000
C
1100
Software
$794
1200
Subscriptions
$99
1000
Cash-Checking
$893
D
1000
Cash-Checking
$1,000
2000
Loan for Computer
$1,000
Notice that, for each transaction, the total debits and credits are equal. If not, the transaction would be considered out of balance and could not be applied to the master file.
When the transactions are posted, the chart of accounts will appear as illustrated below:
Table 6: Detailed Chart of Accounts
Acc
Description
Type
Debit
Credit
1000
Cash-Checking Account
Asset
Beginning Balance
0
A
Owner Investment
$10,000
B
Computer System Purchase
$1,000
C
Software/Subscription purchase
$893
D
Loan Repayment
$1,000
Ending Balance
$7,107
1100
SOFTWARE
Asset
Beginning Balance
0
C
Software Purchase
$794
Ending Balance
$794
1200
SUBSCRIPTIONS
Asset
Beginning Balance
0
C
Subscription Purchase
$99
Ending Balance
$99
1600
COMPUTER SYSTEM
Asset
Beginning Balance
0
B
Computer Purchase
$6,000
Ending Balance
$6,000
2000
LOAN FOR COMPUTER
Liability
Beginning Balance
0
B
Computer Purchase
$5,000
D
Loan Repayment
$1,000
Ending Balance
$4,000
3000
OWNER’S EQUITY
Equity
Beginning Balance
0
0
A
Owner Investment
$10,000
Ending Balance
$10,000
To test that the equation is still in balance, add up all of the ending balances for the assets accounts. Now add up all of the ending balances for the liabilities and the equity account.
Assets: ($14,000)
1000—Cash ($7,107) + 1100—Software ($794) + 1200—Magazine ($99) + 1600—Computer ($6,000)
Liabilities + Equity ($14,000)
2000—Computer Loan ($4,000) + 3000—Owner’s Equity ($10,000)
The total ending balances above should each be $14,000.
An accounting system's objective is to keep the primary equation true at all times. As long as the double-entry procedure (i.e., debits and credits equal at all times) is followed, the chart of accounts will stay in balance. This allows the owner of the business at any time to see the source of funds that were used to acquire the business's assets.
Note: In this chapter, I painted the definitions of Assets, Liabilities, etc. with a broad brush. In most accounting systems, the accounts are further categorized as Current Assets (Assets likely to turn to Cash within the year), Fixed
Impressum
Verlag: BookRix GmbH & Co. KG
Tag der Veröffentlichung: 02.05.2016
ISBN: 978-3-7396-5172-9
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