General Ledger Accounting overview for new Inform users

Maintaining a complete and accurate set of books relies on a list of General Ledger Accounts. This serves as the foundation for recording business transactions in a double-entry accounting system whereby a transaction’s debits and credits must offset each other. Each account serves as a holding place for financial activity. Total debits must equal total credits for a balanced system.

Account Number & Classification	Regular Balance	Examples of accounts used in a retailer or distributor
1000-1999 Assets	Debit (+)	Current: Cash, Accounts Receivable, Inventory Fixed: Property, Plant, Equipment, Depreciation Intangible: Goodwill, Trademarks, Customer List
2000-2999 Liabilities	Credit (-)	Current: Accounts Payable, Taxes Payable Long Term: Loans, Notes Payable
3000-3998 Equities	Credit (-)	Contributed Capital, Partner Draws, Retained Earnings
3999 P&L Break Account	Non-Posting	Separates Balance Sheet and Income Statement accounts for computation of Net income on Trial Balance
4000-4999 Revenue	Credit (-)	Sales, Freight-Out, A/R Discounts, Returns & Allowances
5000-5999 Cost of Goods Sold	Debit (+)	Cost of Sales, Freight-In, A/P Discounts, Inventory Change, Labor Costs, Vendor Rebates
6000-7999 Expenses	Debit (+)	Vehicle Maintenance, Warehouse Supplies, Rent, Utilities, Office Expense, Telephone, Professional Fees, Salaries, Insurance
8000-8999 Other Income	Credit (-)	Interest Income, Finance Charge Assessments, Gain on Sale of Assets and other non-revenue sources of income
9000-9999 Other Expense	Debit (+)	Income Taxes, Bad Debts, Penalties, Fines and other nonoperating sources of expense

The Balance Sheet is a snapshot of the business at a point in time (usually the last day of each month). Accounts contained therein do not zero out at year end – they maintain balances.

Go to Accounting > General Ledger > Financial Reporting > BALANCE SHEET to produce the default report. This document is a demonstration of the accounting equation:

Assets = Liabilities + Owners Equity

Assets are owned or owed to the business.

• Current Assets can be readily converted to cash within a year and include Cash, Bank Accounts, Accounts Receivable and Inventory.
• Fixed Assets cannot be readily converted to cash within one year.
  • Tangible Assets have physical substance and include Land, Building, Leasehold Improvements, Trucks, and Furniture & Fixtures.
  • Intangible Assets have no physical substance and include Goodwill, Customer Lists and Intellectual Property.

Liabilities are owed to parties outside of the business (customers, vendors, employees, tax agencies

• Current Liabilities are able and expected to be paid within one year and include Accounts Payable, Accrued Payroll, Taxes Payable and Customer Deposits.
• Long Term Liabilities are not expected to be paid within one year and include Vehicle Loans, Notes Payable and Due To/From Accounts.

Owner’s Equity is owned or owed to owner(s) of the business – contributed capital minus draws plus retained earnings.

• Contributed Capital: Monies contributed to the business by the owner(s).
• Current Year Earnings: Transferred from the Income Statement each accounting period.
• Retained Earnings: Accumulated profits and losses from prior years.

The Income Statement is a report of the income and expenses of a business for a range of time (usually a calendar month). The accounts contained therein are summarized into a profit or loss value for each reporting period. The profit or loss is then transferred onto the Balance Sheet as a debit (loss) or credit (profit) to Current Year Earnings. Once a year, at the end of the fiscal year, the Current Year Earnings are summarized into Retained Earnings and all accounts begin at zero for the New Year. Go to Accounting > General Ledger > Financial Reporting > INCOME STATEMENT to produce the default report.

Revenue includes income from customer sales, freight, and miscellaneous charges.

• Sales of tangible goods
• Sales of intangible services such as labor and repair
• Sales of miscellaneous intangibles such as freight, restocking, finance charges, etc.
• Sales returns and allowances
• Sales discounts and terms discounts (customer early pay)

Cost of Sales is made up of direct and traceable costs to make goods available for sale to customers.

This includes the following:

• Merchandise cost: vendor’s invoiced cost (expressed per unit).
• Freight-In: may be charged by vendor or a third-party shipper.
• Inventory gain or loss: results from damage, shrinkage, vendor failing to invoice, unit of measure errors.
• Purchase discounts and terms discounts (vendor early pay)
• Rebate income: monies returned back to company from a vendor once a certain purchase level has been satisfied. Rebate income may also be classified as “other income” to avoid contamination of the gross margin.

Gross Profit is equal to Revenue less Cost of Sales directly attributable to that revenue. This calculation is significant because it determines the cost of making the goods available for sale before the application of expenses.

• As a dollar amount, this value represents the amount of profit remaining for expenses.
• As a percentage, the calculation is referred to as Gross Margin. It establishes a benchmark against which an organization's Purchasing and Customer Pricing Programs are operated.

Revenue – Cost of Sales = Gross Profit

Operating Expenses include all regular, expected and recurring expenses of the business’ regular operations.

• Direct expenses are associated with a specific process. These include fleet maintenance and hourly labor and depreciation.
• Indirect expenses cannot be exactly allocated to a process. These include advertising, rent, insurance and salaries.
• Fixed expenses are rigid and not related to fluctuations in the business’ activity
• Variable expenses change in accordance with current usage and anticipated needs.

It is at the discretion of the business principals as to how expenses are further classified for evaluation on the financial reports. Inform is pre-loaded with “suggested” categories. One organization may choose to lump all expenses into “Operating Expenses,” while another may establish categories such as “Vehicle Expenses,” “Selling Expenses,” “Payroll Expenses,” etc.

Income from Operations is the amount remaining after all operating expenses are considered (Gross Profit minus Operating Expenses).

Gross Profit – Operating Expenses = Net Income from Operations

Other Income and Other Expense are reserved for items that are not considered regular, normal and expected. Examples include Gain or Loss on Sale of Assets, Interest Charges, Interest Income, Tax Penalties and Extraordinary Losses.

Net Income before Taxes is the amount of Profit (+) or Loss (-) remaining after accounting for other income and expense.

Net Income from Operations +/- Other Income / Expense = Net Income before Tax

Income Taxes are reported if the business, rather than the individual owners, is responsible for the payment thereof.

Net Income after Taxes is the net result after all taxes are reported.

In order to use the Balance Sheet and the Income Statement, you must first review your Chart of Accounts to verify that:

• Accounts are correctly ordered: assets, liabilities, equity, revenue, cost of sales, expenses
• G/L Names are clear and consistent, especially for entities like bank accounts and credit cards, to prevent the likelihood of mis-posting.
• Unused and obsolete accounts are removed, but only if there are no historical balances or system linkages.
• There is a P&L Break Account separating the last Balance Sheet Account (Retained Earnings) from the first Income Statement account (Revenue).
• Navigate to Accounting > General Ledger > G/L Account > Report to produce a listing of all G/L accounts and groupings.

Your system already contains the templates for a Balance Sheet and an Income Statement. These templates are based on G/L Groups which hold one or more accounts. Inform is preloaded with suggested groups; however you can create your own and edit the report’s structure to include them. The rules for G/L account grouping is as follows:

• All Balance Sheet accounts must be placed in one category group (assets, liabilities, equities)
• All Income Statement accounts must be placed in one category group (revenue, cost of sales, expenses, etc.) PLUS a special group called Income Summary.
• The Income Summary group has the sole function of summarizing the profit or loss for a given period by adding all Income Statement accounts then transferring it to the Balance Sheet.
• An account can be placed in more than one group, but if both groups are part of the report calculation, the item will be overstated.
• An account does not have to be grouped, but if so, its effect will not be calculated and the system will display an exception.
• Go to Accounting > General Ledger > G/L Account to create or edit an account.
• Go to Accounting > General Ledger > G/L Group to create or edit a group of accounts.

You can also customize these reports with quarterly, percent and budget columns. In order to use the % of Revenue indicator, all Revenue G/L account groups must be checked off as “Revenue Group”.

In order to establish that the Balance Sheet and Income Statement are pulling the correct information, do the following:

• Run a Trial Balance to determine the current period’s income (Accounting > General Ledger > G/L Inquiry). Note that the system will only enable a Trial Balance when you inquire on all G/L accounts for all source codes for a single accounting period at a time.
• Compare the Trial Balance YTD Income with the Income Statement.
• Check to ensure that the Balance Sheet is in balance.
• The fastest way to find duplications and omissions is to compare the Trial Balance “side by side” with the Balance Sheet and Income Statement.

Inform uses a structure with four-digit account numbers, followed by a branch suffix and optional suffix.

The accounting system is period driven, which means that transactions are booked to an accounting period designated in MM/YY format. The End of Month Closing Menu controls the accounting period used for the following types of activity: Cash Receipts, Cash Disbursements, Sales Journal, Accounts Payable, Inventory Control and Finance Charge. Activity originating from any of these source codes will default to the current open period. The exception to this is Journal Entries, which can be ported to any open period in the current fiscal year.

This is why it’s critical to maintain a regular monthly closing process in order that transactions are included in the proper month. For example, if the month of June 2016 (0616) is closed a few days late, the daily transactions will continue to be posted into period 0616, but will carry July transaction dates (07/01/2016, etc.)

Closing A/R and A/P prevent users from inadvertently posting in a past month. On File > Company Master > Accounting tab, there are settings to allow posting into a closed A/P period (all versions) and a closed A/R period. Be careful when adjusting these settings, because they will prevent your G/L from balancing to the A/R and A/P Aging Reports run as part of the month end closing process.

The Inventory files are transaction driven, which means that the system updates in real time and assigns dates in MM/DD/YYYY format. This is required in order to run a perpetual inventory system. It also means that the Inventory Value and Inventory G/L will deviate from each other.

Source Codes provide information regarding the origination of a financial transaction. All accounting data is organized by Source Code and controlled by the monthly cutoff of Accounts Receivable and Accounts Payable. Each code is color-specific G/L Inquiry and Bank Reconciliation functions.

The following table summarizes the functions and monthly posting cutoff behavior of the nine source codes available in Inform.

Source Code	Business Process	Posting Period
AP: Accounts Payable	BUYING - Purchases of merchandise and expenses processed through Accounts Payable.	Controlled by monthly cutoff of A/P Module
CD: Cash Disbursements	DISBURSING - Payment of purchases, expenses, taxes and capital investments.	Controlled by monthly cutoff of A/P Module
CR: Cash Receipts	RECEIVING - Receipt of customer and miscellaneous payments.	Controlled by monthly cutoff of A/R Module
FC: Finance Charge	BILLING - Assessment of monthly customer overdue balance finance charges.	Controlled by monthly cutoff of A/R Module
IC: Inventory Control	ADJUSTING - Inventory movement which is not the result of the normal buying and selling cycle. Examples include physical inventory counts, quantity and cost adjustments and stock transfers.	Controlled by monthly cutoff of A/R Module
JE: Journal Entry	User directed. Generally needed for the following transactions: Opening G/L account balances Payroll entries Bank account transfers & fees Bank drafts for taxes & expenses	Controlled by annual G/L closing. JE’s can be posted in any period in the open Fiscal Year
SJ: Sales Journal	SELLING - Customer sales on account and at the point of sale.	Controlled by monthly cutoff of A/R Module
WC: Warranty Claim	Optional journal that tracks merchandise return to vendor claim to claim receipt.	Controlled by monthly cutoff of A/R Module

See also Source codes used in common transactions