Accounting cheat sheet

The Profit and Loss (P&L) report shows the performance of the company over a specific period (usually the current year).

  • The Gross Profit equals the revenues from sales minus the cost of goods sold.

  • Operating Expenses (OPEX) include administration, sales and R&D salaries as well as rent and utilities, miscellaneous costs, insurances, … anything beyond the costs of products sold.

The Balance Sheet is a snapshot of the company’s finances at a specific date (as opposed to the Profit and Loss which is an analysis over a period)

  • Assets represent the company’s wealth, things it owns. Fixed assets includes building and offices, current assets include bank accounts and cash. A client owing money is an asset. An employee is not an asset.

  • Liabilities are obligations from past events that the company will have to pay in the future (utility bills, debts, unpaid suppliers).

  • Equity is the amount of the funds contributed by the owners (founders or shareholders) plus previously retained earnings (or losses).

    Each year, net profits (or losses) are reported to retained earnings.

PROFIT & LOSS

NET PROFIT
GROSS PROFIT
RevenueRevenueLess Costs of RevenueCost of Goods Sold
OPERATING INCOME OR LOSS
Less Operating ExpensesR&D
Sales, General & AdministrativePlus Other IncomeForeign Exchange Gains
Asset write-downsLess Other ExpensesInterest on debt
Depreciation

BALANCE SHEET

NET ASSETS
TOTAL ASSETS
Current AssetsCash & Bank Accounts
Accounts Receivable
Deferred Tax AssetsPlus Non-current AssetsLand & buildings
Intangible AssetsLess Current LiabilitiesAccounts Payable
Deferred Revenue
Deferred Tax LiabilitiesLess Non-current liabilitiesLong-term loans
TOTAL EQUITY
EquityCommon StockPlus Retained Earnings

What is owned (an asset) has been financed through debts to reimburse (liabilities) or equity (profits, capital).

A difference is made between buying an assets (e.g. a building) and expenses (e.g. fuel). Assets have an intrinsic value over time, versus expenses having value in them being consumed for the company to “work”.

Assets = Liabilities + Equity

Chart of Accounts

The chart of accounts lists all the accounts, whether they are balance sheet accounts or P&L accounts. Every financial transaction (e.g. a payment, an invoice) impacts accounts by moving value from one account (credit) to an other account (debit).

 Company Incorporation (Initial Capital $1,000) Customer Invoice ($100 + 9% tax) & Shipping of the Goods Goods Shipment to Customer Customer Refund Customer Payment Vendor Goods Received (Purchase Order: $50) Vendor Bill (Invoice: $50) Vendor Bill (Invoice: $52 but PO $50) Vendor Bill Paid ($52 + 9% tax) Acquire a building (purchase contract) Pay for building Yearly Asset Depreciation (10% per year) Customer Invoice (3 years service contract, $300) Revenue Recognition (each year, including first) Pay Taxes Due

Balance = Debit - Credit

DebitCreditBalance
1 Assets
  11000 Cash
  13100 Accounts Receivable
  14000 Inventory
  14600 Goods Issued Not Invoiced
  17200 Buildings
  17800 Accumulated Depreciation
  19000 Deferred Tax Assets
2 Liabilities
  21000 Accounts Payable
  22300 Deferred Revenue
  23000 Goods Received Not Purchased
  26200 Deferred Tax Liabilities
3 Equity
  31000 Common Stock
4 Revenue
  41000 Goods
  42000 Services
5 Expenses
  51100 Cost of Goods Sold
  52500 Other Operating Expenses
  53000 Price Difference

Journal Entries

Every financial document of the company (e.g. an invoice, a bank statement, a pay slip, a capital increase contract) is recorded as a journal entry, impacting several accounts.

For a journal entry to be balanced, the sum of all its debits must be equal to the sum of all its credits.

 Company Incorporation Customer Invoice ($100 + 9% tax) Customer payment Supplier Bill (Purchase Order $50 but Invoice $52) Supplier Goods Received (Purchase Order: $50) Buy an asset ($300,000 - no tax) Pay supplier invoice Cash sale (Sales Receipt) Customer pays invoice, 5% early payment rebate Fiscal year closing — positive earnings and 50% dividends
DebitCredit
Assets: Cash1000
Equity: Common Stock1000

Explanation:

  • The company receives $1,000 in cash
  • Shares worth of $1,000 belong to the founders

The initial capital can be cash, but could also be intellectual property, goodwill from a previous company, licences, know how, etc…

Sometimes, capital is not released immediately, accounts for "capital to be released" may be necessary.

Reconciliation

Reconciliation is the process of linking journal items of a specific account, matching credits and debits.

Its primary purpose is to link payments to their related invoices in order to mark invoices that are paid and clear the customer statement. This is done by doing a reconciliation on the Accounts Receivable account.

An invoice is marked as paid when its Accounts Receivable journal items are reconciled with the related payment journal items.

Reconciliation is performed automatically by the system when:

  • the payment is registered directly on the invoice

  • the links between the payments and the invoices are detected at the bank matching process

Customer Statement Example

Accounts Receivable

Debit

Credit

Invoice 1

100

Payment 1.1

70

Invoice 2

65

Payment 1.2

30

Payment 2

65

Invoice 3

50

Total To Pay

50

Reconcile

Bank Reconciliation

Bank reconciliation is the matching of bank statement lines (provided by your bank) with transactions recorded internally (payments to suppliers or from customers). For each line in a bank statement, it can be:

matched with a previously recorded payment:

a payment is registered when a check is received from a customer, then matched when checking the bank statement

recorded as a new payment:

the payment’s journal entry is created and reconciled with the related invoice when processing the bank statement

recorded as another transaction:

bank transfer, direct charge, etc.

Legal Office should automatically reconcile most transactions, only a few of them should need manual review. When the bank reconciliation process is finished, the balance on the bank account in Legal Office should match the bank statement’s balance.

Checks Handling

There are two approaches to manage checks and internal wire transfer:

  •  Two journal entries and a reconciliation
  •  One journal entry and a bank reconciliation

The first journal entry is created by registering the payment on the invoice. The second one is created when registering the bank statement.

Account

Debit

Credit

Reconciliation

Account Receivable

100

Invoice ABC

Undeposited funds

100

Check 0123

Account

Debit

Credit

Reconciliation

Undeposited funds

100

Check 0123

Bank

100

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