Understanding journal entry and double-entry accounting and how they work in E-TS.
This topic is intended for people who have basic accounting knowledge to understand when journal entries are created in E-TS and how they will affect the Chart of Accounts according to double-entry accounting system.
A journal entry is used to record a financial transaction in the accounting system for a business.
Double-entry accounting is an accounting system where every financial transaction is recorded and it impacts at least two accounts, one account is debited, another account is credited.
Under double-entry accounting system, the totals of debit and credit must be balance based on the accounting equation: Assets = Liabilities + Equity.
E-TS will automatically create journal entries when:
These journal entries effect the Chart of Accounts and manual journal entries can also be recorded to handle adjustments.
E-TS separates payments, stock and debt. This means that each transaction will result in multiple journal entries.
Refer to the following examples of journal entries made in E-TS, note that the sales tax is 10% for the below examples.
When a client invoice is released, E-TS will create journal entries if the account is set to accrual basis accounting.
| Accrual basis | ||
|---|---|---|
| Sales | $9.99 | |
| Sales tax | $1.00 | |
| Debetors | $10.99 | |
| $10.99 | $10.99 |
| Accrual basis | ||
|---|---|---|
| Sales | $9.99 | |
| Sales tax | $1.00 | |
| Cash on hand | $10.99 | |
| $10.99 | $10.99 |
When a client makes a payment on one or more invoices, E-TS will record the payment. If cash basis is being used, the revenue and sales tax will be recorded too.
| Accrual basis | ||
|---|---|---|
| Debitors | $10.99 | |
| Bank | $10.99 | |
| $10.99 | $10.99 |
| Cash basis | ||
|---|---|---|
| Sales | $9.99 | |
| Sales Tax | $1.00 | |
| Bank | $10.99 | |
| $10.99 | $10.99 |
| Accrual basis | ||
|---|---|---|
| Outstanding Cash | $10.99 | |
| Cash on hand | $11.00 | |
| Cash rounding | $0.01 | |
| $11.00 | $11.00 |
| Cash basis | ||
|---|---|---|
| Sales | $9.99 | |
| Sales Tax | $1.00 | |
| Cash on Hand | $11.00 | |
| Cash rounding | $0.01 | |
| $11.00 | $11.00 |
By default payments by card, bank transfer and cheque are posted to the Bank account, but may be change in the Journal Events to make bank reconciliation simpler.
When stock is supplied to client, E-TS will record the reduction of the Stock on hand account against the Cost of sales account.
| Accrual basis | ||
|---|---|---|
| Stock on hand | $2.00 | |
| Cost of sales | $2.00 | |
| $2.00 | $2.00 |
| Cash basis | ||
|---|---|---|
| Stock on hand | $2.00 | |
| Cost of sales | $2.00 | |
| $2.00 | $2.00 |
When a bad debt is written off in an accrual basis accounting system, sales tax and revenue need to be reversed. In most countries the receiver is going to want the sales tax amount involved as a separate value on the return. As a result, E-TS will post the reversal of the sales tax to the GST on bad debts account by default.
| Accrual basis | ||
|---|---|---|
| Bad debts | $9.99 | |
| GST on bad debts | $1.00 | |
| Debtors | $10.99 | |
| $10.99 | $10.99 |
Upon the release of a supplier invoice for an accrual basis accounting system, E-TS will make a journal entry to reflect the increase in debt, the sales tax involved and what was purchased.
| Accrual basis | ||
|---|---|---|
| Creditors | $55.00 | |
| Sales tax expended | $5.00 | |
| Tools and equipment | $10.00 | |
| Sundry expenses | $10.00 | |
| Invoiced stock | $30.00 | |
| $55.00 | 55.00 |
When a payment is added to a supplier invoice, E-TS will post the transfer of the assets and reduce the debt. Cash basis accounting will also include the reason for the payment.
| Accrual basis | ||
|---|---|---|
| Creditors | $55.00 | |
| Bank | $55.00 | |
| $55.00 | $55.00 |
| Cash basis | ||
|---|---|---|
| Bank | $55.00 | |
| Sales tax expended | $5.00 | |
| Tools and equipment | $10.00 | |
| Sundry expenses | $10.00 | |
| Invoiced stock | $30.00 | |
| $55.00 | $55.00 |
Like client payment methods, the cheque, bank transfer and card payments for supplier invoices can be posted to custom accounts other than the default Bank account.
E-TS does not post directly to the Stock account, but to a holding account that accounts for items which we have received an invoice for, but not a physical product. This account can also be used to identify stock which has been received (on purchase orders) before the supplier invoices.
Upon receiving stock on a purchase order, E-TS will make a journal entry increasing the Stock account, while reducing the holding account which was, or will be, affected by a supplier invoice.
| Accrual basis | ||
|---|---|---|
| Invoiced stock | $30.00 | |
| Stock | $30.00 | |
| $30.00 | $30.00 |
| Cash basis | ||
|---|---|---|
| Invoiced stock | $30.00 | |
| Stock | $30.00 | |
| $30.00 | $30.00 |
In many industries stock is often wasted during commission of a work order. This loss is recorded against a reduced Stock account.
| Accrual basis | ||
|---|---|---|
| Stock | $0.38 | |
| Waste stock | $0.38 | |
| $0.38 | $0.38 |
| Cash basis | ||
|---|---|---|
| Stock | $0.38 | |
| Waste stock | $0.38 | |
| $0.38 | $0.38 |
Sometimes during a stocktake, the amount of stock can be different to what was expected. E-TS will create a journal entry to record this loss, or on the rear occasion, the recovery of stock.
| Accrual basis | ||
|---|---|---|
| Stock | $48.00 | |
| Lost stock | $48.00 | |
| $48.00 | $48.00 |
| Cash basis | ||
|---|---|---|
| Stock | $48.00 | |
| Lost stock | $48.00 | |
| $48.00 | $48.00 |
Upon cashing up a float, many times the amounts will not match perfectly. The difference is posted to the Till shortage account.
| Accrual basis | ||
|---|---|---|
| Cash on hand | $0.20 | |
| Till shortage | $0.20 | |
| $0.20 | $0.20 |
| Cash basis | ||
|---|---|---|
| Cash on hand | $0.20 | |
| Till shortage | $0.20 | |
| $0.20 | $0.20 |
Banking in E-TS will track cash and cheque payment. The double-entry for cheque payments is created at the time of the payment. It is strongly recommended that a clearing account is created for cheque payments. As with cashing up, sometimes the safe does not hold the expected amount, so at this point a loss can be recorded to the Till shortage account too.
| Accrual basis | ||
|---|---|---|
| Cash on hand | $423.20 | |
| Bank | $423.00 | |
| Till shortage | $0.20 | |
| $423.20 | $423.20 |
| Cash basis | ||
|---|---|---|
| Cash on hand | $423.20 | |
| Bank | $423.00 | |
| Till shortage | $0.20 | |
| $423.20 | $423.20 |
Opening transfer will set up the initial account balances with a journal entry that can not be exported. It will also set the initial stock level and cash on hand. This will provide you with a starting point for the company's books.
The opening values should be set before the first purchase or sale is made.
This journal entry will not export to a third-party accounting package.
| Accrual basis | ||
|---|---|---|
| Equity | $488,721.58 | |
| Cash on hand | $1,800.00 | |
| Stock | $486,921.58 | |
| $488,721.58 | $488,721.58 |
| Cash basis | ||
|---|---|---|
| Equity | $488,721.58 | |
| Cash on hand | $1,800.00 | |
| Stock | $486,921.58 | |
| $488,721.58 | $488,721.58 |