BOOKKEEPING WITH COMPUTERS

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1 BOOKKEEPING WITH COMPUTERS INTRODUCTION Whether manual or computerised, bookkeeping is essentially the same. Both methods use the same concept of DOUBLE ENTRY, i.e. Debits () and edits (). Double entry means that for every transaction, there are two things happening. Something is going TO () somewhere, FROM () somewhere else. It is this system that ensures everything will balance, i.e. The s will equal the s. Full bookkeeping systems are usually separated into modules. These are the SALES (DEBTORS) LEDGER (customers), the PURCHASE (CREDITORS) LEDGER (suppliers) and the NOMINAL LEDGER. Computer systems used to show this very well in their early days, when you were often required to pay for each module. There is also a WAGES module. These modules are explained below. Before getting into more detail, as well as the double entry concept, there is a second concept that should always be kept in mind. This concept mainly applies to expenditure, and is the distinction between CAPITAL EXPENDITURE and REVENUE EXPENDITURE. Capital expenditure is something like the purchase of a motor vehicle, or a computer for the office. These items are likely to benefit the business for more than one year. Capital expenditure will go to the BALANCE SHEET. Revenue expenditure is something like the purchase of postage stamps, which will be used immediately. Revenue expenditure will go to the PROFIT AND LOSS ACCOUNT. SALES LEDGER When you sell something to somebody, you raise a sales invoice in the name of that person. If the person is a regular customer who you allow to pay later, then you will probably have an account for them. This is a sales ledger account. On the computer, you give each customer an account code, so that the computer holds a record of all customers. George & Co, Chartered Accountants Page 1 of 1

2 The sales invoice is POSTED (entered) into the computer through the sales ledger module, in sales invoice posting. You key in the customer code and enter the amount of the invoice with a description of what the sale is for. You will also give the computer the nominal account code to which it is to put the other side of the transaction. If VAT is involved, you will let the computer know and it will automatically put the VAT amount to the VAT nominal account. To describe what happens in words, the sales invoice goes to the customer s account in the sales ledger, from the sales account and VAT account, both in the nominal ledger. In journal format it looks like this: Sales ledger (customer account) 4, Sales (nominal account) 4, VAT account (nominal account) The debits equal the credits. All you do is put the amount into the customer s account, tell the computer where you want things to go (by the codes) and it completes the double entry for you. Now, let s say that this customer pays you 3, in the same month as a part payment of the above invoice. In the sales ledger module, within sales ledger receipts, you key in the customer account code and enter the 3, In words, 3, is going to the bank account, from the customer s account as follows: Bank account (nominal account) 3, Sales ledger (customer account) 3, Again, the debits equal the credits. PURCHASE LEDGER This is exactly the same as for the sales ledger. When you buy something from somebody, you receive an invoice. If you are allowed credit on this invoice, you will have a purchase ledger account for the supplier on the purchase ledger, with its own identification code. George & Co, Chartered Accountants Page 2 of 2

3 The invoice is posted into the computer through the purchase ledger module, within purchase invoice posting. You key in the account number and enter the amount of the invoice, letting the computer know what nominal account to post to ( telephone, for example, if the purchase ledger account is British Telecom ). Again, you let the computer know if VAT is involved and it will automatically sort this out. In words, the amount of the purchase invoice goes to the telephone nominal account and the VAT nominal account, from the British Telecom purchase ledger account: Telephone (nominal account) VAT account (nominal account) 8.75 Purchase ledger (supplier account) Let s say that you later pay the whole of this invoice (say, on the last day of the same month). In the purchase ledger module, within purchase ledger payments, you key in the customer account code and enter the as paid. The payment goes to the purchase ledger, from the bank account: Purchase ledger (supplier account) Bank account (nominal account) NOMINAL LEDGER So far, only transactions involving invoices have been entered into the computer. At some stage, you will need to post transactions where there are no invoices. As an example, a bank charge. You will use the nominal ledger to enter any transactions that have not already been dealt with through the purchase or sales ledgers. For example, to enter a bank charge of 15, you would enter a journal within the nominal ledger, putting the 15 to bank charges, from the bank account: Bank charges (nominal account) Bank account (nominal account) George & Co, Chartered Accountants Page 3 of 3

4 A cheque for 20 cash might be written to top up the cash float: Cash account (nominal account) Bank account (nominal account) Then you might make some payments out of petty cash: Postage (nominal account) 1.80 Stationary (nominal account) 3.80 VAT account (nominal account) 0.40 Cash account (nominal account) 6.00 Somebody who you will not be allowing credit (no customer account) then pays you 50 cash for a sundry sale (no VAT). Cash account (nominal account) Sundry sales (nominal account) With many computer systems now, you might not need to enter the above amounts as journals. This is because they are usually set up with procedures described as bank payments and cash payments. You just put in the amount and the nominal code to which you want it to go and the computer automatically carries out the other side of the transaction. However, you can still enter these amounts as journals if you prefer. These alternative methods are just getting the computer to complete the other side of the journal for you. WAGES The wages module enables you to enter the gross pay (or even just the hours worked) and have the computer calculate the tax and National Insurance (NI) for you. You don t need to go through the various tables provided by the Inland Revenue. George & Co, Chartered Accountants Page 4 of 4

5 The wages module can be integrated with the other modules. This means that the information from the payroll can be automatically transferred to the nominal ledger by the computer (this is as for the sales, purchase and nominal ledger, which are usually all integrated). However, it is very common for the wages module to be left as a package on it s own. In this case, you will enter the information produced into the computer as a journal (in the nominal ledger). When a period of wages has been processed, the computer will give a summary of gross pay, tax, employee s NI, employer s NI, net pay and various other amounts (SSP or pension deductions, for example). This summary will show the amounts for each employee for the period being processed and for the period to date. It also gives the totals for all employees (which can be further grouped into departments if required). For example, say in month 9, the computer has processed the payroll and the month s totals are as follows: Directors remuneration (gross) 1, Other salaries (gross) Tax deducted Employee s NI Net pay 1, Employer s NI The initial journal to be entered into the computer will be as follows: Directors remuneration (nominal account) 1, Other salaries (nominal account) Employer s NI (nominal account) Wages control (nominal account) 1, PAYE control (nominal account) When the net wages are paid (usually during the period of processing), assuming they are paid out of the bank, then the following journal will need to be entered: Wages control (nominal account) 1, Bank account (nominal account) 1, George & Co, Chartered Accountants Page 5 of 5

6 This clears out the wages control balance, which was previously 1,000. When the PAYE cheque is paid to the Collector (usually by 19 th of the following month), the journal will be: PAYE control (nominal account) Bank account (nominal account) As can be seen, the PAYE account balance has now been cleared to zero again. RECONCILIATIONS AND CONTROL ACCOUNTS Bank Having completed all postings for a period, the balance at the bank, according to the bank statement (having been adjusted for un-presented cheques and bankings) should agree to the bank balance on the computer. Un-presented items are amounts that have been entered into the computer as paid out of the bank or paid into the bank, but which have not cleared the bank statement as at the date of the reconciliation. For example, if our British Telecom payment above of had been dated 31 December and sent on that day, then the computer bank account will show less in it than the bank statement. The reconciliation would look as follows: Balance per bank statement at 31 December 1, Less unpresented cheque Balance per computer at 31 December 1, ====== Sales Ledger Control The balance on the sales ledger control in the nominal ledger is a total of all the individual customer account balances within the sales ledger. In other words, it is the total amount that is owed to you by your customers. At regular intervals, these should be reviewed as part of your credit control procedures. George & Co, Chartered Accountants Page 6 of 6

7 Purchase Ledger Control The balance on the purchase ledger control in the nominal ledger is a total of all the individual supplier account balances within the purchase ledger. In other words, it is the total amount that you owe to your suppliers. At regular intervals, these should be reviewed to ensure that the balances are being cleared in accordance with your payment policy. Petty Cash Control The cash account balance, according to the computer, should be equal to the amount in your petty cash float. Wages Control The balance on this account should be equal to any unpaid net wages. PAYE Control The balance on this account should be equal to the PAYE payable to the Collector of Taxes. VAT Account This should equal the amount that you owe to the VAT Office. At the end of a VAT quarter, the balance should agree to the VAT Return. These are the main reconciliations that should be made. They are simply an inspection of the balances to ensure that they agree with what you believe they should be. If they do not agree, something will need sorting out. It is better to find it sooner than later, so these reconciliations should be carried out frequently (at the end of each month is usual). George & Co, Chartered Accountants Page 7 of 7

8 TRIAL BALANCE / BALANCE SHEET / PROFIT AND LOSS ACCOUNT A summary trial balance is a list of all the nominal ledger balances. Within the nominal ledger, you can print this trial balance at any time. It should be printed at least at the end of each month, so that all the reconciliations can be made. It should be reviewed to make sure that there is nothing obviously wrong. The trial balance will show debit and credit balances. The total of the debit balances will equal the total of the credit balances. This is because of the double entry process. Taking the transactions that we have used as examples above, a trial balance printout would appear, as shown below: TRIAL BALANCE Sales ledger control B 1, Bank account B 1, Cash account B Purchase ledger control B 0.00 Wages control B 0.00 PAYE control B VAT account B Sales P 4, Sundry sales P Directors remuneration P 1, Other salaries P Employer s NI p Telephone P Printing P 1.80 Stationery P 3.80 Bank charges P , , ====== ====== These are all nominal accounts, with their own identification codes so that the computer can recognise them. The B and P have been included above to indicate which nominal accounts are Balance Sheet codes (B) and which are Profit and Loss Account codes (P). Most computer systems will produce the Balance Sheet and Profit and Loss Account for you. From the summary trial balance above, a Balance Sheet and Profit and Loss Account would be produced, as shown on the following pages: George & Co, Chartered Accountants Page 8 of 8

9 BALANCE SHEET FIXED ASSETS - CURRENT ASSETS Trade debtors 1, Cash at bank and in hand 1, , CURRENT LIABILITIES PAYE Payable VAT Payable , NET CURRENT ASSETS 2, , ====== REPRESENTED BY: Profit for the period 2, ====== George & Co, Chartered Accountants Page 9 of 9

10 PROFIT AND LOSS ACCOUNT INCOME Sales 4, Sundry sales , EXPENSES Directors remuneration 1, Other salaries Employer s NI Telephone Printing 1.80 Stationary 3.80 Bank charges , NET PROFIT FOR THE PERIOD 2, George & Co, Chartered Accountants Page 10 of 10

11 CONCLUSION There are many different computer bookkeeping packages for sale. However, there is one thing that remains absolutely constant, whatever the product looks like. They all adopt the concept of DOUBLE ENTRY BOOKKEEPING. This is not a complicated concept, but it is the whole foundation for bookkeeping. If you can grasp it, then you will be able to use any decent computer bookkeeping package that is available. Without a grasp of it, you will still be able to use the system, but you won t know if you have gone wrong. Another comforting thing to remember is that if anything does ever go wrong, so long as you can spot the problem, you will always be able to correct it. The exact place of entry into the computer system, as described above, might not be the same for the system that you use. However, they are all based on the three modules (the sales ledger, the purchase ledger and the nominal ledger). As systems develop, they are becoming more and more integrated, so that it is more difficult to see the distinction between the modules. However, they are always still there. The development is usually centred on trying to make the systems easier to use for those people without a grasp of double entry. However, you really do need to get to grips with double entry in order to get the full benefit of any system. The procedures and concepts described above are just a background to what is going on within a computer bookkeeping system. There is a mass of useful information that can be obtained from the reports available within the systems. How useful these reports are, is obviously dependent on the quality of the information entered. It is also usually possible to create your own reports. It is always useful to read through the user guides provided and to have a good look at the help facilities within the system. Even though you won t remember how something is done, you will probably remember that it can be done. If you ever need ad-hoc assistance as you are trying to get used to a system, or if you would like a more structured form of training, please do contact us. We have masses of experience with this type of learning and, most importantly, it isn t as difficult as it might look. George & Co. Chartered Accountants Tel: Thornhill House 26 Fisher Street Maidstone Kent ME14 2SU George & Co, Chartered Accountants Page 11 of 11

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