Re: General Ledger queries

On Sun, Mar 2, 2014 at 4:31 PM, Benedict White <..hidden..> wrote:

On 03/03/14 00:00, Chris Travers wrote:
>
> Yes. That is both correct (assuming your £1000 is a loan to the
> company from the director, not the other way around). What doesn't
> make sense about it?
>

Well, the Share account is credited to show the company has an asset of
capital whereas the directors loan account has at some point (though not
in the short term) to be paid back. So whilst it makes some sense it
makes a little less than the share issue. (Please remember, I'm not an
accountant).

Ok. So let's start with two basic assumptions:

1. A business owns nothing but what it owns on behalf of others. This why your books have to always balance, and why assets - liabilities = equity.

2. The money borrowed from the director then does not affect equity (assets held on behalf of the shareholders).

So your director's loan is a liability. After these two transactions you have (account numbers arbitrary here):

1011 Asset Bank Account: Debit balance 1010 GBP

2010 Liability Director's Loan: Credit balance 1000 GBP

3010 Equity Share Capital: Credit balance 10

Your balance sheet should show this.

As a note, if you are dealing with share capital in a real business, you would probably want to track who owns the shares and so depending on how many shareholders you have, you would probably want to track this either in an external system, whether paper or electronic, or by adding additional accounts for each shareholder (for example: 3010-001 Capital - Chris Travers).

I take it that the general ledger is also (by similar means) the way to
enter in purchases of sundry items, professional fees (For example
company formation fees) and other sundry expenses?

Ok, this may seem a little long-winded but it might be worth providing a basic introduction here. We try to keep relatively close to the paper world because the techniques of paper accounting are robust, transparent, and time tested.

In the paper accounting world you have journals and ledgers. The journals are where you enter your transactions and the ledgers are aggregations of what was entered. The general ledger is thus the financial side of your books aggregated from all your journals (general, sales, purchase, payroll, receipts, disbursements, etc). You may have various special ledgers as well (showing such things as inventory or share ownership).

This distinction is blurred in the software world but it is still a useful distinction to keep in mind. Stuff gets entered into journals. It gets presented in ledgers. We are moving more towards this approach with the financial rewrite I am hoping to complete for 1.5.

The big thing missing from the general journal/ledger is an ability to connect directly to any other information. So for a few directors or banks who loan money, you can track who is owed using separate chart of accounts entries. Misc expenses might be ok too as long as you don't have to track who the money was owed to and they are paid at the same time they are accrued. However for expenses, I would just go with AP transactions against a generic vendor if they are paid right there. This helps ensure that your AP reports show the expenses.

Things which are sort of core general journal entries are:

1. Transfer of money from one account to another, especially between asset accounts or the like.

2. Financial adjustments for reporting purposes (for example, accounting for unearned income).

You would also use it any time our current modules do not offer functionality specific to what you are doing, such as:

1. Tracking of equity and disbursement of earnings where there are few shareholders.

2. Payroll (in 1.3, and in 1.4 until your area is well supported).

3. Tracking large loans to financial institutions

Hope this helps,

Chris Travers

Efficito: Hosted Accounting and ERP. Robust and Flexible. No vendor lock-in.

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