FACCTS Accounting System - Application Notes

Debits, Credits and Other Details

The issue of what types of entries are booked to which accounts is often most confusing in any accounting system, whether computerized or manual. The entries most often used in booking A/R and A/P into FACCTS will be examined, with notes on the required set-up of the chart of accounts.

Account Control Information

In the chart of accounts, each account has an account type (B=Balance Sheet, P=Profit/Loss) and an account direction ("+" = normal debit balance, "-" = normal credit balance). These fields are used to determine the direction of some automatic entries and the interpretation of them by the general ledger report and the report writer. It is important that these fields be filled in correctly and carefully.

As examples, consider the following:

The above table constitutes the minimum chart of accounts required to use the accounts receivable and accounts payable subsystems.

The control file carries the accounts to be used for the automatic entries discussed below. It is especially important that this information be correct in the system BEFORE any entry is made to A/R or A/P. Each of the accounts given in the above table, except for the Revenue Account and the Expense Account, must also appear in the control file.

Accounts Receivable Journal Entries

The system creates journal entries from accounts receivable when an invoice (or credit) is entered, and also when a check is entered (or reversed).

When the invoice is booked, the system automatically generates the debit to the accounts receivable control general ledger account for the net amount of the invoice. The revenue distribution information entered on the screen by the user is the basis for the credits to the various revenue accounts. Note that the distribution information is entered as PLUS numbers in the normal case and FACCTS interprets this as meaning that the given account should get a CREDIT. If a MINUS number is entered, the given account is hit with a DEBIT; this might reflect a discount given or an allowance for a trade-in.

If the invoice is a CREDIT invoice, the net amount of the invoice is MINUS and the resulting entry against the accounts receivable control account will be a CREDIT. The "revenue" distribution numbers should be entered as MINUS in the normal case, resulting in DEBITS to the revenue accounts.

When a cash receipt is entered into the A/R subsystem, the system automatically creates a DEBIT to the system cash account. The credit side of the entry is made to accounts receivable control for the total of all payments applied to specific invoices and to the unapplied cash account for the amount (if any) unapplied. This letter account is a balance sheet account that reflects a liability and is thus of type B, direction "-".

If a check is left unapplied and then applied later, the later application causes an entry to be produced that DEBITS the unapplied cash account and CREDITS the accounts receivable account.

If a check must be reversed (NSF check entry), the above entries are reversed. If the check was unapplied, it results in a CREDIT to cash and a DEBIT to the unapplied cash account. If the check was applied, it results in a CREDIT to cash and a DEBIT to accounts receivable control.

Accounts Payable Journal Entries

When a payables invoice (or credit) is entered, a check is written by the system, a manual check is entered, or a check is voided, entries are generated by the system.

When a payables invoice is entered, the system automatically makes the CREDIT entry to the accounts payable control account. The expense distribution is entered by the user in the form of PLUS numbers and results in a series of DEBITS to the various expense (normally type P, direction "+") accounts. If the entry is a vendor credit, the net amount is MINUS and results in a DEBIT to accounts payable control, while the distribution numbers are also MINUS and result in CREDITS to the expense accounts.

When a check (either machine-written or manual) is written, the automatic entry is always a CREDIT to cash and a DEBIT to accounts payable control. If a check is voided, the result is a DEBIT to cash and a CREDIT to the accounts payable control account. Note that if the original check had not yet been posted to general ledger, the reversing entry is not produced; the system just flags the check as not needing entries of either type.

Impact on Job Costing

The entry of invoices (or credits) into accounts receivable and accounts payable may optionally result in entries against the job costing system. Job costing expense/revenue categories do not have a separate indicator for the normal direction of the account, but have their direction taken from the (R = revenue or E = expense) indicator.

The items distributed to job costing from accounts receivable are assumed to be going to revenue categories with PLUS numbers. Thus, the normal case is to distribute a PLUS amount to a REVENUE category, resulting in PLUS revenue for the given job.

If the amount distributed is MINUS and goes to a REVENUE category, the MINUS is preserved and the revenue for the job is reduced by the amount of the distribution.

If an EXPENSE category is used for distribution in entering an accounts receivable invoice, the sign of the entry is reversed. This means that a PLUS number distributed to expense becomes a MINUS expense and a MINUS number that is distributed to expense becomes a PLUS expense. An example of this might be a credit given for a trade-in on an invoice that is distributed as a MINUS to the EXPENSE category used for acquisition cost. The result is a properly PLUS charge of acquisition expense to the newly-acquired item.

In accounts payable, the situation is exactly the reverse of accounts receivable. The normal case is considered to be a PLUS distribution to an EXPENSE category.

This means that any entry from accounts payable that goes to a REVENUE category will be reversed. Again using the trade-in example, the amount (MINUS) by which a vendor invoice is reduced by the value of a trade-in would be entered against a REVENUE category with a MINUS number. This will result in PLUS revenue for the job representing the item traded in.

Bank Transactions

The bank transactions are always looked at from the point of view of the bank account being affected. As an example, interest earned by the bank account is always entered as a PLUS since it should increase the bank account balance. The other side of the ledger entry is a MINUS to the income account that you specify (which should be titled something like "Interest Income"). If you are charged a service charge, this should be entered as a MINUS amount; the system will make the PLUS entry to the expense account you specify.

If you are entering a TRANSFER from one account to another, you must first transfer the amount from the source account to a G/L "holding" account; enter a MINUS amount to do this. Next, make another entry to show the transfer INTO the destination account; this amount should be PLUS. This process is done in two stages to allow for different statement closing dates on the two accounts in question or for wire transfers which might hit the two accounts on different days. The general ledger clearing account will hold the amount that is "in transit" so everything will still balance. Remember to include this account on your balance sheet report!

Bank Reconciliation Report

Note that the bank reconciliation report shows the status of the bank account AS SEEN BY THE BANK. This means that deposits are CREDITS and show as PLUS numbers. Checks written against the account are DEBITS and show as MINUS amounts. This is the reverse of the way things appear in general ledger. This is done so that this report will match your bank statement as closely as possible.

Important Summary

It is EXTREMELY IMPORTANT to understand that the system is making parts of entries, and sometimes entire entries, automatically. Duplicating the system's automatic entries will result in a confusing and incorrect general ledger.

Specifically, remember:

Dates

Many items carry two potentially different dates. The first date is the actual date of the item, such as an invoice date. The second date is the transaction date for general ledger purposes. It is possible that an invoice may be dated 3/1/93 but booked into general ledger as 2/15/93 because the invoice is for a charge that was incurred on the earlier date. The system will correctly handle these circumstances, but we suggest that the use of different dates be avoided as much as possible due to the confusion that can often result in reconciling the various reports.

Reports such as the subsystem aging reports offer the choice of which type of date to use for aging and cutoff purposes. Many of the problems that arise from apparent differences between the subsystem aging reports and the rest of the system stem from a misunderstanding of the effect of these dates. If you are attempting to match the aging against the general ledger, it is necessary to use the G/L date version of the aging. If you are attempting to match the aging against the sales journal and cash journal, use the invoice date version of the aging.