In order to fully harness the power of any computerized accounting system, you must become familiar with some basic accounting rules and procedures.
The program PERFECT FIT uses the Double Entry Accounting system. This system has been in use for over 400 years, and is the basis of all Generally Accepted Accounting Principles, for businesses both large and small.
Using this system will assure financial accuracy, as well as allowing continuous tracking of both profits (or losses) and net worth (value of your business).
The terms for the Double Entries are Debits and Credits (abbreviated DR and CR). Forget everything you may have learned about your bank Debiting and Crediting your account. That is not what this is about.
Every Financial Transaction the business does must be entered at least twice, with the total of the debits equaling the total of the credits. In computer lingo we call each DR and CR entry a separate transaction, and it is assigned a unique number, in sequence.
Some Transactions may involve checks or cash, and others may affect only the value of something, with no money changing hands.
This is what I call ” The Accountant’s Bible“. It is the key to understanding the double entry process.
To help the computer and the user, and for ease of sorting, accounts are numbered, with the first number indicating what type of account it is. The account types and their first corresponding digits (ie: 1200, 2120,…, 4115,…, 7516,…) are as follows:
1 Assets (Things of Value in the business)
2 Liabilities (Money the business owes)
3 Capital (Net Value of the business)
4 Revenue (Money taken in by the business
5 Cost of Goods Sold (Cost of what is actually sold)
6-9 Expenses (Expenses that are not part of the product sold)
The type of account determines whether the Debit or Credit Increases or Decreases that account. This chart is crucial to understanding what happens in a double entry system.
A Debit can Increase or Decrease an account, depending upon what type of account it is.
The Balance Sheet Accounts (with numbers beginning with 1-3) indicate the VALUE of the business at a given POINT in time. The Income Statement Accounts (with numbers beginning with numbers 5-9) indicate the PROFIT of the business over a PERIOD of time.
All accounts may be affected during the day to day operation of the business.
The program PERFECT FIT is designed so that the Debits and Credits are inserted “behind the scenes” whenever possible. For example, when inserting a check – making a payment, the user only needs to enter the account for which the check is being written against (called the offset account). The account, Cash in Bank, is automatically Credited (reduced) when the check is OK’d.
Invoice Posting is even more automated, as all the account categories are selected and the transactions inserted automatically.
For direct entries into the General Ledger, such as opening balances and inventory adjustments, the user will need a full understanding of the DR and CR rules for each account.
All transactions, including the “behind the scenes” ones, can be viewed on the GL Audit Trail Reports. This is the heart of the accounting system. All other reports are merely different sorts, searches, and subtotals of the Audit trail.
The Audit Trail for any given Post Date should show that total Debits equal total Credits. The accounts for that date are said to be In Balance. Any other way of looking at the audit trail may show an out of balance condition which would not be an error.
The Diagnostic reports search for out of balance conditions by post date. Any Transaction or Account errors will put the accuracy of the financial data into question. This is why it is so important to run diagnostics on a regular schedule and fix any errors promptly.
In addition to inserting transactions when needed, the computer also keeps a running tally of the “Balance” on each account. This number is the sum total of all the transactions entered into the computer for the current year.
The Account Balances are the CURRENT total of the transactions on the account. To find the Account Balances from last week, the computer must subtract all of last weeks transactions from the current account balances.
Since the Assets, Liabilities, and Capital Accounts are used for the balance sheet (a POINT in time), the current balance of those accounts is very important. Think about how important your current Bank Balance is (Asset Account, Cash in Bank). These figures are used for the balance sheet reports.
The Revenue, Cost of Goods, and Expenses Accounts are used for the Income Statement, which is the total of transactions over a PERIOD of time. The current balance of these accounts does not affect the Income Statement. The computer merely adds up all the transactions within a given date range.
When you close a period for a single month, the balance of each account is carried forward to the next month. This will enable the General Ledger reports to show the “opening balances” for each month.
No transactions are deleted, so financial statements and analysis reports can still be run after closing.
Closing the period will prevent any posting of transactions to the closed period. This safeguard will help prevent data entry errors.
Diagnostic reports do not examine transactions in closed periods, so they will run faster with fewer periods open.
Unlike many computerized accounting systems, PERFECT FIT does not delete transactions when a period is closed. This allows the user to maintain a large history on Customers, finances, vendors, etc. The cost of this is that the data file will continue to grow in size (uses disk space), which will then make backups take longer.
There is a provision for purging data, which is fully user controlled. Only transactions for closed periods can be purged (deleted).
At the end of the year, when you add up all the revenue and subtract all the expenses, the money left over is the PROFIT. This money increases the value of the business (Capital).
The Year End Close Period function in PERFECT FIT will do these calculations and make the entries automatically. A series of transactions is inserted against each Income Statement account, which effectively puts their balances to 0.00 for the year closed. It also will bring forward the balances on the Balance Sheet Accounts.