• Khaled Abolaynain

Basic Accounting

Before we get into our ERP system in detail, it’s important we first touch on some important accounting concepts before delving into the real stuff, so it will make sense when trying to understand what the accounting module is all about.

What is a journal entry?

In accounting, a journal is a record of financial transactions in order by date. Each of these transactions consist of journal entries that are then posted to the general ledger module. Each journal entry consists of two parts, a debtor and a creditor.

We need to understand the structure of journal entries, how they are constructed, its two sides, which are basically two resource accounts (debtor, creditor) for the company and how these journal entries are able to describe accounting transactions happening across an enterprise. An accounting transaction typically consists of one or more journal entries depending of that kind of transaction. These journal entries are nothing, but a detailed description of what is really happening inside a business entity. The degree of detail of these journal entries may differ according to what a financial manager may see appropriate.

Now that we have a feel of what a journal entry really is, it’s time to categorize its two accounts (debtor, creditor) into four types depending on what they describe. These are assets, liabilities, expenses and revenues. The difference between these accounts is illustrated as follows:

1. Asset accounts: represent the different types of economic resources owned or controlled by an entity. Assets are primarily divided into two types:

  • Fixed assets: These are typically owned for a long period of time such as land, real estate, machinery, instruments and appliances

  • Current assets: These are typically owned for a short period of time, then sold, consumed or exhausted through the normal operations of a business. Examples of these are customers (money owed to the company for a product or service delivered through cash in hand or accounts receivable), treasury, inventory and debtor banks.

2. Liability accounts: represent the different types of economic obligations of an entity, such as suppliers, taxes and creditor banks.

3. Expense accounts: represent the company's expenditures such as materials, utilities, rents, salaries, interest, and insurance.

4. Revenue accounts: represent the company's earnings. These include sales and sales returns.

Now that we have a good understanding of these accounts, their types and what they describe, let’s shift our attention into our ERP system, and how this all blends together. It is worth mentioning that the way we demonstrated these accounts and their types is textbook explanation. Sometimes, these accounts are detailed or aggregated according to each business needs. Sometimes, a business may have a branch account that another doesn’t have. That’s usually the responsibility of a company’s financial manager to design that chart of accounts the way he sees realistic to reflect the company’s activities and operations.

We are ready to begin with the accounting module. What is it? What does it do? How can it help in context of everyday business accounting?