The Profit and Loss (P&L) report shows the performance of the company over a specific period (usually the current year).
The Gross Profit equals the revenues from sales minus the cost of goods sold.
Operating Expenses (OPEX) include administration, sales and R&D salaries as well as rent and utilities, miscellaneous costs, insurances, … anything beyond the costs of products sold.
The Balance Sheet is a snapshot of the company’s finances at a specific date (as opposed to the Profit and Loss which is an analysis over a period)
Assets represent the company’s wealth, things it owns. Fixed assets includes building and offices, current assets include bank accounts and cash. A client owing money is an asset. An employee is not an asset.
Liabilities are obligations from past events that the company will have to pay in the future (utility bills, debts, unpaid suppliers).
Equity is the amount of the funds contributed by the owners (founders or shareholders) plus previously retained earnings (or losses).
Each year, net profits (or losses) are reported to retained earnings.
What is owned (an asset) has been financed through debts to reimburse (liabilities) or equity (profits, capital).
A difference is made between buying an assets (e.g. a building) and expenses (e.g. fuel). Assets have an intrinsic value over time, versus expenses having value in them being consumed for the company to “work”.
Assets = Liabilities + Equity
Chart of Accounts
The chart of accounts lists all the accounts, whether they are balance sheet accounts or P&L accounts. Every financial transaction (e.g. a payment, an invoice) impacts accounts by moving value from one account (credit) to an other account (debit).
Balance = Debit - Credit
Journal Entries
Every financial document of the company (e.g. an invoice, a bank statement, a pay slip, a capital increase contract) is recorded as a journal entry, impacting several accounts.
For a journal entry to be balanced, the sum of all its debits must be equal to the sum of all its credits.
examples of accounting entries for various transactions. Example:
Example 1: Customer Invoice:
Explanation:
- You generate a revenue of $1,000
- You have a tax to pay of $90
- The customer owes $1,090
Configuration:
- Income: defined on the product, or the product category
- Account Receivable: defined on the customer
- Tax: defined on the tax set on the invoice line
The fiscal position used on the invoice may have a rule that replaces the Income Account or the tax defined on the product by another one.
Example 2: Customer Payment:
Explanation:
- Your customer owes $1,090 less
- Your receive $1,090 on your bank account
Configuration:
- Bank Account: defined on the related bank journal
- Account Receivable: defined on the customer
Reconciliation
Reconciliation is the process of linking journal items of a specific account, matching credits and debits.
Its primary purpose is to link payments to their related invoices in order to mark invoices that are paid and clear the customer statement. This is done by doing a reconciliation on the Accounts Receivable account.
An invoice is marked as paid when its Accounts Receivable journal items are reconciled with the related payment journal items.
Reconciliation is performed automatically by the system when:
- the payment is registered directly on the invoice
- the links between the payments and the invoices are detected at the bank matching process
Customer Statement Example
| Accounts Receivable | Debit | Credit |
|---|---|---|
| Invoice 1 | 100 | |
| Payment 1.1 | 70 | |
| Invoice 2 | 65 | |
| Payment 1.2 | 30 | |
| Payment 2 | 65 | |
| Invoice 3 | 50 | |
| Total To Pay | 50 |
Bank Reconciliation
Bank reconciliation is the matching of bank statement lines (provided by your bank) with transactions recorded internally (payments to suppliers or from customers). For each line in a bank statement, it can be:
- matched with a previously recorded payment:
- a payment is registered when a check is received from a customer, then matched when checking the bank statement
- recorded as a new payment:
- the payment’s journal entry is created and reconciled with the related invoice when processing the bank statement
- recorded as another transaction:
- bank transfer, direct charge, etc.
Vorlik should automatically reconcile most transactions, only a few of them should need manual review. When the bank reconciliation process is finished, the balance on the bank account in Vorlik should match the bank statement’s balance.
Checks Handling
There are two approaches to manage checks and internal wire transfer:
- Two journal entries and a reconciliation
- One journal entry and a bank reconciliation
The first journal entry is created by registering the payment on the invoice. The second one is created when registering the bank statement.
| Account | Debit | Credit | Reconciliation |
|---|---|---|---|
| Account Receivable | 100 | Invoice ABC | |
| Undeposited funds | 100 | Check 0123 |
| Account | Debit | Credit | Reconciliation |
|---|---|---|---|
| Undeposited funds | 100 | Check 0123 | |
| Bank | 100 |
A journal entry is created by registering the payment on the invoice. When reconciling the bank statement, the statement line is linked to the existing journal entry.
| Account | Debit | Credit | Reconciliation | Bank Statement |
|---|---|---|---|---|
| Account Receivable | 100 | Invoice ABC | ||
| Bank | 100 | Statement XYZ |