Lesson 5
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Lesson 5
In our example, we are just going to demonstrate a simple accrual. We see that payroll expense is increased by $2,000. So is accrued payroll. Because payroll follows the accrual, only it affects the next month, we need to do a payroll – that is, we need to print paychecks. We won’t be expensing anything because the payroll expense was already accrued. We debit accrued payroll for $2,000 and we credit cash for $2,000. As a result, cash went down $2,000 and accrued payroll went to zero.

This covers many concepts and definitions that we need to know to understand accounting. As time passes, we repeat the same processes over and over. We account for thousands of sales, hundreds of inventory purchases, payrolls every week – or as often as we do payroll – and the transactions we do are routine and there are many of them. That’s exactly what computers were made to do.

Time passes and our accounting history gets big. We have 5,000 customers – 1,000 with open accounts. We have 150 suppliers, all with open accounts. We have 80 employees, each with a payroll history to be tracked. Things are getting complicated. How do we track all of this? We rely on A-Systems Software.

Our software has journals. The accounts receivables journal tracks each of our customers, their individual purchases, their open balances and their invoice numbers, and how much is due and when it is due. The general ledger shows only how much the balance is in the accounts receivable journal. All of the details are in the accounts receivable journal. We can see the aging there.

The software has other journals, too. The accounts payable journal tracks each of our suppliers, their open balances and the invoice numbers, how much is owed on each invoice and when it is due. Again, the general ledger shows only how much the balance is in the accounts payable journal. All of the details are in the accounts payable journal. We can see the aging there.

The software also has a payroll journal that tracks each of our employees, their year-to-date earnings, and it also prints a W2 for each employee at the year-end. Again, the general ledger shows only how much the balance is in the payroll journal. All of the details are included in the payroll journal. Journals are important because they track the details of every transaction.

Now, it’s time for a review. Accounting is a numerical history of our business. The history is called the profit and loss, or the income statement. Accounting presents a numerical photograph of our business, it status. This numerical photograph is called the balance sheet. Together, the income statement and the balance sheet are the financial statement. Accounting is always a two-step process. Every transaction has a positive part called a debit and a negative part called a credit. Debits and credits offset each other. Journals track individual transactions and summaries of the journals are posted into ledgers. The purpose of accounting is to tell us where we are, and how we got there. Without accounting, we are running our business by the seat of our pants.