Bookkeeping

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Basic Accounting Concepts for Oracle Financials
Bookkeeping is the process of systematically and methodically recording the financial accounts and transactions of an entity. Bookkeeping is concerned with the mechanism of keeping accounts, ledgers, and journals, including posting entries and taking trial balances. Two types of records continue to be used in bookkeeping — journals and ledgers. They can be recorded by hand or entered into a computer. The journal contains daily transactions (sales, purchases, etc.), while the ledger contains the record of individual accounts. Bookkeeping involves keeping track of a business's financial transactions and making entries to specific accounts using the debit and credit system. Each entry represents a different business transaction. Every accounting system has a chart of accounts that lists actual accounts as well as account categories. There is usually at least one account for every item on a company's balance sheet and income statement. In theory, there is no limit to the number of accounts that can be created, although the total number of accounts is usually determined by management's need for information. Bookkeeping provides the necessary support for such accounting functions as the preparation of financial statements, cost reports, and tax returns. The process of bookkeeping involves four basic steps: 1) Analyzing financial transactions and assigning them to specific accounts; 2) Writing original journal entries that credit and debit the appropriate accounts; 3) Posting entries to ledger accounts; and 4) Adjusting entries at the end of each accounting period. Bookkeeping is based on two basic principles. One is that every debit must have an equal credit. The second, that all accounts must balance, follows from the first. Bookkeeping entries are made in a journal, which is a chronological record of all transactions. Journal entries are typically made into a computer from paper documents that contain information about the transaction to be recorded.

Journal entries can be made from invoices, purchase orders, sales receipts, and similar documents, which are usually kept on file for a specified length of time. Journal entries assign each transaction to a specific account and record changes in those accounts using debits and credits. Information contained in the journal entries is then posted to ledger accounts. A ledger is a collection of related accounts and may be called an Accounts Payable Ledger, Accounts Receivable Ledger, or a General Ledger, for example. The general ledger, sometimes known as the nominal ledger, is the main accounting record of a business which uses double-entry bookkeeping. It will usually include accounts for such items as current assets, fixed assets, liabilities, revenue and expense items, gains and losses. The general ledger is a ‘collection of the group of accounts’ that supports the value items shown in the major financial statements. It is built up by ‘posting’ transactions recorded in the sales daybook, purchases daybook, cash book and general journals daybook. Posting is the process by which account balances in the appropriate ledger are changed. While account balances may be recorded and computed periodically, the only time account balances are changed in the ledger is when a journal entry indicates such a change is necessary. Information that appears chronologically in the journal becomes reclassified and summarized in the ledger on an account-by-account basis. The general ledger can be supported by one or more subsidiary ledgers that provide details for accounts in the general ledger. The sub ledger, or subsidiary ledger, is a subset of the general ledger used in accounting. The sub ledger shows detail for part of the accounting records such as property and equipment, prepaid expenses, etc. The detail would include such items as date the item was purchased or expense incurred, a description of the item, the original balance, and the net book value. The total of the sub ledger would match the line item amount on the general ledger. This corresponding line item in the general ledger is referred to as the controlling account. The subsidiary ledger balance is compared with its controlling account balance as part of the process of preparing a trial balance. In accounting, the controlling account is an account in the general ledger to which a corresponding subsidiary ledger has been created. The subsidiary ledger allows for

tracking transactions within the controlling account in more detail. Individual transactions are posted both to the controlling account and the corresponding subsidiary ledger, and the totals for both are compared when preparing a trial balance to ensure accuracy. For example, Accounts Receivable is the controlling account for the Accounts Receivable Subsidiary Ledger. In this subsidiary ledger, each credit customer has their own account with their own balance. Thus, while the Accounts Receivable balance can report how much the company is owed, the Accounts Receivable subsidiary ledger can report how much is owed from each credit customer. Trial balances can be generated occasionally to ensure that the journal entries have been posted accurately to every account. Trial Balance refers to Listing of the account balances from the general ledger, prepared at the end of the accounting period. All accounts are listed in the order in which they appear in the ledger. Total debits must equal total credits; otherwise, an error has been made. The trial balance is a work sheet and not a formal financial statement. It serves as a convenient basis for the preparation of the balance sheet and income statement. Other aspects of bookkeeping include making adjusting entries that modify account balances so that they more accurately reflect the actual situation at the end of an accounting period. Adjusting entries usually involves unrecorded costs and revenues associated with continuous transactions, or costs and revenues that must be apportioned among two or more accounting periods.

Chart of Accounts (COA)
Chart of accounts is a list of the accounts used by an organization. The list can be numerical, alphabetic, or alpha-numeric. The structure and headings of accounts should assist in consistent posting of transactions. COA refers to a list of ledger account names and numbers arranged in the order in which they customarily appear in the financial statements. The chart serves as a useful source for locating a given account within the ledger. The numbering system for the chart of accounts must leave room for new accounts. There are seven basic categories in which all accounts are grouped:

1. 2. 3. 4. 5. 6. 7.

Assets Liability Owner's equity Revenue Expense Gains (Profits) Losses

A range of numbers is assigned to each financial statement category. For example, asset accounts may be assigned the numbers 1-100 and liabilities assigned 101-200. For large businesses, a wider range of numbers would be required for each grouping. In fact, some companies employ a three-digit numbering system for each account. In such a case, the first digit identifies the financial statement category and the remaining digits apply to the position of that account within that category. For example, 1 may be the first digit for Assets, and Cash, being the first asset account, would be identified as 101. Chart of accounts will be created in Oracle Financials using Accounting Key Flexfield. Retained Earnings Account: The accumulated net income retained for reinvestment in a business, rather than being paid out in dividends to stockholders. The percentage of net earnings not paid out as dividends, but retained by the company to be reinvested in its core business or to pay debt. Retained earnings and losses are cumulative from year to year with losses offsetting earnings. It is recorded under shareholders' equity on the balance sheet.

Suspense Account: In accountancy, a suspense account is an account used temporarily to carry doubtful receipts and disbursements or discrepancies pending their analysis and permanent classification. It can be a repository for monetary transactions (cash receipts, cash disbursements & journal entries) entered with invalid account numbers. The account specified may not exist, or it may be deleted/frozen. If one of these conditions exist, the transaction should be directed to a suspense account.

Temporary account (i.e., not included in the financial statements) for recording part of a transaction, such as those involving receipts or disbursements, prior to final analysis or identification of that transaction. Cumulative Translation Adjustment Account: Used for Currency Translations. The account type should be Ownership Funds. Whenever actual balances are translated into another currency, General Ledger automatically adjusts the balance of the Cumulative Translation Adjustment account by the net difference needed to balance your translation results. If you have multiple companies or balancing entities within a ledger, General Ledger automatically adjusts the balance of the translation adjustment accounts of each company or balancing entity. Unrealized Gain/Loss Account: Used for Currency Revaluations. The account type should be asset and liabilities. Define accounts for unrealized gains and unrealized losses. Same account can be used for both unrealized gains and unrealized losses. All debit revaluation adjustments are offset against the unrealized gain account and all credit adjustments are offset against the unrealized loss account. If the same account is specified in both fields, the net of the revaluation adjustments is derived.

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