Accounting cheat sheet

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 and the goods it owns. Fixed assets include buildings and offices, while current assets include bank accounts and cash. The money owed by a client 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). Liabilities could also be defined as a source of financing which is provided to the company, also called leverage.

  • Equity is the amount of the funds contributed by the owners of the company (founders or shareholders) plus previously retained earnings (or losses). Each year, net profits (or losses) may be reported as retained earnings or distributed to the shareholders (as a dividend).

What is owned (an asset) has been financed through debts to reimburse (liabilities) or equity (profits, capital).

A difference is made between assets and expenses:

  • An asset is a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit. Assets are reported on a company’s balance sheet. They are bought or created to increase a firm’s value or benefit its operations.

  • An expense is the costs of operations a company bears to generate revenues.

The profit and loss (P&L) report shows the company’s performance over a specific period of time, usually a quarter or a fiscal year.

  • The revenue refers to the money earned by the company by selling goods and/or services.

  • The cost of goods sold (COGS, or also known as “Cost of Sale”) refers to the sale of goods’ costs (e.g., the cost of the materials and labor used to create the goods).

    • The Gross profit equals the revenues from sales minus the cost of goods sold.

    • Operating expenses (OPEX) include administration, sales and R&D salaries, rent and utilities, miscellaneous costs, insurances, and anything beyond the costs of products sold or the cost of sale.

Equity

Common Stock

Plus Retained Earnings

Assets = Liabilities + Equity

Chart of accounts

The chart of accounts lists all the company’s accounts: both Balance sheet accounts and P&L accounts. Every transaction is recorded by debiting and crediting multiple accounts in a journal entry. In a way, a chart of accounts is like a company’s DNA!

Every account listed in the chart of accounts belongs to a specific category. In Odoo, each account has a unique code and belongs to one of these categories:

  • Equity and subordinated debts

    • Equity is the amount of money invested by a company’s shareholders to finance the company’s activities.

    • Subordinated debts are the amount of money lent by a third party to a company to finance its activities. In the event of the dissolution of a company, these third parties are reimbursed before the shareholders.

  • Fixed assets are tangible (i.e., physical) items or properties that a company purchases and uses to produce its goods and services. Fixed assets are long-term assets. This means the assets have a useful life of more than one year. They also include properties, plants, and equipments (also known as “PP&E”) and are recorded on the balance sheet with that classification.

  • Current assets and liabilities

    • The current assets account is a balance sheet line item listed under the Assets section, which accounts for all company-owned assets that can be converted to cash within one year. Current assets include cash, cash equivalents, accounts receivable, stock inventory, marketable securities, prepaid liabilities, and other liquid assets.

    • Current liabilities are a company’s short-term financial obligations due within one year. An example of a current liability is money owed to suppliers in the form of accounts payable.

  • Bank and cash accounts

    • A bank account is a financial account maintained by a bank or other financial institution in which the financial transactions between the bank and a customer are recorded.

    • A cash account, or cash book, may refer to a ledger in which all cash transactions are recorded. The cash account includes both the cash receipts and the cash payment journals.

  • Expenses and income

    • An expense is the costs of operations a company bears to generate revenues. It is simply defined as the cost one is required to spend on obtaining something. Common expenses include supplier payments, employee wages, factory leases, and equipment depreciation.

    • The term “income” generally refers to the amount of money, property, and other transfers of value received over a set period of time in exchange for services or products.

Example

*: Customer Refund and Customer Payment boxes cannot be simultaneously selected as they are contradictory.

Balance = Debit - Credit

Company Incorporation (Initial Capital $1,000)

Customer Invoice ($100 + 9% tax) & Shipping of the Goods

Goods Shipment to Customer

Customer Refund*

Customer Payment*

Vendor Goods Received (Purchase Order: $50)

Vendor Bill (Invoice: $50)

Vendor Bill (Invoice: $52 but PO $50)

Vendor Bill Paid ($52 + 9% tax)

Acquire a building (purchase contract)

Pay for building

Yearly Asset Depreciation (10% per year)

Customer Invoice (3 years service contract, $300)

Revenue Recognition (each year, including first)

Pay Taxes Due

Debit

Credit

Balance

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

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.

Company Incorporation

Account

Debit

Credit

Assets: Cash

1000

Equity: Common Stock

1000

Explanation

  • The company receives $1,000 in cash

  • Shares worth of $1,000 belong to the founders

The initial capital can be cash, but could also be intellectual property, goodwill from a previous company, licences, know how, etc…

Sometimes, capital is not released immediately, accounts for “capital to be released” may be necessary.

Customer Invoice ($100 + 9% tax)

Account

Debit

Credit

Revenue: Goods

100

Liabilities: Deferred Tax Liabilities

9

Assets: Accounts Receivable

109

Assets: Inventory

50

Expenses: Cost of Goods Sold

50

Explanation

  • Revenues increase by $100

  • A tax to pay at the end of the month of $9

  • The customer owes $109

  • The inventory is decreased by $50 (shipping of the goods)

  • The cost of goods sold decreases the gross profit by $50

Configuration

  • Revenue: defined on the product, or the product category if not on the product, field Income Account

  • Deferred Tax Liabilities: defined on the tax used on the invoice line

  • Accounts Receivable: defined on the customer (property)

  • Inventory: defined on the category of the related product (property)

  • Expenses: defined on the product, or the category of product (property)

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.

Customer payment

Account

Debit

Credit

Assets: Cash

109

Assets: Accounts Receivable

109

Explanation

  • The company receives $109 in cash

  • The receivable held against the client is reduced by $109

Configuration

  • Cash: defined on the journal used when registering the payment, fields Default Credit Account and Default Debit Account

  • Accounts Receivable: defined on the customer (property)

Supplier Bill (Purchase Order $50 but Invoice $52)

Account

Debit

Credit

Assets: Uninvoiced Inventory

50

Assets: Deferred Tax Assets

4.68

Expenses: Price Difference

2

Liabilities: Accounts Payable

56.68

Explanation

  • A temporary account is used to note goods to receive

  • The purchase order provides prices of goods, the actual invoice may include extra costs such as shipping

  • The company still needs to pay the vendor (traded an asset against a liability)

Configuration

  • Uninvoiced Inventory: defined on the product or the category of related product, field: Stock Input Account

  • Deferred Tax Assets: defined on the tax used on the purchase order line

  • Accounts Payable: defined on the supplier related to the bill

In this scenario, the purchase order was $50 but the company received an invoice for $52 as there were extra shipping costs

Supplier Goods Received (Purchase Order: $50)

Account

Debit

Credit

Assets: Inventory

50

Assets: Uninvoiced Inventory

50

Explanation

  • Inventory is increased by $50, the expected amount coming from the purchase order

  • A temporary account is used for the counterpart and will be cleared when receiving the invoice

Configuration

  • Uninvoiced Inventory: defined on the product or the category of related product, field: Stock Input Account

  • Inventory: defined on the product category, field: Stock Valuation

Buy an asset ($300,000 - no tax)

Account

Debit

Credit

Assets: Buildings

300000

Liabilities: Accounts Payable

300000

Explanation

  • The company gets an asset worth of $300,000

  • The company needs to pay $300,000 to the vendor (traded an asset against a liability)

Configuration

  • Buildings: Defined on the Asset category selected on the supplier bill line

  • Accounts Payable: defined on the supplier related to the bill (property)

Pay supplier invoice

Account

Debit

Credit

Liabilities: Accounts Payable

300000

Assets: Cash

300000

Explanation

  • The company owns $300,000 less to the supplier (liabilities are settled)

  • The company’s cash is reduced by $300,000 (reduction of asset)

Configuration

  • Accounts Payable: defined on the supplier you pay (property)

  • Cash: defined on the journal related to the payment method

Cash sale (Sales Receipt)

Account

Debit

Credit

Assets: Cash

109

Revenue: Goods

100

Liabilities: Deferred Tax Liabilities

9

Explanation

  • Company’s cash is increased by $109

  • Revenues increase by $100

  • A tax of $9 has to be paid

Configuration

  • Cash: Payment method defined on the Sales Receipt

  • Sales: Defined on the product used in the sales receipt, or the category of product if empty

  • Deferred Tax Liabilities: Defined on the tax used in the sales receipt (coming from the product)

Customer pays invoice, 5% early payment rebate

Account

Debit

Credit

Assets: Cash

950

Revenue: Sales Discount

50

Assets: Accounts Receivable

1000

Explanation

  • Company’s cash is increased by $950

  • Sales discounts lowering effective revenues by $50

  • The customer owns $1000 less to the company

Configuration

  • Cash: is defined on the journal related to the payment / bank statement

  • Sales Discount: is selected during the payment matching process

  • Accounts Receivable: is defined on the customer associated to the payment

Fiscal year closing - positive earnings and 50% dividends

Account

Debit

Credit

Net Profit

1000

Equity: Retained Earnings

500

Liabilities: Dividend Payable

500

Explanation

  • The P&L is cleared (net profit)

  • 50% is transferred to retained earnings

  • 50% will be paid to shareholders as dividends

Configuration

This transaction is recorded by the advisor before closing the fiscal year, depending on how the company uses its net profit.

Reconciliation

Reconciliation is the process of linking journal items of a specific account and matching credits and debits.

Its primary purpose is to link payments to their related invoices to mark them as paid. This is done by doing a reconciliation on the accounts receivable account and/or the accounts payable account.

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

Partial payment 1/2

70

Invoice 2

65

Partial payment 2/2

30

Payment 2

65

Invoice 3

50

Total to pay

50

  • Reconcile

  • Reconcile Next

  • Unreconcile

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.

Odoo should automatically reconcile most transactions; only a few should need manual review. When the bank reconciliation process is finished, the balance on the bank account in Odoo should match the bank statement’s balance.

Checks Handling

There are two approaches to managing checks and internal wire transfers:

  • 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