Friday, June 29, 2007

Why computerise your accounts?

If your accounting is not already computerised, then this is probably a question that you should ponder.

Accounting software has evolved into more than just book-keeping software, and actually organises your work and streamlines it while providing you with critical information for decision making. Let's take a look at a typical business activity.

Sales cycle process
Think of a company that trades in goods. In the normal course of doing business, it has to:
  1. provide quotations,
  2. receive orders,
  3. deliver orders,
  4. invoice delivered orders, and,
  5. receive payment for invoiced orders
Now, if you were doing this manually, you would prepare a quote, and when the customer confirms, look up that quote and prepare a delivery order/invoice which would involve re-entering the data into a different format.

On top of this, you would have to lookup stock levels to ensure that you have enough, as well as ensure that the customer has not exceeded their credit limit with the new order.

Phew! A lot of work for just one order, and if your business is growing, it would be very easy to lose track of things.

There is also the possibility of human error. Imagine for a moment if the person entering the data missed out one zero and did not notice the error. You just quoted RM10.00 for an RM100.00 product!

At your finger tips
These days, business is conducted at the speed of thought. Customers do not like to wait too long for a quote or an order to be fulfilled, and are always on the look out for suppliers who can not only cater to their requirements but are also price competitive.

With a good accounting software, you can do all this seamlessly. Most accounting softwares allow you to generate quotes to customers. These are essentially memo entries and do not have an accounting impact. These quotes can then be recalled instantly and converted to orders, and then into invoices without having to bend over backwards. A good system should allow you to look up stock levels and prices as well as customer credit standing at each point of the process. In other words, even when you are preparing the quote, you would have all this information at your finger tips.

Business decisions
And if the customer asks for a discount? No problem! You can look up:
  1. the customer's history to see how much they have bought from you and how regularly,
  2. their payment history
  3. your cost price
before making a decision. All this is done right at your desk! No need to rummage through files looking for information or running down to the store to see if you have sufficient stock on hand.

An accounting software therefore empowers you with information, both current and historical, enabling you to make decisions instantly.

Accounting knowledge not required
Most accounting software these days are single entry systems. What this means is that you do not need accounting knowledge to use them. The systems are intelligent and know where to make the corresponding entry. For instance, if you generate an invoice, the system knows it has to debit Trade Debtors. You only need to know which income account you want to classify the sale to.

The only time accounting knowledge is required is when passing journal entries, and these are usually entered at the end of the month and/or financial year.

Segregation of functions
Accounting systems also allow you to segregate functions. With multi-user access, you can segregate sales, purchasing and store keeping functions, allowing the accounting department to focus on core functions rather than expending time on issuing invoices, etc.

You could then divert manpower resources to revenue generating activities and still be able to function administratively.

So if you haven't already, take a serious look at computerising your accounts. There are a lot of good accounting software out there, and they vary in price and functions, but are affordable and can save you time and money.

Thursday, June 28, 2007

Designing your chart of accounts

Before you even start using your system, whether manual or computerized, you need to design your chart of accounts. How you design your chart of accounts is very important in ensuring that the work you do is streamlined and that reports required by management are available "at the press of a button".

Chart of accounts defined
A Chart of Accounts is a list of accounts that your business will be using and are essentially classification of transactions. Every transaction needs to be recorded under an account.

Classifying transactions
Transactions fall into four broad categories as follows:
  1. Assets or what the business owns or is owed,
  2. Liabilities what the business owes
  3. Income, business income, and,
  4. Expenses, what the business incurs in generating the income in (3) above.
These will then have to be further broken down into smaller classifications. For instance, the asset category can be broken down into the following:

  1. Fixed Assets - assets that have a life time value to the business of more than a financial or calendar year, for example a car which can have a minimum beneficial value of 5 years to the business.

  2. Current Assets - assets that have a life time value of less than a financial or calendar year, for example an amount owed by a customer that is payable in the next 30 days.
Confused? Don't be. Let's go back to the statement of "list of accounts that your business will be using" and examine that.

Differences between businesses
Not all types of businesses have the same requirements. For instance, a construction or manufacturing company would need an account called "work-in-progress" to keep track of the value of work or goods that is incomplete or unfinished.. A trading or wholesale company would require an account called "stock" to track the goods that they have for sale.

First step
So the first step would be to identify the classifications or accounts that you would need. If you are an existing business, then the best place to start is with your audited accounts. Bear in mind that audit reports are essentially abridged versions and you will need to expand on it to suit management reporting requirements. For instance, the audited accounts would only indicate total income, whereas management would prefer to know details of where that income is coming from. As an example, total income may come from the sale of products as well as the servicing of the product.

Get input/feedback
Using the audited accounts as a basis, expand on the details. Don't however go into too much detail. Your chart of accounts will then become too cumbersome. Speak to management and find out what information they need to make business decisions. Speak to your auditors and find out what kind of detailed information they need. Try to balance the two.

Account numbering
If the system that you are using requires account numbering, space the numbers out by 5s or better yet 10s. For example, if the first account is numbered 1000, the next should be 1010 and the following 1020, and so on. This would give you the leeway to add an account in between without having to re-number. Number your accounts in the same order as the four broad categories of transactions stated above, i.e. all fixed assets, then liabilities and so on.

Do keep in mind that, as with most other tasks, you will never get it picture perfect at the onset. In time, you will need to add or delete accounts, so if you have followed the steps above, you will have something to start with that has the flexibility to grow along with the business.

The amount of time you spend in this initial stage of designing your chart of accounts will go a long way in improving the efficiency of your work, and will enable you to produce management reports "at the press of a button".

Sample chart of accounts

Account Number
Account Name

Bank account
Cash in hand/petty cash

Deposits paid

Trade Debtors
Computers & Peripherals

Trade Creditors
Hire purchase creditor

Paid Up Capital
Retained Earnings
Current Earnings


Currency Gain/Loss

Cost Of Sales

Rental & utilities
Office rental
Telephone & Internet
Postage & Courier
Hire purchase interest account
Bank charges
Traveling & accommodation

Petrol, Parking & toll
Training & seminars
Repairs & maintenance
Salaries, wages and allowances

Monday, June 18, 2007

Treatment of hire purchase transactions

Hire purchase transactions require the:
  1. Capitalisation of the asset
  2. recording of the liability to the hire purchase company
This in itself is straight forward:
  1. Debit Asset account
  2. Credit Hire purchase company
But, in book-keeping, we need to capitalise the asset at cost (i.e. net of the interests) and state the liability to the hire purchase company in full (i.e. cost + interest). Assuming that we purchase an asset as follows:

Cost of asset 10,000.00

Period of hire purchase 4 years

Hire purchase interest . 4% p.a

The total would therefore be:

Cost of asset 10,000.00

Interest over 4 years 1,600.00

Total hire purchase amount 11,600.00

<---- Per instalment ---->


Repayments Interest

47 payments 33.33

Final payment 33.49



The accounting entry for this would then be:

Account Type

Asset account

HP Interest account Asset

Hire purchase co Liability



Note on calculating the interest and principal components of repayments:

1. Cost of asset / number of repayments (10,000/48)
2. Total interest / number of repayments (1,600/48)

Round off the amounts and ensure that the interest + principal = repayments as specified in the hire purchase company's repayment schedule.

The HP interest account and Hire purchase company account will reduce as we make the periodical payments and will be become zero when all payments have been made.

We will need one other account to expense off the hire purchase interest as we make progressive payments. Let's call this the HP Interest Expense account.

There are two ways to record payments to the Hire Purchase company:

  1. Credit the full amount paid (in this case 241.66) to the hire purchase company liability account and create a journal to reduce and expense off the hire purchase interest

    The accounting effect of payment made is as follows:

    Debit Credit

    Hire Purchase company 241.66


    The journal entry would be:

    Debit Credit

    HP Interest Expense 33.33

    HP Interest Account

  2. Make all the relevant entries at the time of recording the payment. Our payment screen would therefore look like this:

    Hire purchase company 241.66

    HP interest expense 33.33

    HP interest (33.33)


    Accounting impact:


    Hire purchase company 241.66

    HP interest expense 33.33

    HP interest

    274.99 274.99

    The advantage to this is that you make both entries simultaneously and there is a lesser chance of overlooking the interest journal.

With some accounting software like MYOB and QuickBooks, we can save transaction templates. In MYOB it's called a recurring transaction, while in QuickBooks it's called memorizing a transaction. With this feature, you can save the template with all the necessary details and recall the template every time you need to make payment. Recording the transaction using the second method therefore allows you to recall and record in one step.