Choosing an accounting system

The problem with choosing one for your business is that there are so many options available and almost everyone says they are the best. Then, nowadays, you also have to think about whether to use a cloud based solution. 

So, how to choose? Let’s explore.

Free vs paid

Free software is very tempting, but as the saying goes, there is no such thing as a free lunch.

Free accounting software usually has limitations. Either they restrict the number of users that can access the system, or they restrict the number of transactions that you can key in.

But, at the end of the day, one question that should come to mind is how are they able to offer this for free? For these accounting software providers, there is a cost in terms of developing the solution as well as maintaining the infrastructure to support the solution.

So the concern here is this, will the solution provider be able to provide this over the long term, and also whether you can get support when needed. Of course we are not saying that you should not consider the free options, only that you should take these into account before deciding.

On-premise vs Cloud

On-premise

On-premise solution will need to be installed on computers at your office. Mostly these are perpetual licence, meaning you pay for the software only once and you have lifetime access to use it.

Although the licence is perpetual, it does not mean that you have lifetime access to technical support or be able to use the latest version of the software.

Most providers have an annual maintenance plan, which is optional. You can choose to pay for the annual maintenance or not. Annual maintenance is for upgrade of software and also support. If you decide not to pay, then you will not be able to use the latest version of the software, and you may not have access to technical support after a period of time.

What are the hidden costs of on-premise solution?

For on-premise solutions the hidden costs include the cost of maintaining the computers, ensuring security of data, including regular backup and having a good anti-virus/internet security solution in place. If you are multi-user, it also means you have to maintain a secure network at your office.

Then there is the cost of upgrading as well as technical support after a certain period of time. Even if you feel you don’t need technical support, there are times when you would need to upgrade. A classic example is when Malaysia switched to GST. Another would be if your computer crashes and you buy a new one. The old version of your software may not run on the latest version of Windows for example.

On cloud

Cloud accounting systems are maintained on the solution provider’s computers or, more correctly, servers. So you do not need to install any software. This frees up your company from the overhead of maintaining IT infrastructure.

The biggest advantage of a cloud based solution is that it is accessible from anywhere as long as you have an internet connection. You are also not tied down to any particular operating system like Windows, and you can even access the solution from smart devices. This would have been especially useful during the recent Covid-19 lockdown from March to June 2020. Many small businesses had to put business on hold because they did not have access to their accounting system, or had to copy the data and try to work from home.

Features and capabilities
Nowadays, technology has advanced so much that cloud based solutions are equally, if not more, capable as on-premise solution. With AI (Artificial Intelligence), it has also become easier and more efficient. Keep in mind that with on-premise solutions, to have these features, you would need to provide higher end computers to cater for the technology needed, whereas with cloud based, that is already provided.

What’s the catch?
Well, all cloud based solutions work on a SaaS (Software as a Subscription) basis. You need to keep paying to continue to use it, which most businesses find a deterrent. But, if you factor in the hidden costs, you might find that it balances off and also makes doing business more efficient.

For instance, with the subscription, you will automatically receive upgrades. During the GST period and the subsequent switch back to SST, your accounting software would have automatically been upgraded to track them.

On the other side, if your computer crashes and you get a new one, it would be a matter of plug and play.

Also, you don’t have to worry about whether your data is backed up or about security, as these are generally assured by the provider. Please do check on each of the respective solution providers on the level and extent of service that is included in the subscription.

What are the hidden costs of cloud solution?
Very little actually. The cost is upfront and includes the maintenance costs, etc. But there is the recurring annual subscription that would impact the decision on whether to go with this or not. Another factor is the thought that your data is not kept with you, and the concern that third parties may be able to access and view it.

Entry level or mid-sized

One other part of the discussion was around whether one type of application is suitable for businesses of all sizes. This is simply not true. There are different levels of accounting software that fit the needs of business needs.

Entry level accounting software

These are generally priced in the RM1,500.00 to around RM5,000.00 range. Entry level accounting software are suitable for start ups and smaller businesses. These have smaller volume of transactions and less number of users accessing the system. If you use an entry level accounting system for a business with large number of transactions and/or a bigger number of users, then you might find the system starting to slow down or crash. This is because entry level accounting systems are designed specifically for small business requirements to keep the cost of development low, and therefore can be priced cheaper.

Entry level accounting systems are easier to implement and use and can mostly support up to around 10 concurrent users.

ABSS (formerly known as MYOB) is one such solution.

Mid level accounting software

Mid level accounting software are priced from RM50,000.00 to over RM500,000.00 depending on your requirements. These would offer more features and higher data transaction processing capabilities than entry level solutions. Number of concurrent users can range from 10 to over 100.

Unlike entry level solutions, where you will need to close fiscal periods and clear historical data often, mid level systems would allow you to retain historical data for longer periods of time. Sage 300 for instance allows you to keep between 7 and 99 years data.

However, you cannot buy mid level systems off the shelf and implement them yourself. This is because they require more technical knowledge to install and also need more detailed configuration before you can start using it.

Which to choose?

Having said all that, are we recommending on-premise or cloud, entry or mid level? The short answer is neither.

Having been in the business of providing solutions for more than 21 years, we understand that each business is unique and have their own constraints and comfort levels. So, it really depends on you, what you are comfortable with and the budget you are working within, the manpower resources you have, etc.

However, taking into account the business challenges of the current pandemic we are experiencing, it would seem wiser to invest in a cloud based system as it would offer the “work anywhere, anytime” option.

 

Higher EPF contributions from Jan 2012

From January 2012, the Employers contribution for employees earning RM5,000.00 or less has been increased from 12% to 13%.

Employees contributions remain at 11%, no change to the existing rate.

Total monthly contribution to EPF would now be 24%, made up of 12% Employer contribution and 11% Employee contribution.

For employees aged 55 and above, the Employer rate has been increased by 0.5% from the existing 6.0% to 6.5%.  Employees contribution remains at 5.5%, making a total of 12%.

Prime Minister and Finance Minister Datuk Seri Najib Tun Razak announced the increase during his 2012 Budget Speech.  The increase seeks to address the problem of retirees having insufficient funds to see them through their retirement age.

The latest EPF contribution schedule (Third Schedule, EPF Act 1991)  can be downloaded from KWSP's website.  Click here to download.

Malaysian GST Implementation Postponed

The finance ministry announced on Wednesday, 13th October 2010, that the implementation of Goods and Services Tax (GST) has been deferred.

GST was initially mentioned in the 2005 budget and had its first parliamentary reading in December 2009, with the second originally scheduled for March 2010.

GST is a tax on consumption and is meant to replace the existing sales tax and service tax.

Accounting for depreciation

Depreciation refers to the method of apportioning the value of an asset over several financial periods.

An asset's value is not expensed off immediately, but over a period of time, depending on the length of it's estimated useful lifespan.

So if we anticipate that a motor vehicle has a useful lifespan of 5 years, we would first capitalize the cost of the motor vehicle and then expense it off over a period of 5 years.  The depreciation rate for the motor vehicle each year would then be 20%.

There are two main methods of depreciating an asset, straight line and reducing balance.


Straight line depreciation method

In the straight line method, we would apply the rate of the depreciation to the initial cost of the asset.  The depreciation expense for each year would therefore be the same.

As an example, if the asset cost RM10,000.00 and the depreciation rate is 20%, we would depreciate the asset RM2,000.00 each financial year, over a period of 5 years.

Reducing balance depreciation method

In the reducing balance method, we apply the depreciation rate to the cost of the asset less the amount already depreciated.

For an asset purchased at RM10,000.00, the depreciation would be calculated as follows:

For the first year, depreciation is calculated at 20% of RM10,000.00.

The second year's depreciation however is calculated at 20% of RM10,000.00 minus the first year's depreciation.

In general, most businesses use the straight line method for depreciating their assets.

Frequency of calculating depreciation

Depending on your reporting requirements, depreciation is calculated either monthly or annually.

Small businesses generally do not bother with depreciation or accrual of expenses, and leave it to the auditor to work this out during the audit.

It is good practice, however, to account for depreciation every month so that your income statement reflects a more accurate position.

Accounting for depreciation

Depreciation is taken up in the accounts through journal entries. 

An account called Accumulated Depreciation, which holds the total depreciation expensed to date is credited, and the Depreciation account is debited.

Each asset account will have a corresponding Accumulated Depreciation account. 

The accounting journal entry for straight line depreciation would look like this:

		Debit		Credit
	Depreciation expense account	2,000.00
	Accumulated depreciation account (Motor Vehicle)			2,000.00
		2,000.00		2,000.00

Depreciation rates

Standard depreciation rates used by most businesses in Malaysia are as follows:

Doing it twice and checking it thrice?

Somethings done twice or thrice are enjoyable.

Most things are not.

In business especially, having to re-enter data is an absolute pain and slows down the process of getting on with it, not to mention the need to over staff just to cater for this inefficiency.

We are now in an age when technology makes streamlining your business processes and doing things once the norm rather than the exception.

Issuing an invoice to a customer should not only update your accounts and your inventory, but should enable you to print the necessary documents in the process.

So why are there still so many businesses out there still issuing manual invoices or using a spreadsheet to do it?

Fear of technology? Perhaps.

Another reason could be that business owners tend to separate the accounting function from all other business functions and making it an entity unto itself.

Everything is done independently and then flows back to accounting who have to re-enter and process the data before they can produce meaningful management reports.

The alternative?

Forget accounting.  Seriously.

Study your business processes and analsye your requirements.

Look for a solution that automates those processes.

When you have found one that fits the bill, ask if it can handle the accounting aspect as well.

Chances are that the answer would be yes.

Note that unless you are customising a solution for your requirements, it would not be possible, with an off the shelf solution, to meet all your requirements.  If the solution can meet with between 80% to 90% of your requirements, then you are on your way.  With off the shelf solutions, you would need to bend some of your requirements to fit the way the solution works.

What if the answer is no?

Call us.

We would be happy to show you how you can get all that and more in one easy to use solution that has been around for years and has helped hundreds of small businesses work smarter not harder!

Pieces of a puzzle?

Business is like a jigsaw puzzle, with pieces that fit together and make a complete picture.

The catch is that each piece is held by a different member of the business team. It's like doing a giant jigsaw puzzle with about 10 or 20 others, each looking at one part of the puzzle and working on it.

So what's the problem?

What if you had the wrong pieces, or if one of those pieces is missing?

What if one person just could not get his or her part right? Everyone else has completed and are waiting on this one part to be complete. Until that happens, the picture is not complete, and no one can sit back and take satisfaction from a job well done.

Possible reasons why that one person is struggling?

1. Never done this before.
2. Have done this before but cannot remember how I completed it.
3. It's too complicated, I'm used to smaller puzzles.
4. No one showed me what the final picture is supposed to look like, so I have no idea what to do with my pieces.

Then again, it could be because one of the completed parts is in the wrong place and the final piece cannot go in.

Okay, so what's the similarity with running a business?

Never done this before.
Do you have training or mentor programmes in place for new or inexperienced employees? A new employee who has training or guidance fits into the organisation much faster and performs much more efficiently.

Ideally, this would be in place internally with senior members of your staff training and guiding the new member.

And it is known who is responsible for the training and mentoring so there is no second guessing.

Have done this before but cannot remember how I completed it.
Does your organisation have written procedures in place? Something as simple as a filing procedure can throw a spanner in the works.

Imagine if you would that your salesman quoted for a big job, and now the customer is on the line and wants to confirm and pay a deposit so you can get started. Salesman is on extended leave or worse still has resigned.

Where is the quote? What did he quote for? How much is the job worth? Do you have the necessary materials to start the job? If not then when can you start?

If everyone knew where quotations are to be filed, then this would not be a problem as you would know exactly where to look for it and retrieve it.

Having a training/mentoring programme and written procedures in place would also have an added advantage of minimising the impact of staff turnover on the running of your business.

It's too complicated, I'm used to smaller puzzles.
Round peg in a square hole? This goes hand in hand with the training and mentoring programme. No doubt with proper training and guidance, your staff can graduate from doing small puzzles to big ones. That is not to say that you get your salesman to do your book keeping for you, although with some training that too may not be too much of a challenge.

No one showed me what the final picture is supposed to look like.
Has everyone in your organisation, from the tea lady to the Managing Director, seen the complete picture of what your business is about and where it's heading? Your vision and mission as a business owner needs to be communicated to all levels so everyone knows, understands and shares the same inclinations. If not, the picture is always in the "nearly finished" phase and never quite gets completed.

To conclude, no matter how small your business, you must have:

1. training/mentoring programme
2. written procedures, and,
3. vision and mission statement

in place.

A few simple things that can make your business a well oiled organisation that responds and not just reacts.

Who's minding your business?

I made a follow up call to one of our customers today. The system was implemented about a year ago, and as is our normal practice, we call to inquire if everything is okay.

The answer I got was, as in an alarmingly large number of cases, something similar to "I will check with the accounts clerk and come back to you."

Although I have to a certain degree become immune to such responses, I felt compelled to write about the apathy business owners have towards their business.

How does a business owner run her or his business without concrete information about the business? Putting aside all the other analytical reports that a business owner needs, pertinent information such as:

1. Am I making a profit, breaking even or worse still making a loss?
   
   
2. Where is the money going? Are certain expenses too high in proportion to sales?
   
   
3. Who owes me money?
   
   
4. Who do I owe money to?

If as a business owner you have the answer to these questions, not necessarily at your fingertips, but accessible to you periodically on a timely basis, then it goes without saying that whatever system you have is working for you.

So, when a business owner responds with an answer like the one above, it generally is an indication of "I don't know, and frankly I don't care". Well, maybe not so drastic, but it borders on that.

Which in turn means that your accounts clerk is minding your business, and that's a dangerous proposition whichever way you look at it.

The buck stops here

Who should make the decision when it comes to choosing an accounting solution?

All too often, business owners shy away from getting involved in the selection process, perhaps because they do not want to get into accounting.

The reality is that they should and must get involved, because it impacts on the way they run their business.

Information is the lifeblood of any business, and to run a business without it is like driving with a blindfold on.

The best person to decide which is best for the business is you, and look beyond just accounting, beyond the pricing and pretty user interfaces.

Look instead at what kind of information you need to run your business, and whether the solution offers it without you having to bend over backwards manipulating data in a spreadsheet.

Which accounting solution is better?

I have often been asked by customers which is better ABC or XYZ?

The truth is all accounting applications are similar in that they perform the same function of recording your accounting entries and producing your financial reports.

So what's the big deal?

Well, the big deal is in the approach taken when deciding which solution best fits your needs.

Accounting is accounting is accounting. Look beyond that when deciding, because all accounting solutions will produce a trial balance, profit and loss account and balance sheet. If that's all you need then the decision is easy.

Keep in mind though that accounting solutions have grown beyond just the traditional functionalities. Today, an accounting application can help streamline your business processes and make it more competitive and efficient.

Early settlement of hire purchase accounts

One of our readers, Rosli, asked about the accounting treatment when hire purchase accounts are settled early.

In a previous post, we discussed the how to handle hire purchase transactions, but did not touch on the topic posed by Rosli.

If a hire purchase account is settled early, the only accounting impact will be on the HP Creditor liability account and the Hire Purchase Interest Suspense asset account.

Taking the example from our previous discussion, say the hire purchase amount was settled early after 24 months.

Our hire purchase account would now look like this:

	<---- Per instalment ---->
Repayments	Interest	Principal	Total	Total
24 instalments paid	33.33	208.33	241.66	5,799.84
23 repayments due	33.33	208.33	241.66	5,558.18
Final payment due	33.49	208.49	241.98	241.98
Grand total				11,600.00

We would have paid off 5,799.84 of the 11,600.00 due, and our ledger accounts would look like this:


The balance outstanding would therefore be RM5,800.16, but this includes an interest amount that is payable only if you continue with the hire purchase arrangement.

For an early settlement therefore the interest would be reduced from the amount payable, which in our example would be RM5,800.16 less RM800.08 leaving a balance of RM5,000.08.

So, when we make payment, we would credit the bank account and debit the Hire Purchase creditor's account. We would then need to journalise the interest amount. The result would be as shown below:

	Hire Purchase creditor's account
	Debit				Credit
	Date	Description	Amount		Date	Description	Amount
		Early settlement payment	5,000.08			Balance b/fwd	5,800.16
		HP interest account	800.08
			5,800.16				5,800.16
	Hire Purchase interest suspense account
	Debit				Credit
	Date	Description	Amount		Date	Description	Amount
		Balance b/fwd	800.08			HP creditor's account	800.08
			800.08				800.08

In reality, of course, the hire purchase company would not cancel all the interest. They would also charge an "admin fee" for early settlement. Just charge out the interest to the relevant expense account and journalise the balance.

Do note that early settlement of hire purchase accounts do not impact on the actual asset account.

The short and long of it.

What's the difference between long term and short term liabilities?

Some liabilities are short term, while others are long term. If you purchase goods, the amount owing to the supplier is payable within a period 30 to 90 days. This is a short term liability otherwise known as a current liability.

The amount payable to a hire purchase company, on the other hand, is a long term liability, as the repayment period extends beyond a year.

For liabilities, the short and long of it relates therefore to the time in which the amount owing is payable.

Short term or current liabilities are payable in periods of less than a year, whereas long term liabilities are payable over a period of more than a year.

What's in a number?

In a number of my implementations, I have come across clients who:

1. Prefix invoice numbers, purchase order numbers, etc with the year and the month. So if the invoice number is 1001, it would be prefixed with 2007/08/1001, or some combination to that effect.


2. Prefix the above documents with an acronym of the document type. For instance CN1001 for credit notes or PO1001 for Purchase orders.


3. Number payment vouchers.

Prefixing document numbers

While there is nothing wrong with doing this, when using a computerised accounting system, it does present a problem. In the case of prefixing document numbers, the system does not automatically give you the next number. Most systems do not cater for a prefix and/or a suffix to document numbers and work on the presumption that these are numerical and will increment it by one and give you the next number. Invoice 1001 becomes 1002 and so on. The problem arises when a non numerical sequence is encountered, like 2007/08/1001. The system will then either give you the last reference or nothing for the next reference.

To avoid this you can leave out the slashes, like 2007081001, in which case the system will generate 2007081002 for the next document number. Then again, you will have to remember to manually change the prefix for each month as well as for the year, as the system does not do this for you.

Prefixing document numbers with an acronym helped to differentiate and identify documents. CN1001, PO1001, PV1001. You easily identified the document types without me having to tell you, right?

As these types of prefixes do not change, you can insert these into the document's customised format. It would then not be necessary for you to enter the prefix at the transaction screen, and the system will increment the reference numbers correctly.

What's the fuss about?

Why prefix document numbers and why number payment vouchers?

This practise is essentially a carry over from the manual system of accounting. While it was okay to number them 1001, 1002, etc, it was not so easy to search for and find a particular document

The logic was the if we prefixed a document with the year and the month, that would enable us to establish exactly where the document was filed and zero in on it. If the boss, therefore, asked for a copy of invoice 2006/10/7659, we knew that we would have to look in the October file located in the 2006 cabinet. Easy!

The same applies to payment voucher numbers. These were used to help organise the payments so that we could trace them if necessary.

Payment vouchers

Payment vouchers, on the other hand, pose an additional problem, even if you do not use prefixes. Most systems only have a field for cheque numbers.

Okay, we can live with that, but what about petty cash payments? These do not have a cheque number.

The answer is to use the cheque number as your petty cash voucher number. As long as you do not prefix the number with PV, PC etc, the numbers will increment and you will get the next reference when keying in a new transaction.

Why number at all?

Numbering all accounting source documents with a number not only helps in referencing them, it also helps to ensure that your accounting records are complete.

So, for instance, if you look at the sales register and see a list of invoices numbered 1, 2, 4 and 5, you would know that data from invoice 3 has yet to be entered.

Even if this particular invoice has been canceled, enter it into the system with the description "Cancelled" and amount of zero. This way, months later, at one glance you would know that the records are complete.

The paradigm shift.

Let's look at the need to find documents which gave rise to the practise of prefixing numbers.

With the advent of computerised systems, this has become obsolete. Finding documents is now so much easier.

Most systems allow you to search transactions by any number of criteria, allowing us to find a particular document easily.

Find transactions screen in MYOB

The find screen allows you to search by account, transaction type, customer/supplier/employee.

Advanced find screen in MYOB

The advanced find screen even allows you to search for transactions by amount and description.

This essentially makes prefixing document numbers obsolete.

To prefix or not to prefix?

There is no rule that says you should or should not prefix. If you do, however, the onus will be on you to ascertain and enter the next number in the sequence.

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What's it all mean?

Okay, we've debited and we've credited, but what does it all mean?

Let's look at each in turn.

What are debits?

A debit is either an expense or an asset.

In the basis of book keeping, we learnt that debits are the receiving aspect. A debit will therefore be the representation of a value received.

So if you bought a car, the value of the car would be represented by a debit entry in the Motor Vehicle account, and it is an asset.

If you paid for utilities, the value of the services rendered by the utility company is represented by a debit entry in the Utility account, which is an expense.

What's the diff?

The difference is in the lifetime value.

A car's value is over several years, whereas the value of services rendered by a utility company is month to month. A car is an asset whose value to the business extends beyond one year. So, although buying a car is an expense, it is categorized as an asset because it's value to the business extends beyond a year.

When you make calls on your telephone in September, the value of those calls have been expended in that month and does not carry through to October. The benefit of services rendered by utility companies is only for that particular month. It is therefore an expense.

What are credits?

A credit can be interpreted as capital, liability or an income.

Capital is the amount of money put into the business by the owner of the business. In book keeping, we regard the owner as an entity separate from the business. With that in mind, whatever the owner puts in is considered as owing by the business to the owner.

A liability is a debt owed to another business or person. So if you buy a car on hire purchase, you create an asset by acquiring the car and you also create a liability in the amount you owe to the hire purchase company. The entry would be to debit the motor vehicle account and credit the hire purchase company account.

Income on the other hand represents revenue earned. A service or product is the giving aspect and the income gained from that is the receiving aspect. An income is, like with expenses, earned in that particular month only.

Summing up
Okay, so step 1 was to understand the basis of accounting, which is debit and credit. Step 2 was to understand what a debit and credit represented.

In a future post, we will get into a bit more detail and look at the long and short term interpretations of it.

Stock transactions

There are two ways to handle stock transations.

The first is to debit all trade purchases into the Purchases account, and maintain a separate (perhaps manual) stock account.

In this method, to calculate your cost of sales, you would:

1. Add opening stock balance
2. Add Purchases
3. Deduct Closing stock

Your Profit & Loss account would look like this:

	Sales		100,000.00
	Less: Cost of sales
	Opening stock	35,000.00
	Purchases	75,000.00
		110,000.00
	Less: Closing stock	30,000.00
			80,000.00
	Gross profit		20,000.00

You would have to do a stock take to ascertain the value of your closing stock as at any point in time, and pass a journal entry into the system so that Gross Profit can be calculated.

The alternative is to maintain a perpetual stock system.

With this method, purchases are debited to a stock account and, as stocks are sold, the cost is deducted from it.

At any point in time, the amount reflected in the stock account would therefore be the value of stocks on hand.

In this scenario, the Profit & Loss Account would look like this:

	Sales		100,000.00
	Less: Cost of sales		80,000.00
	Gross profit		20,000.00

The real impact on the bottom line is the same. I say real because with the previous system the closing stock value would, at best, be an estimate as you would first have to do a stock take, and then value the stock. This would be time consuming, and, except at the financial year end, most businesses would just take an estimated value and plug it in.

To maintain such a system manually would be too tedious, but the good news is that most, if not all, modern day accounting systems cater for this.

There are primarily three advantages to using this system.

The first is that you can ascertain the gross margin on each sale, as well as ascertain your profits at any given time.

Secondly you know the exact value of your stock in hand, as well as what is in stock and what needs re-ordering.

Thirdly, you can easily do a month to month comparative of your monthly income, because the actual cost is recorded at the time of recording the sale.

Note that although you do not have to perform stock takes just to ascertain the value of your stocks, you would still need to do one at the end of each financial year for audit purposes.

It's also a good idea to do selective stock takes to ensure that the balances in your system tally with that of the physical stock. This will also discourage pilferage.

The basis of book keeping

To start with, I am never sure if it's bookkeeping, book keeping or book-keeping. A quick search on Wikipedia seems to confirm this confusion is not confined to me as all three are deemed acceptable.

And that, to me is the only confusing part. Once you get past that, everything else is, as we are so fond of saying here in Malaysia, kacang putih (peanuts)!

Most are daunted by it, but it is actually very simple and precise. Bookkeeping is simply the act of recording a business transaction. That's it, nothing more, nothing less.

Double entry concept
Business transactions have two aspects, the giving aspect and the receiving aspect. Think of it as when someone gives, another receives. These two aspects are named Debit (the receiving aspect) and Credit (the giving aspect).

So in recording a transaction, you need to ask yourself who is giving and who is receiving. For instance, if you pay salary to your employee, the bank is the giving aspect, and the employee is the receiving aspect. Easy huh?

The bank gives and the employee receives.

Debit aspects are recorded on the left and credit on the right.

Account
Most business transactions can be grouped together. For instance when you pay an employee, or your utility bill or your creditor, the common giving aspect here is the bank (assuming you make all these payments by cheque).

For transactions that occur regularly, we create an account so that we can group or categorise them. An account is essentially a name that describes the transaction, for example, we would name banking transactions with the name of the bank that we maintain an account with. (See some similarity here? Banks create an account with our name when we when we open an account with them.) So if your bankers were XYZ Bankers Ltd, you would name the account "XYZ Bank" or to that effect.

Grouping of transactions is relatively straight forward, and depends on the depth of information you require about your business. For instance, you pay for electricity, water and telephone. If you absolutely need to know what the business expended on each, you would create an account for each. In practical terms it would be more prudent to group all 3 under an account called "Utilities" or simply "Electricity, water and telephone".

On the same note, payment of salaries can be grouped under one account rather than in separate accounts for each employee.

Why group transactions?
We group transactions so that we can obtain information about the business. Transactions, if not grouped, do not offer information. It's nothing more than a list of transactions that need to be analysed further if any sort of meaningful information is to be gleaned from it.

If we grouped them however, we would be able to extract meaningful information such as how much was expended on rental or what was the total sales this month.

If you look back at the figure above, at a glance you can ascertain that RM1,000.00 was paid out in salaries.

Is that it?
Well, yes and no. There is much more to bookkeeping than just debits and credits, but this is the basis of everything else.

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Control accounts - making life simpler

Control or clearance accounts are temporary holding accounts. It's the ideal way to track an ongoing accrual that occurs on a monthly basis. An example would be salary payments.

During a normal salary payment cycle, the following statutory deductions have to be taken into account:

• Employees Provident fund or EPF
• Social Security Organisation or SOCSO
• Schedular tax deduction or STD (PCB)
  

Of the above, the employer contributes a share towards (1) and (2). The total of EPF and SOCSO contributions, as well as the STD would need to be remitted to the relevant bodies in the following month by the prescribed dates.

Breaking it down therefore, in bookkeeping we would need to track:

• Gross salaries,
• Net salary payable,
• EPF payable,
• SOCSO payable, and,
• STD payable.
  

If you only have a handful of employees, tracking what is payable and what has been paid will not be such a difficult task. With more employees however this becomes increasingly a chore.

The easy way to track the above would be to set up control accounts. These accounts would be the indicators of what is due and what is not. Balances in these accounts should be zero by a given date. If the balance is not zero, assuming that your salary computations are correct, then:

• For credit balances - either you have not made the payment or you short paid
• For debit balances - you have not accrued for the payable or have overpaid.
  

Control accounts are useful with either the accrual or cash accounting methods.

Let's use the following example as a basis for the entries required in the above methods:

			Employee		Employer		Total
	Basic salary		4,000.00
	EPF		440.00		480.00		920.00
	SOCSO		14.75		51.65		66.40
	STD		67.00		-		67.00
	Net		3,478.25

Accrual accounting
In accrual accounting, you pass journal entries for the expenses and payables first and make the necessary payments at a later date.

The first step would be to record the expenses and payables as follows:

			Debit		Credit
	Salary expense		4,000.00
	EPF expense		480.00
	SOCSO expense		51.65
	Salary control				3,478.25
	EPF control				920.00
	SOCSO control				66.40
	STD control				67.00
			4,531.65		4,531.65

When payment is made, you would credit bank and debit the control account, and if all is well, the balances in the control account will be zero.

This practice is ideal in large organisations that have HR departments calculating the payroll, while payment is made by the finance departments. Payroll details are kept confidential.

Cash accounting
In cash accounting, transactions are recorded as payments are made. In this instance, salaries would usually be paid first while statutory deductions are remitted later.

So, to record the payables, make the following entry when paying out salaries:

			Debit		Credit
	Bank				3,478.25
	Salary expense		4,000.00
	EPF expense		480.00
	SOCSO expense		51.65
	EPF control				920.00
	SOCSO control				66.40
	STD control				67.00
			4,531.65		4,531.65

Because the net salary is paid immediately, there is no necessity for a salary control account. Instead, credit the net amount to the bank account.

In a single entry accounting system, your transaction screen would look like this:

EPF	480.00
SOCSO	51.65
EPF control	(920.00)
SOCSO control	(66.40)
STD control	(67.00)
Net payment	3,478.25

In making a payment, the double entry would be credit bank and debit whatever items you enter in the payment section. The effect of putting a negative amount in the payment section would, therefore, convert a debit entry to a credit entry. The net payment would be the cheque amount and is calculated by the system.

Conclusion
While it may seem a bit tedious to have these accounts, I have found that it made life easier when it came down to checking what was paid and what was not. It also becomes easy to identify where the difference is coming from because each payable can easily be matched to the payment.

The added advantage was that it kept my Salary, EPF and SOCSO expense accounts clean. If you follow the above method, you will only have one entry in each account for each month. This makes it a breeze to tally the figures back to salary sheets.

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