Acounting for the non accountant - by a computer programmer

The Accounting Ledgers

The Ledgers

The accountant has things called ledgers. I the good old days these were huge ledger books that had hordes of sweaty clerks scribbling in them. I the world of computers we have got rid of the books and replaced them with databases that allow us to have vast numbers of individual bits of paper. These are put in boxes called files. Unfortunately we still have the clerks – these people are the main cause of the files, as they have absolutely no faith in the computers. The only thing to be said for this is that the books were neater.

Back to the Ledgers. There are three core ledgers, they all have a variety of names depending on where you live.

• Purchase Ledger – this looks after your Suppliers – they are sometimes know as creditors, and hence the creditors ledger.
• Sales Ledger – This looks after customers – they are sometimes know as debtors, yes you guessed it – the Debtors Ledger.
• Nominal Ledger. This is the big book in the middle, where all the management reports are run from to give the data listed above. Also called General Ledger or Chart of Accounts, or just plain management accounts,

You might be starting to notice the usage of words starting with debit and credit. These are interesting words, shrouding logical concepts. The whole world of Accounts can be expressed as debits and credits, but more on that later.

Sales Ledger

This is a customer thingy. Now, the only thing that we care about with customers is how much money they owe us, and when we might get it. In a Sales Ledger each of our customers have an account set up. This stores stuff like names and addresses etc. The customer account has a balance on it. This is the amount of money owed to us. Just one arbitrary figure. The balance is the entire point of the sales ledger is to move that balance up and down.

The balance is the figure he owes us. We have tools for moving it about. To make the balance go up we can put on an invoice. (Sometimes known as a debit note). This is our way of telling the customer he should pay us some money. The actual invoice is a piece of paper. You can identify it as an invoice because it has INVOICE written at the top. Somewhere should also be an invoice number. The invoice tool in the sales ledger merely records the fact he has been sent an invoice in our accounts. To actually print an invoice you need a Sales Order Processing system

To make the balance go down the customer must pay use some money. This is put on the system as a Sales Ledger Receipt. The balance then duly goes down.

If we realise that we sent the wrong invoice out, and wish to reverse the early entry of the invoice we raise a Credit Note. This is a sort of Anti-Invoice. The two cancel out in the management accounts. It is different from a receipt because are bank does not have any more money!

If we wish to bugger about a bit, due to mistakes somewhere, we can do debit adjustments and credit adjustments. The first increases the balance and the second reduces it.

Purchase Ledger

The complete opposite. Lets pretend to be the customer I just invoiced. He is called Bloggs & Co. I am called ABC Ltd.

In the eyes of ABC Ltd, Bloggs & Co. is a customer, and has an account on ABC’s Sales Ledger.

In the eyes of Bloggs and Co., ABC Ltd is a supplier, and has an account on Bloggs’ Purchase ledger.

So, to pick up the story, ABC used its sophisticated Sales Order System, in this case a pen and paper, and wrote out a piece of paper that said invoice at the top and details of how many widgets that ABC sent to Bloggs in the last month, and how much Bloggs had better pay for them, preferably some time in the next 30 days. ABC put in on their system as a sales ledger invoice against Bloggs &Co. s’ Sales Ledger account.

When the invoice got the the office of Bloggs and Co., they looked at it, saw it was from the suppliers, ABC Ltd, and called it a Purchase Invoice. (on account of the fact they had purchased loads of widgets from ABC ltd last month).

So they went to there Purchase Ledger and entered the invoice as a Puchase Ledger invoice against the Purchase ledger account on Blogg’s Purchase ledger for the supplier called ABC Ltd.

On Bloggs’ purchase ledger the supplier account also has a balance. This figure is the amount of money that the owner (bloggs) of the ledger owes to that supplier. Again, putting on an invoice from ABC to Bloggs make the balance go up, and a credit note makes it go down. If we should happen to pay a supplier, heaven forbid, the payment makes the balance go down. However, just to keep one on ones toes, this time a debit adjustment reduces the blance and a credit adjustment increases the balance.

The two most important reports to come out of this lot is the Aged Credit and Aged Debt.

The Aged Credit is run from the purchase ledger and says how much money we owe to our suppliers and how long we have owed it for.

The Aged Debt is run from the Sales ledger and says how much money we are owed by our customers and for how long they have owed it to us.

Simple?

No, as one also has to print the bloody invoices!