Introduction to the Chart of Accounts
Hi everyone, my name is Lynette Sharon and I work as a consultant at Frappe Technologies. We are the publishers of ERPNext, one of the leading open source ERP solutions.
In this tutorial, we would be learning the fundamental concept of accounting, that is the Chart of Accounts.
The Four Pillars of Personal Finance
Firstly, let us understand the four basic principles of the Chart of Accounts, that is: incomes, expenses, assets, and liabilities. I shall be giving you simple examples so that you can understand better.
Now as an individual, you earn money and you also spend it. You earn money through various sources like monthly salaries, bonus, dividends, etc. Those are your incomes. You also spend money by paying for rent, utilities, groceries, etc. Those are your expenses.
You may have bank deposits, cash, or any kind of investments. Those are your assets. Now on the other hand, you may also have to pay off some home loan or outstanding credit card payment. Those are your liabilities.
It is very important for you to track and also diligently be aware of your incomes, your assets, liabilities, and your expenses.
Applying Accounting Principles to Business
Well, companies also do the same. Companies earn money by selling goods and services; these are called as direct incomes. Companies also earn money by various other sources like interest on deposits; these are called as indirect incomes.
Companies spend money on buying goods and services; these are called as direct expenses. While on the other hand, companies spend money on marketing and other activities like employee salaries; these are called as indirect expenses.
Companies own inventory, cash, bank balances; these are called as current assets. Companies also own machinery, furniture, buildings, etc.; these are called as fixed assets.
Companies may have short-term loans or any kind of outstanding supplier invoices; these are called as current liabilities. Companies also have long-term loans or bonds payables; these are called as non-current liabilities.
Balance Sheet and P&L Accounts
Now, it is very helpful to recognize, classify, and label each of the income, expenses, assets, and liabilities into different accounts. Once we organize these accounts properly, that is when we get what is called as the Chart of Accounts.
Accounts under the assets and liability groups are called as balance sheet accounts because they help in preparing the balance sheet. While accounts falling under the income and expenses group are called as the profit and loss accounts.
Navigating the Chart of Accounts in ERPNext
Well, let us see the Chart of Accounts in action. We will now show you how to manage your Chart of Accounts, accounting settings, and company master in ERPNext.
To navigate to the Chart of Accounts from Home, click on Accounting, and then click on Chart of Accounts under Accounting Master.
The Chart of Accounts is represented in a tree structure with group nodes and leaf nodes. Group nodes are indicated by folders and leaf nodes are indicated by dots.
Only leaf nodes can be used in transactions. The Chart of Accounts has five main groups: Assets or Application of Funds, Liabilities or Source of Funds, Equity, Income, and Expenses.
You can click on a group or a subgroup to further expand it, or you can click on Expand All to view all the ledgers at once.
Creating New Accounts and Groups
You can create additional groups or ledgers by clicking on a group and then on Add Child.
Fill in the details, the account type, and you can check on 'Is Group' if you want it to be added as a sub-group instead of a ledger.
Setting Account Types and Editing Ledgers
For each account, the Account Type property can be set. This helps in selecting the right ledgers in a transaction. For example, all ledgers representing a bank account must have the account type set to Bank. And all ledgers representing inventory must have the account type set to Stock.
Click on Edit to update the existing details of groups or ledgers. You can also change the account type and then view the ledger of that particular account.
Financial Reports and Account Settings
Lastly, you can quickly view the financial statements and other information like the chart of cost centers on a click of a button.
Next, let us look at the Account Setting to review some of the most important configurations. Well, you can click on Account Setting under Accounting Masters or you can use the awesome bar to navigate. You can set the date till which your books of accounts are frozen. This makes sure that no one can post transactions in accounting periods that have been closed.
You can also specify the credit controller role. You can learn more about account settings by reading the documentation.
Multi-Company Setup in ERPNext
ERPNext supports multi-company setup. For each legal entity, you can create a company record. Each company will have its own Chart of Accounts.
The company record contains default values and important configurations about Sales, Accounts, Inventory, Asset Depreciation, and Human Resources. The default ledgers for cash, bank, income, expenses, payable, receivable can be set in account settings also.
The default cost center, credit limit, and payment terms can be set here. You can also maintain the child-parent relationship between companies and manage inter-company transactions.
Conclusion
I hope you got an overview of the Chart of Accounts. You can find more on the Chart of Accounts and other concepts in our user manual, the link to which is shared in the description box below. Thanks for watching.
