ahmadhuss / accounting

This repository represents some accounting scenarios commonly needed in software.

Accounting Overview

The following documentation presents some general concepts used in accounting.

Fundamentals:

F1:

Assets (What you own) = Liabilities (What you owe) + Equity (What you get capital Profits Losses)

F2:

Equity = Assets - Liabilities

F3:

Liabilities = Assets - Equity

General Chart of Accounts:

| Root Headers   |
|----------------|
| Assets         |
| Liabilities    |
| Equity         |
| Revenue/Income |
| Expenses       |

Financial Workflow:

Journal Entry: Record financial transactions.

Ledger: Post entries from the journal into individual ledger accounts.

Trial Balance: Summarize ledger balances to check for accuracy.

Trading and Profit and Loss Account: Determine the profit or loss from trading activities.

Balance Sheet: Provide a snapshot of the company's financial position.

Example:

Journal Entry → Ledger → Trial Balance → Trading and Profit and Loss → Balance Sheet

Debit & Credit:

We can remember how accounting Debit and Credit work using this mnemonic called DEALER.

Letter	Meaning
D	Debit
E	Expenses
A	Assets
L	Liabilities
E	Equity
R	Revenue/Income

Debit:

Increases Expenses and Assets

Decreases Liabilities, Equity, and Revenue/Income

Credit:

Increases Liabilities, Equity, and Revenue/Income

Decreases Expenses and Assets

Journal Entry Scenarios:

Scenario 1: Sales Invoice to Customer:

Root Category	Sub-Category	Debit	Credit
Asset	Accounts Receivable	$1000
Income	Sales Revenue		$900
Liability	Tax Payable		$100
Expense	Cost of Goods Sold	$600
Asset	Inventory		$600

Explanation:

• Asset (Accounts Receivable): The customer owes $1,000.
• Income (Sales Revenue): Revenue from the sale is $900.
• Liability (Tax Payable): $100 tax is owed to the government.
• Expense (COGS): The cost of goods sold is $600.
• Asset (Inventory): Inventory decreases by $600.

Scenario 2: Payment Entry against the Sales Invoice:

Root Category	Sub-Category	Debit	Credit
Asset	Cash/Bank	$1000
Asset	Accounts Receivable		$1000

Explanation:

• Asset (Cash/Bank): The company receives $1,000 in payment.
• Asset (Accounts Receivable): The customer’s outstanding balance is cleared.

Scenario 3: Regular Salary to the Employee:

Root Category	Sub-Category	Debit	Credit
Expense	Salary Expense	$3000
Liability	Deductions Payable		$500
Asset	Cash/Bank		$2500

Explanation:

• Expense (Salary Expense): The full salary expense of $3,000 is recorded.
• Liability (Deductions Payable): $500 is withheld for taxes/contributions.
• Asset (Cash/Bank): The company pays $2,500 to the employee.

Scenario 4: Bonus Given to the Employee:

Root Category	Sub-Category	Debit	Credit
Expense	Bonus Expense	$500
Asset	Cash/Bank		$500

Explanation:

• Expense (Bonus Expense): Debited by $500 to record the cost of the bonus payment.
• Asset (Cash/Bank): Credited by $500 as the company pays the bonus in cash.

Scenario 5: When the Bonus is Paid Along with Salary:

Let’s assume the employee’s regular salary is $3,000, and the bonus is paid along with the salary.

Combined Table (Salary + Bonus Payment):

Root Category	Sub-Category	Debit	Credit
Expense	Salary Expense	$3000
Expense	Bonus Expense	$500
Liability	Deductions Payable		$500
Asset	Cash/Bank		$3000

Explanation:

• Expense (Salary Expense): Debited by $3,000 for the regular salary.
• Expense (Bonus Expense): Debited by $500 for the bonus.
• Liability (Deductions Payable): Credited by $500 for any deductions (taxes, contributions, etc.).
• Asset (Cash/Bank): Credited by $3,000 for the net payment (including the bonus).

Scenario 6: Advance Salary to the Employee:

Root Category	Sub-Category	Debit	Credit
Asset	Advance Salary	$1000
Asset	Cash/Bank		$1000

Explanation:

• Asset (Advance Salary): The advance salary is treated as a receivable from the employee.
• Asset (Cash/Bank): The company pays out $1,000 in cash.

Scenario 7: Salary to the Employee with Advance Deduction:

Root Category	Sub-Category	Debit	Credit
Expense	Salary Expense	$3000
Asset	Advance Salary		$1000
Asset	Cash/Bank		$2000

Explanation:

• Expense (Salary Expense): The employee’s full salary is recorded as $3,000.
• Asset (Advance Salary): The $1,000 advance is deducted from the total.
• Asset (Cash/Bank): The company pays $2,000 to the employee after the advance deduction.

Scenario 8: Employee Takes a Loan from the Company:

Root Category	Sub-Category	Debit	Credit
Asset	Employee Loan	$2000
Asset	Cash/Bank		$2000

Explanation:

• Asset (Employee Loan): Debited by $2,000 as the company records the loan given to the employee. This is treated as a receivable because the employee will repay the loan in the future.
• Asset (Cash/Bank): Credited by $2,000 because the company is paying out this amount to the employee.

Scenario 9: Deduct 6% of Loan during Salary Payment:

The employee's regular salary is $3,000, and 6% of the loan ($120) is deducted during the salary payment.

Root Category	Sub-Category	Debit	Credit
Expense	Salary Expense	$3000
Liability	Deductions Payable		$500
Asset	Cash/Bank		$2380
Asset	Employee Loan		$120

Explanation:

• Expense (Salary Expense): Debited by $3,000 for the full salary amount.
• Liability (Deductions Payable): Credited by $500 for tax or other deductions.
• Asset (Cash/Bank): Credited by $2,380, which is the net salary paid to the employee after the 6% loan deduction and taxes.
• Asset (Employee Loan): Credited by $120 to reflect the reduction in the employee's loan balance (6% of $2,000).

Scenario 10: Refund After Sales Invoice Creation and Payment Entry:

Root Category	Sub-Category	Debit	Credit
Liability	Refund Payable	$1000
Asset	Cash/Bank		$1000

Explanation:

• Liability (Refund Payable): Debited by $1,000, as the company now owes this amount to the customer.
• Asset (Cash/Bank): Credited by $1,000, indicating the payment of the refund from the company's bank account to the customer.

License:

MIT