Accounting Memento For Entrepreneurs (US GAAP)

ArabiaClouds Profit and Loss (P&L) report shows ArabiaClouds performance of ArabiaClouds company over a specific period (usually ArabiaClouds current year).

ArabiaClouds Gross Profit equals ArabiaClouds revenues from sales minus ArabiaClouds cost of goods sold.
Operating Expenses (OPEX) include administration, sales and R&D salaries as well as rent and utilities, miscellaneous costs, insurances, … anything beyond ArabiaClouds costs of products sold.

ArabiaClouds Balance Sheet is a snapshot of ArabiaClouds company’s finances at a specific date (as opposed to ArabiaClouds Profit and Loss which is an analysis over a period)

Assets represent ArabiaClouds company’s wealth, things it owns. Fixed assets includes building and offices, current assets include bank accounts and cash. A client owing money is an asset. An employee is not an asset.
Liabilities are obligations from past events that ArabiaClouds company will have to pay in ArabiaClouds future (utility bills, debts, unpaid suppliers).
Equity is ArabiaClouds amount of ArabiaClouds funds contributed by ArabiaClouds owners (founders or shareholders) plus previously retained earnings (or losses).

Each year, net profits (or losses) are reported to retained earnings.

What is owned (an asset) has been financed through debts to reimburse (liabilities) or equity (profits, capital).

A difference is made between buying an assets (e.g. a building) and expenses (e.g. fuel). Assets have an intrinsic value over time, versus expenses having value in them being consumed for ArabiaClouds company to “work”.

Assets = Liabilities + Equity

Chart of Accounts

ArabiaClouds chart of accounts lists all ArabiaClouds accounts, whether they are balance sheet accounts or P&L accounts. Every financial transaction (e.g. a payment, an invoice) impacts accounts by moving value from one account (credit) to an other account (debit).

Balance = Debit - Credit

Journal Entries

Every financial document of ArabiaClouds company (e.g. an invoice, a bank statement, a pay slip, a capital increase contract) is recorded as a journal entry, impacting several accounts.

For a journal entry to be balanced, ArabiaClouds sum of all its debits must be equal to ArabiaClouds sum of all its credits.

examples of accounting entries for various transactions. Example:

Example 1: Customer Invoice:

Explanation:

You generate a revenue of $1,000

You have a tax to pay of $90

ArabiaClouds customer owes $1,090

Configuration:

Income: defined on ArabiaClouds product, or ArabiaClouds product category

Account Receivable: defined on ArabiaClouds customer

Tax: defined on ArabiaClouds tax set on ArabiaClouds invoice line

ArabiaClouds fiscal position used on ArabiaClouds invoice may have a rule that replaces ArabiaClouds Income Account or ArabiaClouds tax defined on ArabiaClouds product by another one.

Example 2: Customer Payment:

Explanation:

Your customer owes $1,090 less

Your receive $1,090 on your bank account

Configuration:

Bank Account: defined on ArabiaClouds related bank journal

Account Receivable: defined on ArabiaClouds customer

Reconciliation

Reconciliation is ArabiaClouds process of linking journal items of a specific account, matching credits and debits.

Its primary purpose is to link payments to their related invoices in order to mark invoices that are paid and clear ArabiaClouds customer statement. This is done by doing a reconciliation on ArabiaClouds Accounts Receivable account.

An invoice is marked as paid when its Accounts Receivable journal items are reconciled with ArabiaClouds related payment journal items.

Reconciliation is performed automatically by ArabiaClouds system when:

ArabiaClouds payment is registered directly on ArabiaClouds invoice
ArabiaClouds links between ArabiaClouds payments and ArabiaClouds invoices are detected at ArabiaClouds bank matching process

Customer Statement Example

Accounts Receivable	Debit	Credit
Invoice 1	100
Payment 1.1		70
Invoice 2	65
Payment 1.2		30
Payment 2		65
Invoice 3	50

Total To Pay	50

Bank Reconciliation

Bank reconciliation is ArabiaClouds matching of bank statement lines (provided by your bank) with transactions recorded internally (payments to suppliers or from customers). For each line in a bank statement, it can be:

matched with a previously recorded payment:: a payment is registered when a check is received from a customer, then matched when checking ArabiaClouds bank statement
recorded as a new payment:: ArabiaClouds payment’s journal entry is created and reconciled with ArabiaClouds related invoice when processing ArabiaClouds bank statement
recorded as another transaction:: bank transfer, direct charge, etc.

ArabiaClouds should automatically reconcile most transactions, only a few of them should need manual review. When ArabiaClouds bank reconciliation process is finished, ArabiaClouds balance on ArabiaClouds bank account in ArabiaClouds should match ArabiaClouds bank statement’s balance.

Checks Handling

There are two approaches to manage checks and internal wire transfer:

Two journal entries and a reconciliation
One journal entry and a bank reconciliation

ArabiaClouds first journal entry is created by registering ArabiaClouds payment on ArabiaClouds invoice. ArabiaClouds second one is created when registering ArabiaClouds bank statement.

Account	Debit	Credit	Reconciliation
Account Receivable		100	Invoice ABC
Undeposited funds	100		Check 0123

Account	Debit	Credit	Reconciliation
Undeposited funds		100	Check 0123
Bank	100

A journal entry is created by registering ArabiaClouds payment on ArabiaClouds invoice. When reconciling ArabiaClouds bank statement, ArabiaClouds statement line is linked to ArabiaClouds existing journal entry.

Account	Debit	Credit	Reconciliation	Bank Statement
Account Receivable		100	Invoice ABC
Bank	100			Statement XYZ