You are here

Knowledge of accounting principles is required

From an accounting perspective the spreadsheet consists of three tabs:
  1. Ledgers!!! – This tab is the general ledger which lists accounts in the usual categories for a general ledger: Assets, Expense, Liabilities, Equity, Income. All of the debit entries on the Ledgers!!! tab must tally with all of the credit entries. Note that this spreadsheet involves entering transactions directly into a ledger, and accounting “journals” are not used.  
  2. Income Statement!!! – This tab brings in the period end balances for all of the accounts relevant to whether a profit or loss has been made in the time period being considered.
  3. Balance Sheet!!! – This tab lists all accounts normally shown on a balance, sheet, and brings in the net profit / loss from the income statement to confirm whether the balance sheet balances.
 
Use of this spreadsheet requires the user to be somewhat familiar with basic accounting principles. The following provides a very brief outline of some of the basic principles:
  1. Double entry accounting is applied: each transaction must be entered twice i.e. into two separate ledgers. One entry must be a debit entry, and one must be a credit entry, such that a tally of all debits equals a tally of all credits.
  2. There are typically 5 categories of accounts: Shareholder Equity, Income, Expense, Assets, and Liabilities.
  3. For Asset accounts and Expense accounts: an increase is recorded as a debit, and a decrease as a credit. (When first learning accounting rules it is best to simply memorize this rule and later attempt to understand it more deeply. This rule is noted on the top of the Ledger Index!!! tab of the spreadsheet).
  4. For Liability accounts, Equity accounts, and Income accounts: an increase is recorded as a credit, and a decrease is recorded as a debit.  (Again, when first learning accounting rules it is best to simply memorize this rule and later attempt to more deeply understand it. This rule is noted on the top of the Ledger Index!!! tab of the spreadsheet).
  5. Asset, liability, and equity accounts typically do have opening balances, and income and expense accounts typically do not have opening balances but start from zero each year.
  6. The year end balance for each account must be recorded on either the Income Statement or the Balance Sheet.
  7. The Income Statement is used to calculate the net profit (or loss) of the business, and therefore the Income Statement contains income accounts (e.g. business income and investment income) and expense accounts (e.g. salaries, rent, marketing costs).
  8. The Balance Sheet sets out the accounting equation i.e. Assets - Liabilities = Shareholder Equity. Shareholder equity is made up of Shareholder Capital (the amount the shareholders paid to buy their ownership interest in the business) + Retained Earnings.  Putting aside changes in Shareholder Capital (indeed such changes are relatively rare for most small businesses) the accounting equation checks that the annual change in “Assets – liabilities” matches the change in Retained Earnings in the year (such change being the net profit (or loss) for the year). In other words, if there has been no change in the Shareholder Capital during the year (which as noted is the typical situation) then if the business makes a net profit of $X then “Assets – liabilities” must have increased by $X, and this is reflected in a $X change in retained earnings. Conversely, if the company made a $Y net loss then there will be a $Y decrease in retained earnings (perhaps making retained earnings negative). See the accounting equation, and notes, on the Balance Sheet!!! Tab.
 
Although it will also accommodate “cash accounting”, this spreadsheet is suited to application of accrual accounting, which is an accounting method that records revenues and expenses when they are incurred, regardless of when cash is exchanged e.g. if an invoice is issued to a customer in 2017, but will not be paid until 2018, the invoice amount is recorded in income (and in accounts receivable) in 2017 and treated as income for the 2017 financial year. Then, in 2018, when the cash comes in there will be double entries in the bank account, and in accounts payable.
 
The following website provides a detailed explanation of debits and credits: http://www.dwmbeancounter.com/tutorial/DrCrTChart.html