Chapter: 1 - Importance of Accounting

Transactions

Accounting transactions can be any business activity that impacts the financial status and financial statements of the organization. Let’s familiarize some basic accounting transactions.

Journals

All the transactions related to the purchase are recorded in the purchase voucher. In Odoo they are termed ‘purchase journals’. It can be a product purchase, service, or any asset purchase. A purchase involves a series of transactions: Purchase order, material receipt, Rejection Out, Purchase Invoice, and purchase return.

Purchase order: A purchase order is created for any goods or services from a vendor for a required quantity. The Creation of purchase orders is not affecting both the stock or account ledgers.

Material receipt: Material receipt is the next operation. Once the vendor sends the product, it has to be received and moved to the stock. So on material receipts, only stock accounts get affected. In Odoo, on receiving the product ‘Stock Valuation Account’ and ‘Stock Input Account’ get affected.

Accounts Nature Increasing/Decreasing Debit/Credit
Stock valuation account Asset Increasing Debit
Stock Input account Liability Increasing Credit

Rejection Out: Sometimes, the organization returns the purchased product before making payment for any reason like damage of product or quality issue, and many more is termed by rejection out. In this case, the stock is reversed, and hence the stock affected and not the accounts. The stock value will decrease.

Accounts Nature Increasing/Decreasing Debit/Credit
Stock valuation account Asset Decreasing Credit
Stock Input account Liability Decreasing Debit

Purchase invoice: Creating an invoice against the purchase order affects the payable account and expense account. Since the nature of the payable account is ‘Liability’ and the expense account is ‘expense’, the payable account gets credited, and the expense account gets Debited.

Accounts Nature Increasing/Decreasing Debit/Credit
Account Payable Liability Increasing Credit
Expense Account Expense Increasing Debit

On making payment, the payable account and outstanding receipts account gets affected. Once the payment has been made, liability decreases, and hence the payable account is debited. From Odoo 14, a temporary account outstanding payments is used in bank and cash journals to keep the unreconciled entries. The nature of outstanding payments is ‘Asset’, and as assets decrease, the outstanding payment account is credited.

Accounts Nature Increasing/Decreasing Debit/Credit
Account Payable Liability Decreasing Debit
Outstanding Payments Asset Decreasing Credit

After reconciling with the bank statement, the amount will be transferred to the bank account. So the outstanding payments account gets debited, and the bank is credited.

Accounts Nature Increasing/Decreasing Debit/Credit
Outstanding Payments Asset Debit
Bank Account Asset Credit

Purchase Return: Purchase return after invoicing reduces the stock, and the paid amount has to be refunded. This affects both the stock and accounts. Hence the stock accounts, as well as accounts, were also affected. So corresponding reverse journal entries will be generated.

The below table describes the journal entry for the entire purchase transaction.

Operation Accounts Affected Debit Credit
Purchase order No Accounts Affected
Material Receipt Stock Valuation Account XX
Stock Interim Account XX
Purchase Bill Expense Account XX
Account Payable XX
Registering Payment Account Payable XX
Outstanding Payments XX
Reconciling Outstanding Payments XX
Bank Account XX

Sales

Now let's look at the sales transaction and operations involved and how journal entries are affected. The sales transaction involves the following operations: Sales order, Delivery Note, Rejection IN, Sales Invoice, and Sales return.

Sales order: Creating a sale order involves only creating an order for the customer for certain goods or services for a specified quantity. This does not depend on stock or any accounts.

Delivery note: A confirmed order is delivered to the customer from the inventory. Thus stock value decreases. Delivering products to customers affects two accounts, ‘Stock Valuation Account’ and ‘Stock Output Account’.

Accounts Nature Increasing/Decreasing Debit/Credit
Stock Valuation Account Asset Decreasing Credit
Stock Output Account Liability Decreasing Debit

Rejection IN: If the products are returned before invoicing, the only stock is affected, not accounts. The stock value increases since it returns to the inventory.

Accounts Nature Increasing/Decreasing Debit/Credit
Stock Valuation Account Asset Increasing Debit
Stock Output Account Liability Increasing Credit

Sales Invoice: On invoicing, the Account Receivable and Income account get affected. The nature of Account Receivable is ‘Asset’ and Income Account is ‘Income’. Here the asset is decreasing, and income is increasing, and hence the Account Receivable is credited, and the Income Account is debited.

Accounts Nature Increasing/Decreasing Debit/Credit
Income Account Income Increasing Credit
Account Receivable Asset Increasing Debit

On payment registration, a temporary account, Outstanding Receipts, is used to keep the unreconciled entries. Thus a journal entry is generated against Account Receivable and Outstanding Receipts.

Accounts Nature Increasing/Decreasing Debit/Credit
Accounts Receivable Asset Credit
Outstanding Receipts Asset Debit

After reconciling with the bank statement, the amount will be transferred to the bank account. So the outstanding receipts account gets credited, and the bank is Debited.

Accounts Nature Increasing/Decreasing Debit/Credit
Bank account Asset Debit
Outstanding Receipts Asset Credit

Sales Return: Sometimes, customers return the product even after invoicing. Thus both the stock and accounts get affected. Reverse journal entries will be generated for them.

The below table describes the journal entry for the entire sales transaction.

Operation Accounts Affected Debit Credit
Sales order No Accounts Affected NA NA
Delivery Note Stock Valuation Account XX
Stock Output Account XX
Customer Invoice Income Account XX
Account Receivable XX
Registering Payment Accounts Receivable XX
Outstanding Receipts XX
Reconciling Outstanding Payments XX
Bank Account XX

So in the end the sum of credits will equal the sum of debit as per the double-entry bookkeeping system.

The above series of transactions are defined based on the continental accounting method.

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