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.

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.

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.

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.

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.

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.

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’.

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.

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.

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.

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.

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.

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.