Accounting for Programmers

Accounting guide for programmers. My best attempt to convert accounting concepts to data models and operations.

Introduction

Accounting is the universally accepted gold standard for tracking the flow of value, works for every business model and has no apparent successors. It offers the business to compute critical metrics like:

has and expects to receive

owes to vendors and customers

owes to shareholders (owners)

has earned

has spent

Accounting exposes where value is stored within, and how it flows through a business. Quality accounting is a sign of, and fundamental basis to prove, the trustworthiness of an entity’s financial records.

Terminology

Stuff that business owns = Assets

Assets can be made up of:

Cash
Accounts Receivables (A/R)
Inventory
Plant, Property and Equipment (PPE)
Land and Buildings (L&B)
Investments
Goodwill

Stuff that business owes = Equity, Liabilities

Liabilities can be made up of:

Accounts Payable (A/P)
Loans payable
Wages Payable
Taxes Payable

Equity can be made up of:

Stockholder’s
Owner’s
Retained Earnings (R/E) - Profit held for future use

Stuff that business owns and Stuff that business owes should always be equal

Equity - Stuff that business owes to the owner

Liabilities - Stuff that business owes to third parties

The accounting equation

A balance sheet is a snapshot of our different assets, liabilities and equity at a single point in time

What is accounting?

Accounting is a methodology of tracking the movement of value through a system of accounts.

The fundamental rule of accounting is that what the business owes and is owed must always EXACTLY EQUAL what is owes to others. Which is essentially the accounting equation.

Debit and Credit

Let’s get rid of some misconceptions:

Debits and Credits are neither good nor bad

Debits and Credits are not the same as adding or subtracting

Debits and Credits are words used to reflect the duality or double-sided nature of all financial transactions.

Think of debits and credits of a coin, it’s basically the heads and tails of every transactions. For the money to go in one account, it has to come from another.

Accountants consider every transaction to involve a flow of “Economic Benefit” from a source to a destination.

Credits represent the source and Debits represent the destination.

The debit can be (destination):

Assets

Expenses (for 3rd party service)

Dividends

Sources where “economic benefit” can flow form:

Owner’s Equity

Liabilities - from suppliers or bank loan

Revenue

Accounts

An account is a place where we can record, sort and store financial transactions

A T-account is a graphical representation of an account

The general ledger is a place where a business stores a complete record of all its financial transactions and accounts

Journal Entries

A journal is a record of financial transaction. Here are the components of a journal:

Date

Journal Number - unique

Debit account

Debit amount

Credit account

Credit amount

Description

The total of debit and credit column always match.

Automatic journals are used in accounting which create the journal entries in respective accounts automatically. These are used by accounting software to save us time.

Bookkeeping

Bookkeeping is the recording of all financial transactions in a business.

Trial Balance

It’s an accounting report showing the closing balances of all general ledger accounts at a point in time. This is used to check if the debit and credit columns match each other. Since the advent of accounting software, this system is used less and less and is now used as an internal tool by accountants to check for errors and prepare financial reports.

Having a balanced Trial Balance report indicate that it’s free of error, some possible errors that could occur is as follows:

Switching the debits and credits

Posting the same journal twice

Not posting it at all

Posting a journal to the wrong accounts

Getting the number values wrong

Gross Profit

When you subtract COGS from your SALES, we get gross profit

Gross means “fat” or “big” in German.

Net Profit

Remove expenses from Gross Profit we get net profit

Net profit / Net Income / Earnings is called as the bottom line! All of them are the same thing!

General Ledger

It’s a moment by moment record of everything that happens (financially).

Notes

The length of time in an income statement is the accounting period.

Earnings from past accounting periods are called Retained Earnings

Notes Payable has to do with money owed to someone else for money received. We got cash.

Accounts Payable has to do with some things we got for our business which we have to pay for someday. We got goods or service.

Liabilities are generally ordered as they come due. That’s why account payable (due in 30 days) comes first and notes payable (due in an year) comes next.

So if we were employing someone to make our product, their labour increased the value of our inventory. (We take $1 from Cash and add it to Finished Good). The “Cost of Production” labour is tied up in inventory. That $1 cost cannot be recognised (or expensed) until the inventory is sold. This is the reason why companies closely manage inventory quantities and always wants to sell it quickly.

Pointers

Double entry systems are more reliable at tracking money than any other viable alternative

Core principle of double-entry accounting is that every transaction should record both where the money came from and what the money was used for

Operating statement, Income statement, and Profit & Loss Statement are all the same thing.

Building Blocks

Accounts

An account is a segregated pool of value. Any discrete balance can be an account. Accounts generally correlate with the balances you want to track.

In accounting, accounts have types.

Transactions

These are atomic events that affect account balances. Transactions are composed of entries. A transaction has at least two entries, each of which correspond to one account.