Applying manual bookkeeping principles to accounting software series: Part 2

In part 1 of this series, I set up The Millyard’s business details, including the financial year-end and VAT information.  I also created some general ledger accounts and entered most of my opening balances.

In this article, I’m going to look at customers and sales, specifically how to:

  1. Create customer accounts
  2. Enter the SLCA opening balance
  3. Generate an invoice for new sales
  4. Generate a credit note
  5. Generate a customer statement

If you remember I added the following opening balances, as at 1 June 2020, with the exception of the SLCA and PLCA:

The balance on the SLCA is the total of three individual customer account balances:

My knowledge of manual bookkeeping means that I know:

  • the balance on the SLCA is the total outstanding amount owed by credit customers
  • that accounting systems are made up of three ledgers, including:
    • the general ledger, which contains the sales, VAT and SLC accounts
    • the sales ledger, which contains individual customer accounts

1 – Create customer accounts

I have already added some general ledger accounts so now I’m going to create the sales ledger accounts.  Wave’s main menu has a drop down list under sales which includes customers and within that an add a customer button.  The information I have and can include is very basic, just names and addresses.  Once I’ve added all three customers, I can see a list of the accounts, in other words, my subsidiary sales ledger:

2 – Enter the SLCA opening balance

While some software allows for opening balances on customer accounts, it wasn’t possible to add the payment terms or opening balances within this version of Wave, so I’ll have to generate three dummy invoices in order to enter the opening balances.  I need to draw on my manual accounting knowledge again as I know that the opening balances relate to sales generated in the last financial year. 

Therefore, I must enter them in a way that will not result in an opening balance in the sales account or an increase in my opening VAT account balance, but will add opening balances to the SLCA and the individual customer accounts.  This will need to be done via invoices using a date from the previous financial year and entering the outstanding amount, as opposed to the net sales value and VAT, so the software will process them correctly.  I’m going to use 31st May 2020, in other words, the last day of the previous financial year.

Invoices are within the sales section on the main menu.  As I’m generating my first invoice Wave is suggesting I customise them with my logo and gives different template options but I’m going to skip this for now.

The basic invoice template allows me to:

  • edit my business address and contact details:
  • use intuitive options to add the customer, the date and payment terms:
  • and add details of the opening balance:

I then have to approve the invoice:

Before I add the other two opening balances I’m going to use a trial balance, dated 1st June 2020, to check that the results of Wave’s postings are as I expect; no balance on the sales account, the VAT liability to still be £2,830 and a receivables balance of £1,536.25:

As all looks well, I’m going to add the other two dummy invoices:

And update the trial balance to ensure a receivables opening balance of £6,785.25:

So, that’s my opening SLCA balance sorted. 

3 – Generate an invoice for new sales

Now I need to work out how to generate documentation for new sales and sales returns.

I have already set up some main ledger accounts but am going to edit the default sales accounts so that I can differentiate between gallery and picture framing sales.  The default accounts are under income in the chart of accounts and are easily edited:

Let’s say I sold some gallery items to The Wye on 7th June for £372.  A framed painting for £180 and two vases for £96 each.  The prices include VAT so the net sales values are £150 and £80 respectively.

I already know how to create a sales invoice and most of the inputting is the same.  The software automatically generates a sequential invoice number, so I just need to add the customer, date and payment terms.  I can add a new item and enter a description, amend the quantity, enter the net sales amount and select the VAT:

Finally, I can select the correct sales account and check the invoice total:

I know that accounting software uses double entry in the background.  This means that now I’ve generated the invoice, even though I’ve only input the information once, the software will automatically make multiple entries when I approve the draft:

There are a number of ways to check data in accounting software.  I talked about the dashboard in a previous article, and if we look at it now we can see the amount currently owed by credit customers:

This is the same as the receivables balance we can see on a trial balance dated 7th June:

Which now also show an increase in sales and the amount of VAT owed to HMRC:

4 – Generate a credit note

Finally, l want to see how to create a credit note as I have noticed it is not a listed option in the sales menu.  An internet search reveals that you have to create a negative invoice.  This will reduce the value of sales income, which is ultimately what sales returns do in manual accounting, but rather than net the two accounts off, Wave will just make the reduction immediately in the sales account. 

Let’s say The Wye have returned a damaged jug to me and need a credit note for £50 plus VAT.  I can:

  • amend the title ‘Invoice’ to ‘Credit Note’:
  • add CN to the system generated invoice number, to make it easier to identify:
  • create a new item, add the details, enter the net amount as a negative number, select the VAT and check the total:

When I approve the credit note I expect that my single input will be automatically posted in line with double entry principles:

When I check the trial balance again, I can confirm that receivables balance has reduced by £60, income by £50 and VAT by £10.

To check what has happened in The Wye’s account I have to generate a customer statement in the sales section:

Choosing account activity will show the details of all invoices, credit notes and payments within the selected date range.

In the next article we’ll look at suppliers and add the opening balance for the PLCA.

Further reading:

Gill Myers is a self-employed accounts consultant. She has taught AAT qualifications since 2005 and written numerous articles and e-learning resources.

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