Applying manual bookkeeping principles to using accounting software series: Part 1

In a previous article I suggested that if you approach learning to use accounting software from a manual bookkeeping perspective, it reduces the importance of which software you learn because your skills will become transferable between programs.

In this series of articles, I am going to test that theory by setting up an imaginary business using Wave’s free accounting software.  If you would like to have a go too, create an account or even better sign up for a trial of any accounting software that takes your fancy, and see if you can achieve the same results.  You will be able to check your progress as the figures should be the same as mine.

This series is going to be split into five articles that cover:

  1. Setting up business details, general ledger accounts and entering opening balances
  2. Customers and sales
  3. Suppliers and reports
  4. Purchases
  5. Banking & petty cash

So here’s the imaginary business scenario; I own a VAT registered art gallery called The Millyard, that sells handmade items from a range of artists and offers a picture framing service.  It’s been trading for a couple of years and sells to corporate clients as well as the public.  Up until now I have maintained the accounts in a manual system.

In this article, I’m going to:

  1. Create a new business
  2. Input the year end date
  3. Input the VAT setting
  4. Customise the general ledger
  5. Enter opening account balances
  6. Use a report to check progress

1 – Create a new business

I’ve logged on and can see an option to create a new business:

which enables me to add the business’s details:

The software is giving me three options to get started: 

However, as I’m setting up an established business I want to enter the closing balances as at the end of the last financial year because they will be the opening balances for this year, just in the software as opposed to my manual system, so I am going to ignore these set-up wizards. 

2 – Input the year end date

Instead, I’m going to look in setting, which is an option in the main menu, to see where I can tell Wave the business’s year end:

3 – Input the VAT settings

There is also an option for sales taxes in settings.  I know that the terminology used in accounting software varies and that in this case, these are the VAT settings.  However, when selected it says:

As Wave is cloud-based software that is available worldwide, it allows users to set up relevant VAT rates as opposed to having lots of pre-set options.   I charge standard rate VAT of 20% on all sales and reclaim the VAT I pay on purchases, so can create a sales tax to account for that:

Note that I have included my VAT registration number, 987 654 321 and ticked the box that says the tax is recoverable.*  This tells the software to record all VAT charged on sales as credits in the sales tax account, in other words the VAT control account, and all VAT paid on purchases as debits, so that the balance will either be owed to or from HMRC.  In effect, the software will now make the double entry postings I would have done manually!

4 – Customise the general ledger

Now the business details are set up, I can think about the opening balances as at 1 June 2020 I’ve extracted from my manual system:

My knowledge of bookkeeping systems tells me that both manual and electronic systems are made up of three ledgers:

  • the general ledger, which contains accounts classified into either income, expenses, assets, liabilities or equity
  • the sales ledger, which contains individual customer accounts
  • the purchases ledger, which contains individual supplier accounts

I also know that double entry postings are only made between accounts in the general ledger and that the entries made in the sales and purchases ledger accounts are memorandum postings.

So, before I can enter the opening balances I need to find the general ledger in Wave and see what default accounts it contains.

Under the accounting tab in the menu, there is a link to the chart of accounts, the term often used in accounting software for the general ledger:

It is split up into the five account categories which form the basis of all accounting systems.  It is essential to understand them because of the way the classification determines in which financial statement account balances, and therefore transactions, are included.  I know that at year end the balances on all the income and expense accounts are written off to the statement of profit or loss (SoPL).  I also know that all the balances are carried forward on the asset, liability and equity accounts, which are shown on the statement of financial position (SoFP).  If this doesn’t sound familiar have a read of this article before continuing. Wave’s chart of accounts has a number of default accounts:

Wave’s chart of accounts has a number of default accounts:

The two assets accounts are Cash on Hand, i.e. the Bank current account, and Accounts Receivables i.e. SLCA.  Therefore, I need to add accounts for Computer Equipment, Fixtures and Fitting, and Petty Cash.  I also need to create accounts for the Computer Equipment – Accumulated Depreciation and Fixtures and Fitting – Accumulated Depreciation as I know that even though these accounts have credit balances they are not liabilities.  Instead these balances reduce the value of the assets to their carrying values so are included in the assets classification. Add an new account is an option within each category:

I can simply add the account name but have to be careful to select the correct account type.  For example, petty cash is a ‘cash and bank’ type but computer equipment is ‘property, plant and equipment’:

The two liability accounts are the Accounts Payables i.e. PLCA and the Sales Taxes/VAT control account I just created.   I do not need to worry about the income or expenses accounts at the moment because there are no opening balances on accounts in these categories.  Finally, Capital is one of the two default equity accounts and is called Owner’s Equity.

5 – Enter opening account balances

Now I can enter my opening balances and a quick internet search tells me that is done via transactions which is also in the accounting section:

Here I’ve got options to: add income, add expense, add journal transactions and upload a bank statement:

The opening balances are in effect set out like a journal and are all for SoFP accounts so that looks like the best option, however, I’m not going to enter the balances on the SLCA and PLCA for now.

I can add a description and the date but, in Wave, I can only enter one journal line at a time, in other words, one debit entry and one credit entry, rather than all the account balances in one go with the total debits balancing the total credits:

Entering the opening balances one at a time makes the process a bit more complicated and time consuming, however, it is possible because I know the accounting equation, which tells me that assets less liabilities equal capital.  I already know the default name for the capital account is Owner’s Equity, so, if I enter Owner’s Equity as the opposite account for each transaction, then once I have completed them all, the equity should net off to £24,939.75.  Remember, the functionality of accounting software will differ but the theory will always be the same.

The journal to enter the bank current account balance is therefore:

This is because the bank balance is an asset which is increased by debit entries and the capital balance is the amount the business owes me, it’s owner, at any given time, so is a liability and increased by credits.

I’ve entered the other three accounts with debit balances the same way but have left the SLCA for now.

I’ve also entered the opening balances for the accounts with credit balances, including the two accumulated depreciation accounts, using Owner’s Equity for the debit entries.   I haven’t entered the PLCA balance as I’ll do that in a later article.

The VAT liability was credited to:

as the sales taxes account was not an obvious choice. 

6 – Use a report to check progress

Generating a trial balance is an option in the dig deeper section of reports and shows that the VAT has been correctly entered.  It also shows that all the opening balances are correct so far.  Click on the link to check your figures against mine, but don’t be put off if the format is different to what you are used to.

In the next article we’ll look at customers and sales, and add the opening balance for the SLCA.

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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