Applying manual bookkeeping principles to using accounting software series: Part 3

This series is about testing the theory that if you understand manual bookkeeping you can apply your knowledge to enable you to use accounting software, regardless of its type or version, as they are all based on double entry accounting principles.

So far I have set up The Millyard’s business details, created and edited some general ledger accounts, entered all but one of my opening balances, set up some customer accounts and worked out how to generate both invoices and credit notes using Wave’s free accounting software.

In this article we’re going to look at suppliers and add the opening PLCA balance.  I am expecting that, from a user’s point of view, actions to do with suppliers and purchases will work in a similar, but mirrored, way to customers and sales, and that Wave will automatically make the required account entries in the background.  I’m going to focus on how to:

  1. Create expense accounts
  2. Create supplier accounts
  3. Enter the PLCA opening balance
  4. Use the trial balance to check expected activity
  5. Use the trial balance to check the opening PLCA and capital account balances

In parts 1 and 2, I entered all of the following opening balances, as at 1 June 2020, with the exception of the PLCA:

The balance on the PLCA is the total of two individual supplier account balances:

My knowledge of manual bookkeeping means that I know:

  • the balance on the PLCA is the total outstanding amount owed to credit suppliers
  • that accounting systems are made up of three ledgers, including:
    • the general ledger, which contains the purchases, VAT, and PLC accounts
    • the purchases ledger, which contains individual supplier accounts

1 – Create expense accounts

The PLC and VAT accounts are set up in the general ledger but the purchases account might not be, so I need to check the default expense accounts in the chart of accounts in the accounting section.  

Due to my knowledge of financial statements I know that purchases are part of the cost of sales section of the statement of profit or loss (SoPL) as opposed to operating expenses, which are listed separately.  Most of Wave’s default accounts are operating expenses so I need to create ‘purchases’ as a cost of goods sold account in order for the software to reflect the value of purchases correctly in reports. 

I already know how to add a new account as I started customising the chart of accounts in part 1.  I’m setting up two purchases accounts so I can differentiate between items for resale in the gallery and raw materials used to make picture frames:

2 – Create supplier accounts

Now I have the required general ledger accounts I can set up the individual supplier accounts.  I found customer accounts in the sales section of the main menu so presume that suppliers will be in the purchases section, which they are but are called vendors.  The pages look similar to the customer accounts so I can simply add my suppliers’ names and addresses then save the details to create the accounts:

Even though it is not called the subsidiary purchases ledger, I know that this is what I have created as it is an area within the accounting system that lists all my individual supplier accounts.

3 – Enter the PLCA opening balance

Just like in the customer accounts, in this version of Wave there isn’t the option to add the payment terms or opening balances, although this functionality is available in other accounting software.   I’ll again have to generate dummy invoices, in order to enter the opening balances, although I can see they’re referred to as bills.  My manual accounting knowledge tells me that the opening balances relate to expenses incurred in the last financial year.  Therefore, I must enter them in a way that will not result in an opening balance in the purchases accounts or a decrease in my opening VAT account balance, but will add opening balances to the PLCA and the individual supplier accounts.  This will need to be done via bills using a date from the previous financial year and entering the outstanding amount, as opposed to the net purchases value and VAT, so the software will recognise them correctly.  I’m going to use 31st May 2020, again as I did for the opening SLCA balance.

Bills are within the purchases section of the main menu and have a create a bill button which enables me to:

  • choose the supplier, amend the date, and add a reference to indicate an opening balance:
  • add the details of the opening balance and save.

4 – Use the trial balance to check expected activity

Before I enter the other opening balance I’m going to run a trial balance, dated 1st June 2020, to check that the results of Wave’s postings are as I expect; no expense account balances, the VAT liability to be £2,830 and a payables balance of £1,645.75:

That looks right, so I’ll go back to bills and add the other dummy invoice:

5 – Use the trial balance to check the opening PLCA and capital account balances

If I update the trial balance I can check the payables opening balance is £3,124.45:

I’m also going to check all the opening account balances against the ones from my manual system.  This is because, in part 1, I had to enter most of them as a single journal line using owner’s equity as the balancing account.  Due to the accounting equation I said that this would work, as assets less liabilities equal capital and that once all the balances were entered the capital/equity account should net off to £24,939.75, which it does:

And the opening balances should equal, which they do:

Now I am happy all my opening balances are accurate, I’m going to see how to enter supplier invoices and credit notes in part 4.

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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