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SIEMENS F.A. for I.T.

Professionals
A Short Course on Financial Accounting for I.T. Professionals
During the past only 3 years, I have worked in 5 different Financial Accounting Systems in 5 different
companies and some of them are large by International standards In this process I find that I!
professionals manage by having very nebulous ideas of what is e"actly debit or credit #owever, FA is
the hub around which all other activities move So almost every other system has an interface to FA
$uite a few of a company%s activities need a voucher, a &' entry So it is important for any one
working in commercial computing to understand FA
1. What is Debit? DR - it is nothing but LHS left han sie of a accounts ledger It has no
connotation of take or give, good or bad
2. What is Creit? CR ( it is nothing but RHS right han sie. !he common understanding is that if
you are good you get credit)
!. The accounting e"uation*
Source of Funs # De$lo%&ent of Funs 'aw of +onservation of money)
Liability ' Income ' Capital # Assets ' ("penses ' Distribution
'I+,A-D for short
Accounts can be put in the . classes ' I + A - D
DR is increase of A ( D written on '#S ) CR is ecrease of A ( D written on the /#S
DR is ecrease of L I C written on '#S ) CR is increase of L I C written on the /#S
Assets are of 3 types
'i0uid ( +ash 1 2ank
Fi"ed ( of long term value3 +o gets depreciation at year end
+urrent rest 4 materials 5loans and advances paid, receivable6
!he account-coes are so designed to give good 7IS
!he accounting codification and specification is called the company%s Chart of Accounts
!he company may have sales accounts for each city
but the code is so designed that it will be easy to aggregate total sales
An -lectric supply public utility would have groupings of accounts based on
overhead or under(ground cabling
4. Accounts are also classifie in * $arts
Profit + Loss Accounts - Income an ("pense
P # I - (
I and ( &ae ,ero at the beginning of a financial %ear
At the en of a %ear %ou calculate P an
ecie to $ut $art in Distribution and $art in Capital
D is like e"pense in a way 4
normally very soon you pay the dividends in cash or by che0ue
A L 1 C are never made 8ero ( they carry on perpetually
!hey are often called balance Sheet accounts
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SIEMENS F.A. for I.T.
Professionals
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SIEMENS F.A. for I.T.
Professionals
5. Accounts are classifie into * t%$es
Control Accounts - they have sub-legers or $art%-coes
once you decide that a Account is +ontrol every voucher must have a party(code
Any account that does not have a sub(ledger is a non-control account
-"amples of +ontrol Accounts*
Accounts Recei-able or Sunr% Debtors party is Custo&er
Accounts Pa%able or Sunr% Creitors party is Su$$lier
-mployee is 9 party in many control accounts payroll, loans, travel, benefits :
If !elephone or ;ehicle e"penses are high then !el(no or car(no could be a subledger
If maintenance e"penses are high then a e0uipment(no could be a subledger
6. What is a FA .oucher
A voucher is a document 5 paper or electronic 6 that records a business transaction with financial
implications but may not involve money in the normal sense of usage5 see <; 6
A voucher will record the debit and credit entries against accounts. If any are control accounts
then the sub-ledger or party is mandatory. A voucher always balances ! and "!.
#ouchers are of $ types
"ash voucher - involves the company%s cash account
&an' voucher ( involves one ban' account of the company
)ournal voucher *)#+ ( involves neither ban' or cash
7. Example of Vouchers

,et us start from the end of a manufacturing activity
where an item of value !1-- is sitting in current assets as finished goods.
"ustomer "4$2 buys the goods on credit for !15-.
.inished /oods would be credited *decreased+ by !1--
0ales e1pense would be debited *increased+ by !1--
0undry ebtors an asset account would be debited *increased+ by !15-
0ales income would be credited*increased+ by !15-
2his would be done by a )# that operates on $ asset accounts
i.e. $ on same side of Accounting e3uation and 1 Income account
Even though customer has not paid since invoice has been raised
the company is deemed to have made income and has to pay tax4
2he bright side is that ban's may pay loans against debtors 5 6-days
&ad debts are sad and may need to be charged off as e1pense44
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0uppose a few days later the customer pays in cash
0undry ebtors would be credited*decreased+ by !15-
"ash would be debited(increased) by !15-
A cash voucher on the same side of A78,I"
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0uppose we place an order on supplier 0962 for a material worth !2--
At this stage no voucher
0upplier delivers
0till no voucher
2he goods are inspected and found :;
<ow a voucher is raised = liability is boo'ed
"urrent Assets is debited*increased+ by !2-- = could also be e1pense a>c
0undry "reditors a liability account is credited*increased+ by !2--
2his would be done by a )# that operates on 1 asset account ? 1 liability account
i.e. opposite sides of Accounting e3uation

0uppose a few days later the company pays the supplier in cash
0undry creitors would be debited*decreased+ by !1--
"ash would be credited(decreased) by !1--
A cash voucher on opposite sides of A78,I"
!eal life vouchers can be comple1 as for e1ample advance can be paid to suppliers and
2a1 deducted at source from their bills.
#ouchers are very important documents. An authori@ed accountant would approve a
voucher
based on supporting documents. 2he amount may be determine the level of seniority for
approval. :nly approved vouchers are posted in General Ledger, ash !oo" #
!an" !oo" etc.
$. %bservations
7very voucher balances ? hence A78,I" always
<ormally asset accounts * in fact A 7 +should have debit balances
<ormally ,I" accounts should have credit balances
At year end we produce the &#L statement and @eroi@e 7 and I type accounts
&ut a good co. may produce A?, each month or even each day
An audited balance sheet is normally produced at times prescribed by law.
In India companies are re3uired by law to publish half-yearly accounts
'(
th
)ept and year end '*
st
+arch
Auditors ta'e 3uite a while to audit all accounts
0hareholders ? others ta'e 'een interest in studying a company%s annual report
that contains Arofit ? ,ossB &alance 0heetB auditor%s remar's etc.
/. 0an1 Reconciliation

A very fascinating part of accounts is ban' reconciliation
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It is the reconciliation of a company%s ban' account balance
with the ban'%s pass-boo' balance
2he reasons for deviation are many
suppliers sit on their che3ues
outstation che3ues ta'e time to clear
rarely che3ues may be dis-honoured>bounce
ban' pays interest or deducts service charges =. <ew vouchers44
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1- epreciation
All countries have rules for depreciation ( sometimes 3uite comple1.
2his is the portion of a fi1ed-asset value that can be converted to e1pense
epreciation is always an e1pense
2his is calculated at the end of a financial year
A8I-7 gets reduced and company pays less ta1.
2he benefit of depreciation is used to replenish fi1ed assets
11. 2emplate #ouchers
:ne interesting thing is that especially in e1penses vouchers often
tend to be the same. :nly a few things change.
.or e1ample contractor feesB rentsB fi1ed bills. 0o good .A systems
incorporate templates or fi1ed vouchers. 2hese are the basis of
ma'ing new vouchers. 2his drastically reduces data entry and improves 3uality.
An user can loo' up wee'ly or fortnightly or monthly or whatever period e1penses
and proactively ensure that payments are made and no omissions occur.





!ohit <adhaniCs corrections on my section 9
9. 71ample of #ouchers

,et us start from the end of a manufacturing activity
where an item of value !1-- is sitting in current assets as finished goods.
"ustomer "4$2 buys the goods on credit for !15-.
.inished /oods would be credited *decreased+ by !1-- *incorrect+
0ales e1pense would be debited *increased+ by !1-- *incorrect+
0undry ebtors r !1--
*and party%s a>c r !1--+
0ale a>c "r ! 1--
0undry ebtors an asset account would be debited *increased+ by !15-
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0ales income would be credited*increased+ by !15-
2his would be done by a )# that operates on $ asset accounts
i.e. $ on same side of Accounting e3uation and 1 Income account




!ohit <adhaniCs comments

0ince I * !ohit <adhani + have developed a complete accounting system from scratchB
some of the design considerations may be
:pening balance can be treated as a transaction and stored in the balance file with the
balance date 8 *fin year starting date - 1+. 2his ma'es calculations very easy.
2he balance file should have only the transaction total for a ledger>sub-ledger
combination for the dayB not a cumulative running balance *which ma'es life hell when
creating a voucher of prior date+. 2his step also minimi@es loc'ing.
I prefer 'eeping only one amount col. and not separate cols for debit and credit. ebit can
be stored as *-+ and "redit as *D+. 2his again helps in report-design.
Esers are thrilled if they are given an e1plorer style interface to create /eneral
,edgers...with unlimited grouping. 2his will result in very good-loo'ing balance sheet >
0chedules to the balance sheet generated right from the computerB without ta'ing any help
from the auditor.
esigning of 2emplate vouchers for fi1ed e1penses can reduce data-entry by 5-F.
2his is a partial list of ideas which I would li'e to have in my dream .A system
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