--- title: "General Ledger Terminology" canonical: "https://kb.myframeworks.com.au/space/FRAM/28390130/General%20Ledger%20Terminology" format: markdown --- # Overview This page covers terminology used within Frameworks related to its General Ledger module. # Accrual Accounting Accrual accounting is a method of accounting that records revenue and expenses when they are incurred, regardless of when the cash is actually received or paid. This means that you would record revenue when it is earned and expenses when they are incurred, even if payment for these transactions have not yet been received or made. > **For example**, if you make a sale to a customer in December but don't receive payment until January, you would record the revenue from that transaction in December under the accrual accounting method, rather than waiting until January when the payment is received. Accrual accounting allows you to have a more accurate representation of your financial position than cash accounting, which only records transactions when cash changes hands. It enables you to track your income and expenses more precisely, which can be useful for budgeting, forecasting, and financial analysis. --- # Assets Assets represent the economic resources that you own or control, including tangible assets like inventory and equipment, as well as intangible assets like trademarks and patents. Assets are one component of the fundamental accounting equation: Assets = Liabilities + Stockholders/Owners Equity. Liabilities, on the other hand, are the debts and obligations that your business owes to others, such as loans, accounts payable, and taxes. Owners equity or stockholders equity is the remaining value after liabilities have been subtracted from assets. This represents the value that is left over for the business owner or shareholders. The accounting equation is important to remember because it shows that your business's assets must equal the sum of its liabilities and owners' equity. This equation is crucial in ensuring that financial statements are balanced and accurate, providing an accurate picture of your business's financial health. --- # Average Costing The average cost method is an inventory costing method in which the cost of each item in your inventory is calculated on the basis of the average cost of all similar goods in the inventory. The average cost method is calculated by dividing the cost of goods in inventory by the total number of items available for sale. Overall, average costing provides a relatively simple and straightforward way of valuing inventory, but it may not be the most accurate method in all situations. It is important for your business to carefully consider the pros and cons of different inventory valuation methods and choose the method that best suits their needs. > ⚠️ Frameworks can be configured as Average Costing or Standard Costing, but not as a mix of both. --- # Balance Sheet Accounts Asset, liability and equity accounts are used in the calculation of your business's net worth at a given point in time. Examples of balance sheet accounts include: - Asset accounts such as **cash, accounts receivable, **and **equipment** - Liability accounts such as **notes payable, accounts payable, **and **wages payable** - Stockholders' equity accounts such as **common stock **and **retained earnings** Balance sheet accounts are also known as permanent accounts or real accounts because their balances will NOT be closed at the end of an accounting year. Instead, the balances in these accounts are carried forward to the next accounting year. --- # Debits and Credits In a General Ledger, a debit and credit are accounting entries that are used to record financial transactions. Debits are used to record increases in assets and decreases in liabilities or equity, while credits are used to record increases in liabilities or equity and decreases in assets. This is known as the double-entry accounting system, where every financial transaction must have equal and opposite debits and credits. > **For example,** If you purchase inventory for cash, the transaction would be recorded as a debit to the inventory account, which increases the asset, and a credit to the bank account, which decreases the asset. Within Frameworks: - **Debit**: A positive entry in a GL Account. - **Credit**: A negative entry in GL Account. --- # Revenue and Expense Accounts Revenue and expense accounts are categories in accounting used to record the revenues earned and expenses incurred by a business during a specific period, usually a month, quarter, or year. These accounts are essential for measuring your business's financial performance and calculating its profit or loss. This information can be used to assess the business's profitability and make decisions about future investments and operations. **Revenue Accounts** Revenue accounts, also known as income accounts or sales accounts, are used to record a business's earnings from its primary activities, such as the sale of goods or services. Revenue accounts are used to calculate important financial metrics, such as gross profit and net income. Examples of revenue accounts include: - **Operating revenues**: These accounts refer to the revenue that is directly related to the primary operations of the business, such as the sale of goods or services. - **Non-operating revenues and gains**: These accounts refer to revenue and gains that are not directly related to the primary operations of the business, such as interest income or gains from the sale of investments. > ℹ️ Revenue accounts are typically credited when revenue is earned and debited when revenue is recognized. The use of revenue accounts is important for accurate financial reporting and providing a clear picture of a business's financial performance. **Expense Accounts** Expense accounts are used to record the costs incurred by a business in generating revenue, such as salaries and wages, rent, utilities, insurance, and taxes. Examples of expense accounts include: - **Operating expenses:** These accounts refer to expenses that are directly related to the primary operations of the business, such as salaries and rent. - **Non-operating expenses and losses: **These accounts refer to expenses and losses that are not directly related to the primary operations of the business, such as interest expenses or losses from the sale of investments. --- # Standard Costing Standard costing is the practice of substituting an expected cost for an actual cost in the accounting records. Subsequently, variances are recorded to show the difference between the expected and actual costs.   These variances can help companies identify areas where actual costs are higher or lower than expected, and take corrective action to improve efficiency, reduce costs, and improve profitability. > For example, if the actual cost of materials is higher than the expected cost, a business may investigate whether there are ways to reduce waste or negotiate better prices with suppliers. It is important to note that standard costing is a tool and is not always a perfect reflection of actual costs or performance. Actual costs may vary due to factors such as changes in market conditions, unexpected events, or fluctuations in exchange rates. Therefore, companies should regularly review and update their standard costs to ensure they are still accurate and relevant. --- # Sundry Receipts Sundry receipts refer to miscellaneous or non-specific revenue items that are not related to the main operations of your business. They are typically small and irregular in nature and can come from a variety of sources. Examples of sundry receipts may include: - Interest earned on bank deposits or other investments - Sale of scrap material or other excess inventory - Reimbursement from employees or customers for expenses incurred on behalf of the business - Refunds received for overpayment of taxes or fees Sundry receipts are usually recorded in a separate GL Account. They are important for maintaining accurate financial records and ensuring that all income is properly accounted for. ---