Accounting Essentials

In ARC, accounting masters refer to the foundational data elements used in financial accounting processes. These masters play a crucial role in ensuring accurate and compliant financial reporting.

By effectively managing these accounting master doctypes in ARC, organizations can maintain accurate financial records and comply with regulatory requirements.

Company

Within the Company master, you can set many of the default values for masters and accounts. These default accounts will help you in the quick posting of accounting transactions, where the value for the account will be fetched from the Company master if provided.

The following defaults can be set for a company:

Default Letter Head
This will appear in your formal documents to be printed.

Default Holiday List
Contains the dates of holidays. Most organizations have a standard Holiday List for their employees. However, some of them may have different holiday lists based on different Locations or Departments. In ARC, you can configure multiple Holiday Lists and assign them to your employees based on your requirements.

Country
Set to your organisation to where your business is currently operating.

Tax ID
LHDN Tax Identification Number.

Other Features

Monthly Sales Target
Set the monthly sales target number in the company currency, for example, RM30,000. Total monthly sales will be visible once transactions are made.

Account Settings

Some of the following accounts will be set by default in your site, others can be created. The accounts can be seen in the Chart of Accounts.

Default Bank Account
Default Cash Account
Default Receivable Account
Round Off Account
Round Off Cost Center
Write Off Account
Discount Allowed Account
Discount Received Account
Exchange Gain/Loss Account
Unrealized Exchange Gain/Loss Account
Default Payable Account
Default Employee Advance Account
Default Cost of Goods Sold Account
Default Income Account
Default Deferred Revenue Account
Default Deferred Expense Account
Default Payroll Payable Account
Default Expense Claim Payable Account
Default Cost Center
Credit Limit
Default Payment Terms Template

Stock and Manufacturing Settings

Perpetual Inventory feature would lead to Stock Transactions impacting the company's books of accounts whereby an accounting entry is done for every stock transaction. Each warehouse is linked with a corresponding account head.

On receipt of items in a particular warehouse, the balance in the Warehouse Account will increase. Similarly when items are delivered from the warehouse, an expense will be booked, and the balance in the Warehouse account will reduce.

Fixed Asset Defaults

For managing fixed assets in a company, the following accounts are needed. Most of them will be created by default. They can be seen in the Chart of Accounts.

Accumulated Depreciation Account
Depreciation Expense Account
Series of Asset Depreciation Entry (Journal Entry)
Expenses Included in Asset Valuation
Gain/Loss Account on Asset Disposal
Asset Depreciation Cost Center
Capital Work in Progress Account
Asset Received But Not Billed

HR Settings

Set the default Component for the following Salary Components.

Budget

Exception Budget Approver Role: The role selected here can bypass the set budget to approve expenses.

Company Info

For reference, the following details can be saved in ARC:

Date of Incorporation
Phone No
Fax
Email
Website
Address
Registration Details

Deleting all Company Transactions

You can delete all transactions (Orders, Invoices) of a Company. Use with caution, transactions once deleted cannot be recovered.

Requirements:

The User has to be a System Manager
The User has to be the creator of the Company

STEP 1 Click on the Delete Transactions button under Manage.

STEP 2 Verify your password.

STEP 3 Enter Company name for Confirmation.

And you are done. The master data i.e. Item, Account, Employee, BOM etc. will remain as it is.

What is affected?

Sales/Purchase Orders/Invoices Receipts/Notes will be deleted
The monthly sales and sales history will be cleared
All notifications will be cleared
Lead Addresses to which the Company is linked will be deleted
All communications linked to the Company will be deleted
All naming series will be reset
Stock Entries linked to a Warehouse of this Company will be deleted

Currency

In ARC, the Currency list stores the currency value, it's symbol and fraction unit. Most of the commonly used currencies are already present in ARC.

How to Create a Currency Exchange

STEP 1 Go to Currency Exchange list (Home > Accounting > MultiCurrency > Currency) and click on New.

STEP 2 Enter a date from which this exchange rate will be valid. New Currency Exchange forms saved with newer dates will be used in transactions.

STEP 3 Set the From and To currency.

STEP 4 Enter the Exchange Rate.

STEP 5 Select whether the exchange rate applies to selling, buying, or both transactions.

STEP 6 Save.

Configurations

Each currency has defaults set based on widely accepted configurations. You can however modify the configuration to suit your requirements.

Enable / Disable
By default only few popular currencies and your company's currencies are enabled. To Enable more go to currency list and check "Enabled".

Fractional Units
Some currencies have fractional units like "Cent", you can configure what this fractional unit will be called when converting numbers into words.

Symbol
Standard currency symbol are populated by default, if you need to change the currency symbol you can update it on Currency document.

You can configure position of currency symbol to the right by checking "Show currency symbol on right".

You can also hide all currency symbols from "Global Defaults".

Chart of Accounts

The Chart of Accounts is the blueprint of the accounts in your organization.

The overall structure of your Chart of Accounts is based on a system of double entry accounting that has become a standard all over the world to quantify how a company is doing financially.

Chart of Accounts is a tree view of the names of the Accounts (Ledgers and Groups) that a Company requires to manage its books of accounts. ARC sets up a simple chart of accounts for each Company you create, but you can modify it according to your needs and legal requirements.

For each company, Chart of Accounts signifies the way to classify the accounting entries, mostly based on statutory (tax, compliance to government regulations) requirements.

The Chart of Accounts helps you to answer questions like:

What is your organization worth?
How much debt have you taken?
How much profit are you making (and hence paying tax)?
How much are you selling?
What is your expense break-up?

As someone managing a business, it is very valuable to see how well your business is doing.

Account Types

Account types are mainly classified as income, expense, asset or liability.

Balance Sheet Accounts

Balance Sheet accounts are 'Application of Funds (Assets)' and 'Sources of Funds (Liabilities)' that signifies the net-worth of your company at any given time. When you begin or end a financial period, all the Assets are equal to the Liabilities.

All the accounts under Balance Sheet accounts represent an asset owned by the company like "Bank Account", "Land and Property", "Furniture" or a liability (funds that the company owes to others) like "Owners funds", "Debt" etc.

Two special accounts to note here are Accounts Receivable (money you have to collect from your Customers) and Accounts Payable (money you have to pay to your Suppliers) under Assets and Liabilities respectively.

Profit and Loss Accounts

Profit and Loss is the group of 'Income' and 'Expense' accounts that represent your accounting transactions over a period.

Unlike Balance Sheet accounts, Profit and Loss accounts (or PL accounts) do not represent net worth (Assets), but rather represent the amount of money spent and collected in servicing customers during the period. Hence, at the beginning and end of your Fiscal Year, they become zero.

In ARC it is easy to keep track of Profit and Loss via the Profit and Loss chart.

Groups and Ledgers

There are two main kinds of Accounts in ARC - Group and Ledger. Groups can have sub-groups and ledgers within them, whereas ledgers are the leaf nodes of your chart and cannot contain more accounts in them.

Accounting Transactions can only be made against Ledger Accounts (not Groups).

Info: The term "Ledger" means a page in an accounting book where entries are made. There is usually one ledger for each account (like a Customer or a Supplier).

Note: An Account "Ledger" is also sometimes called an Account "Head".

Other Account Types

In ARC, you can also specify more information when you create a new Account, this is there to help you select that particular account in a scenario like 'Bank Account' or a 'Tax Account' and has no effect on the Chart itself.

Explanation of account types:

Accumulated Depreciation: To store the total accumulated depreciation information of the Company Assets. Accumulated depreciation appears on the balance sheet.
Asset Received But Not Billed: A temporary liability account which holds the value of Asset received but not billed yet.
Bank: The account type under which bank accounts will be created. There must be at least one group account of type "Bank" in the CoA.
Cash: The account type under which a cash account will be created. There must be at least one group account of type "Cash" in the CoA.
Chargeable: Additional charges applied to Items can be stored in accounts of this type. For example, "Freight and Forwarding Charges".
Capital Work in Progress: Current charges when creating Fixed Assets are stored in CWIP accounts. For example, construction costs when constructing a building. In ARC Assets are booked against CWIP accounts when they are not yet being used.
Cost of Goods Sold: An account under this type is used to book the accumulated total of all costs incurred while manufacturing/purchasing a product or service, sold by a Company.
Depreciation: The expense account to book the depreciation of the fixed assets. This appears on the Income statement.
Equity: These type of accounts represent transactions with people that own the business, i.e. the shareholders/owners.
Expenses Included In Asset Valuation: The account to book the expenses (apart from the direct material costs of Assets) included in the landed cost of an Asset.
Expenses Included In Valuation: The account to book the expenses (apart from direct material costs) included in the landed cost of an item/product, used in Perpetual Inventory.
Fixed Asset: The account to maintain the costs of fixed assets.
Income Account: This type of accounts represents any source of income or revenue booked for the Company.
Payable: The account type represents the amount owed by a company to its creditors (Suppliers).
Receivable: The account type represents the amount owed to a company by its debtors (Customers).
Round Off: In many Invoices there can be some rounding off in the final amount. For accurate tracking, those amounts can be booked to accounts of this type.
Stock: The account group under which Warehouse accounts will be created.
Stock Adjustment: An expense account to book any adjustment entry of stock/inventory. Generally comes at the same level of Cost of Goods Sold.
Stock Received But Not Billed: A temporary liability account which holds the value of stock received but not billed yet and used in Perpetual Inventory.
Tax: All tax accounts like VAT, TDS, GST, etc. come under this type.
Temporary: A Temporary account is useful for balancing incomes, expenses and nullifying them when shifting to ARC mid-year with outstanding accounting entries.

Accounting Period

In ARC, Accounting Period is a timeframe outside which selected submittable transactions (like Sales/Purchase Invoice, Stock Entry, Payroll Entry, Journal Entry etc) are not allowed to be created. In other words, the selected transactions are only allowed to be created within the defined Accounting Period.

Why is Accounting Period needed?

When transactions are submitted, they affect the ledgers and the reports which process the ledger data. This can cause issues when financial reports have to be generated for audit by authorities or for closing the accounting books for the financial year.

Here the Accounting Period can be used to limit the time period within which transactions can be submitted to preserve the integrity of the corresponding reports.

How to create an Accounting Period

STEP 1 Go to Accounting > Accounting Period.

STEP 2 Enter a name for the Accounting Period.

STEP 3 Define a time frame by setting Start and End Dates.

STEP 4 Add or remove transactions from the table. Note that all transactions listed in the table with "Closed" option checked will be restricted after the accounting period ends.

STEP 5 Save and Submit.

What is the "Closed" option for the selected transactions used for?
The "Closed" option in the child table for transaction doctypes is used to select which of them are to be restricted after the end of the Accounting Period.

If you try to save a closed transaction after its Accounting Period ends, you will see a validation error preventing you from doing so.

NOTE: If the Accounting Period ends and if any of the selected transactions in the child table don't have "Closed" checked, then they won't be restricted after the Accounting Period ends.

Fiscal Year

A Fiscal Year is used to record and report the transactions for the year.

It is also known as a financial year or a budget year. It is used for calculating financial statements in businesses and other organizations. The Fiscal Year may or may not be the same as a calendar year.

For tax purposes, companies can choose to be calendar-year taxpayers or fiscal-year taxpayers depending on the jurisdiction. In many jurisdictions, regulatory laws regarding accounting and taxation require such reports once per twelve months. However, it is not mandatory that the period should be a calendar year (that is, 1 January to 31 December).

A Fiscal Year usually starts at the beginning of a quarter, such as April 1, July 1 or October 1. However, most companies' Fiscal Year also coincides with the calendar year, which starts at January 1. For the most part, it is simpler and easier that way. For some organizations, there are advantages in starting the Fiscal Year at a different time.

For example, businesses that are seasonal might start their Fiscal Year on July 1 or October 1. A business that has most of its income in the fall and most of its expenses in the spring might also choose to start its Fiscal Year on October 1. That way, they know what their income will be for that year, and can adjust their expenses to maintain their desired profit margins.

Set up a Fiscal Year

STEP 1 Go to Accounting > Accounting > Setup > Fiscal Year.

STEP 2 To set the Fiscal Year as default, click on Set as Default button.

Note:

New Fiscal Year should be created each year, at the end of the current fiscal year. Creation of a new Fiscal Year before its beginning has been automated in ARC.
Three days prior to the end of the current Fiscal Year, the system checks if a new Fiscal Year for the incoming year is already created. If not, then the system auto-creates a new Fiscal Year.

Finance Book

You can have multiple finance books. For example, one book for tax authorities and another for stockholders. This is useful if you have to report depreciation and other values in different ways based on regulatory requirements. You can also use this to post alternate balance sheets for your internal reporting.

In order to use Finance Books, you need to check Enable Finance Books under the Fixed Asset Defaults section of the Company master.

Finance Book is not a mandatory setup. But if you choose to create multiple Finance Books, then you can make entries against a specific Finance Book by selecting that book in Journal Entry. If a Finance Book field is blank in a Journal Entry that means the entry will be available in all finance books.

Many times, for fixed asset depreciation, a Company may use different depreciation methods (Straight Line / Written Down Value / Double Declining Balance) for different finance books. You can set up different depreciation schedules for each Finance Book. Then, automatic depreciation will be booked against that Finance Book according to the schedule.

Payment Term Template

Payment Terms Template allows you to club multiple payment terms together and fetch in transactions.

After creation, the Payment Terms Table can be set to a specific Customer/Supplier. On selecting the Customer/Supplier in a transaction, the Payment Terms Template will be fetched automatically into the transaction.

For example: If you receive payment in the slab of 30-70, then you can define Payment Term for each slab, i.e. 30% and 70%. In the Payment Terms Template, you can select all the Payment Terms and define a template which can be easily applied in the sales and purchase transactions.

Prerequisites

Before creating and using Payment Request, it is advisable to create the following first:

Payment Terms

How to create a Payment Terms Template

A Payment Terms Template tells ARC how to populate the table in the 'Payment Terms Schedule' section of the sales/purchase document. You should use it if you have a set of standard Payment Terms or for ease of use.

STEP 1 Go to the Payment Term Template list and click on New.

STEP 2 Enter a name for the template.

STEP 3 Add the created Payment Terms in the table rows.

STEP 4 Make sure that the total invoice portion adds up to 100.

STEP 5 Save.

If 'Allocate Payment Based On Payment Terms' is enabled on a template, Payments made against the Invoice through Create > Payment will have allocation based on the Terms.

Payment Term

A Payment Term defines a specific payment slab. For example, 50% payment on shipping and 50% on delivery of the item. You can save your business's payment terms on ARC and include them in all documents in the sales/purchase cycle. ARC will make all the General Ledger entries accordingly.

In ARC, the Payment Terms form only defines portion percentages. The actual payment schedule can easily be applied using the Payment Terms Template.

You can use Payment Terms in the following documents:

Sales Invoice
Purchase Invoice
Sales Order
Purchase Order
Quotation

How to create a Payment Term

STEP 1 Go to Home > Accounting > Accounting Masters > Payment Term. Click on New.

STEP 2 Enter a name for the Payment Term (eg: 50% post-shipment).

STEP 3 Enter the Invoice portion. If you enter 50, the portion will be 50 percent of the invoice amount.

STEP 4 Select a Due Date type.

STEP 5 Under Credit Days, enter the number of days after which the remaining amount has to be paid.

STEP 6 Save.

The fields are explained as follows:

Payment Term Name: The name for this Payment Term.
Due Date Based On: The basis by which the due date for the Payment Term is to be calculated. This is calculated X number of days from the posting date of the invoice/order. There are three options:
- Day(s) after invoice date: Due date should be calculated in days concerning the posting date of the invoice. For example, if 7 is entered on date 20th, the due date will be 27.
- Day(s) after the end of the invoice month: Due date should be calculated in days concerning the last day of the month in which the invoice was created. For example, if 7 is entered in the current month and the last day of the month is 30th, the due date will be the 7th of the next month.
- Month(s) after the end of the invoice month: Due date should be calculated in months concerning the last day of the month in which the invoice was created. For example, if 3 is entered on the 20th of January, the due date will be on 20th March.
Invoice Portion: The portion of the total invoice amount for which this Payment Term should be applied. The value given will be regarded as percentage i.e 50 = 50% of the invoice/orders Grand Total.
Credit Days (optional): The number of days or month credit is allowed depending on the option chosen in the Due Date Based On field. 0 means no credit allowed.
Description (optional): A brief description of the Payment Term.

Setting up Discount on Early Payments

You can set up a discounted payment terms such that if payment is done within the specified period then some amount/percentage of the invoice value will be discounted. The following fields define the discount configuration:

Discount Type: Default is Percentage. You can also change it to Amount.
Discount: In terms of Percentage or Amount (eg. 10% or RM5).
Discount Validity Based On: This field acts similar to the Due Date Based On field in the previous section.
Discount Validity: The number of days or months the discount is valid with respect to the invoice date (eg. 10 days after the invoice date).

You can now link the Payment Terms with an Invoice and on creating the payment against such invoice, the discount will be applied automatically.

NOTE: This discount is only applied on a Payment Entry that is made from an individual invoice. Independently made Payment Entries, where invoice references are fetched, will not have any early payment discount applied.

Payment Terms in Converted Documents

When converting or copying documents in the sales/purchase cycle, the attached Payment Term(s) will be copied. When creating a Sales Order from a Quotation, the Due Date in the Payment Terms will be according to the Quotation, this needs to be updated.

For ease of use, you can also set a Payment Terms Template and simply reselect it.

Adding Payment Terms to Documents

Once you have composed the Payment Terms Template, you can use them in sales and purchase transactions. Based on the value defined for Payment Terms and transaction value, the payment schedule will be defined, with a Due Date for each payment slab.