Accounting System

Accounting that incorporates the time axis into the three-dimensional real world and thinks in four dimensions

2019/04/09


What accounting information do you want to share on this blog?

In this blog, I've been implementing business systems in Indonesia for nearly 20 years, and I've shared my IT and business-related knowledge from my conversations with the people in charge in the field, as well as some of the difficulties I faced in implementing the project.

I would be very happy if this could be a source of relief for expatriates and business travelers who have been forced to deal with work outside of their main job after coming to Indonesia.

The number of accesses to our blog from Japan is overwhelmingly higher for accounting-related entries than for Indonesia-related entries, especially for entries on other account transfers, payroll calculation, and journalization of paid and unpaid payments.

It is not always necessary to have knowledge of accounting in order to work on business systems, but it is definitely possible to have more in-depth discussions with Indonesian accounting staff if you have knowledge.

When I was a student, I wanted to become an accountant, so I first passed the second level of Nissho Bookkeeping and then studied for the first level, but failed.

At that time, I didn't have the guts to devote my entire student life to studying for exams, and furthermore, after my interest in Indian classical music, I spent most of my long holidays in India, and my dream of becoming an accountant was crushed.

When I heard that Mr. S., my junior member of the Chinese martial arts club I belonged to at that time, had left the club to concentrate on the accountancy exam at the same time as he was advancing to his second year, and he had passed the exam in his fourth year.

I don't have as much expertise as an accountant, but I would like to share the knowledge and experience I have gained in the field of accounting system implementation and operation, which can't be gained by learning about accounting and bookkeeping.

There's something interesting about accounting, where the amounts match up like a slide puzzle.

In accounting, there is a mechanism like a "sliding puzzle" that balances "assets = liabilities + equity (net assets)" by extracting only items related to expenses and income from a list of journal entries for one month, which is recorded on two sides, one on the debit side and the other on the credit side, and adding the profit (loss) obtained as a result of subtraction to net assets.

The more profits you make, the more your capital expands, but the more losses you make, the more your capital shrinks, and when your cash and deposits are short, it's game over for the company.

All transactions that fall under debit and credit

  • Increase in assets <-> Decrease in assets
  • Decrease in debt <-> Increase in debt
  • Decrease in capital <-> Increase in capital
  • Increase in expenses <-> Decrease in expenses
  • Decrease in revenue <-> Increase in revenue

The P/L (profit and loss statement) is used to calculate the profit and loss for the current month, and the B/S (balance sheet) is used to find out the status of assets, liabilities and net assets as a result.

The difficulty of bringing the concept of time into transactions that occur in the real world and causing transactions that don't occur in the physical world

The real world is a three-dimensional world formed from the top, bottom, right and left, and the front and back, but in accounting, the concept of time is introduced to the transactions that occur in this three-dimensional space, and they are recorded with an awareness of the four-dimensional space.

For example, if you purchase a fixed asset such as a machine or inspection equipment, you can make it your property by paying in cash or in kake (tsuke).

The idea is that if the use of that fixed asset contributes directly or indirectly to profit, it is not fair profit unless the contribution is expensed and deducted from sales.

Thus, even though no transactions have occurred in the real world, machinery (fixed assets) and stationery (supplies) purchased and acquired in the past, as well as prepaid insurance premiums (assets in the form of the right to free or discounted treatment), are considered to have contributed to the acquisition of sales for the current month, and the contribution of the assets is converted into an amount and expensed.

The concept of time increases to deal with reality in the third dimension, and it becomes the fourth dimension. Just as Doraemon's pockets are connected to the four-dimensional space, the typical transactions in which payments incurred at a certain point in the past are expensed in the present (current period) retroactively to the future are depreciation, transitional accounts (prepaid expenses), and supplies.

Depreciation
Fixed assets purchased in the past are considered to have contributed to the current month's sales, so the contribution is expensed. For fixed assets, the book value is calculated indirectly by accumulated depreciation, leaving the acquisition cost unchanged.

  • Dr. fixed assets 900    Cr. deposit 900
  • Dr. Depreciation 10    Cr. Accumulated depreciation 10

Prepaid insurance
Thanks to a year's worth of premiums paid in the past, you can get free or insurance-discounted treatment at the hospital in the current month.

  • Dr. prepaid insurance 80    Cr. deposit 80
  • Dr. insurance 10    Cr. prepaid insurance 10

Supplies
Supplies paid for in the past that were consumed in the current month are considered to have contributed to the current month's sales.

  • Dr. Supplies 90    Cr. Cash 90
  • Dr. Consumables cost 10    Cr. Supplies 10

Thus, the principle of accrual is to record revenues or expenses at the time based on the occurrence or change in economic events, regardless of cash income or expenses, and input to the business system, including accounting, is basically done on an accrual basis.

The difficulty of erasing the time line from the four-dimensional story and returning to the three-dimensional cash movement.

What's the point of going back to the third dimension when you've done your best to incorporate the concept of the time axis into real-world transactions, based on the principle of emergenceism, and put the story in the fourth dimension? However, in the real world, the presence or absence of cash determines the life and death of a company, so in order to grasp the movement and balance of cash in the current month, it is necessary to adjust the P/L created on an accrual basis to a cash basis.

Assuming this accrual-based performance input, cash flow management is a modification to the cash basis to figure out how much of the fresh water assets at hand, i.e., cash and deposits, are moving freely.

When a company makes a profit, it means that it is making a profit on a P/L basis.

  1. Accrued and unsettled expenses and income from receivables and payables
  2. Depreciation expenses

Cash flow statement provides management information to address the most recent settlement on a cash basis.

The difficulty of having different values depending on the background of a three-dimensional object

In the real world, the same product is valued differently in inventory from the previous month and manufactured in the current month than in inventory from the previous month, and the shipped product is a mix of both, so the breakdown of cost of sales is strictly as follows

  • Product inventory unit price from the previous month x shipping quantity
  • Product unit price for the current month's production x shipping quantity

In other words, even if a product looks the same in the real world, the valuation value differs depending on the background of when it was produced, and the "cost of production = cost of sales" is established only in the case of complete made-to-order production, where only what can be sold is made.

  • The cost of materials purchased in this month is the cost of materials purchased in the current month.
  • The cost of materials put in this month out of the material inventory at the beginning of the month and materials purchased this month is the cost of materials put in this month (incurred)
  • Direct labor costs and manufacturing overhead costs for the month are the processing costs for the month.
  • The cost of products completed this month out of the work-in-progress inventory at the beginning of the month and material and processing costs in the current month is the manufacturing cost.
  • Cost of goods shipped this month out of the product inventory at the beginning of the month and products completed this month is the cost of goods sold

In reality, due to the combination of the Indonesian company law and internal resources, the business administration department will calculate the valuation as accurately as possible and reflect it in the inventory section of B/S. However, if there is a miscounting error in the actual inventory work, the figure that comes out will be wrong.

If the inventory of materials and work-in-progress is too little, it is regarded as a lot of input for production and the production cost will increase and profit will decrease.