Accounting Entries in ERPNext: Explained with a Tea Stall Example
The concept of accounting is easiest to grasp with a simple example. Here we take a “Tea Stall” as our company and walk through how to book its accounting entries from the owner’s first investment to booking profit at month-end.
Mama, the tea-stall owner, invests Rs. 25000 to start the business.
1. Investment
Mama invested Rs. 25000 in the company, hoping to earn a profit. In other words, the company is liable to pay Rs. 25000 to Mama in the future. So the “Mama” account is a liability account and is credited. The company’s cash balance increases because of the investment “Cash” is an asset, so it is debited.
The company needs equipment (stove, teapot, cups) and raw materials (tea, sugar, milk) right away. Mama buys them from a nearby general store, “Super Bazaar,” whose owner is a friend, so he gets some credit. The equipment costs Rs. 2800 and the raw materials Rs. 2200. He pays Rs. 2000 of the total Rs. 5000. This is recorded in ERPNext using a Payment Entry.
2. Assets
Equipment is a Fixed Asset (it has a long life) and raw materials are a Current Asset (used in day-to-day business). So the “Equipments” and “Stock in Hand” accounts are debited to increase their value. He pays Rs. 2000, so the “Cash” account reduces by that amount and is credited; and he is liable to pay the remaining Rs. 3000 to Super Bazaar later, so “Super Bazaar” is credited by Rs. 3000.
Mama decides to book sales at the end of every day, so he can analyse daily sales. At the end of the very first day, the stall sells 325 cups of tea for net sales of Rs. 1625, and he happily books his first day’s sales.
3. Income
Income is booked in the “Sales of Tea” account, which is credited to increase its value, and the same amount is debited to “Cash”. Say it costs Rs. 800 to make those 325 cups then “Stock in Hand” reduces (credited) by Rs. 800, and the same Rs. 800 expense is booked in the Cost of Goods Sold account.
At the end of the month, the company pays the stall’s rent (Rs. 5000) and the salary of one employee (Rs. 8000), who joined on the first day.
4. Booking Profit
As the month progresses, the company buys more raw materials. After a month, Mama books profit to balance the Balance Sheet and Profit and Loss statements. The profit belongs to Mama, not the company, so it’s a liability for the company (it has to pay it to Mama).
When the Balance Sheet isn’t balanced debit not equal to credit the profit hasn’t yet been booked. To book it, the profit and loss accounts are reset: the profit/loss is transferred to the liability account, and the P&L statement starts fresh. This is done using a Period Closing Voucher.
Explanation: the company’s net sales and expenses are Rs. 40000 and Rs. 20000 respectively, so it made a profit of Rs. 20000. To book it, the “Profit or Loss” account is debited and the “Capital Account” is credited. The company’s net cash balance is Rs. 44000, with some raw materials worth Rs. 1000 still on hand.
NOTE
The thread running through every entry is double-entry bookkeeping: every transaction debits one account and credits another by an equal amount, keeping the books balanced. Each step above is just that rule applied to a real event an investment, a purchase, a sale, or month-end profit.
Related Topics
- Payment Entry
- Advance Payment Entry
- Freeze Accounting Entries
- Post Dated Cheque Entry
- Adjust Withhold Amount in Payment Entry
- Difference Entry Button
SUMMARY
Using a Tea Stall as the company, this example walks through booking accounting entries. The owner’s Rs. 25000 investment credits a liability (Mama) and debits Cash. Buying equipment and raw materials debits Fixed and Current Assets, credits Cash for what’s paid, and credits the supplier for the balance owed. Daily sales credit income and debit Cash, while Cost of Goods Sold and Stock in Hand record the cost. At month-end, profit is booked via a Period Closing Voucher, transferring it to the Capital (liability) account so the P&L resets. Every entry follows double-entry bookkeeping, keeping debits and credits equal.
