Chapter: 1 - Importance of Accounting

Account Groups

Account Groups are the collection of Ledgers with the same characteristics. They are used to establish the hierarchy of Ledger Accounts, which aids in the creation of relevant and compliance reporting. Odoo uses the Account groups of Regular, Payable, Receivable, and Liquidity. All account ledgers are defined under these groups.

1. Receivables (Debtors)

Receivables are the amount owed from the customer on sale or service rendered. Also known as debtors. Receivable Accounts are used to record all the receivables from the customer. The nature of receivables is Assets. On a sale, as receivables are increasing, the receivable account gets debited.

2. Bank and Cash

All the bank and cash accounts of the organization come under the type ‘Bank and Cash’. Its nature is Asset. For example, Company makes a cash payment for a credit purchase, and the amount is transferred from the bank account. The Bank account will be credited as the Asset decreases.

3. Current Assets

Current asset account types are generally used to record short-term assets like inventory, cash in hand that can be used within a year. Current assets include bank deposits, cash in hand, loans and advances provided to employees, stock, and many more.

Stock valuation account, Stock input account, Stock Output Account, Deferred Expense Accounts, and many more are the General Accounting Ledgers of type ‘Current Assets’ used in Odoo. Entries of this type affect the Balance Sheet since its nature is an asset.

4. Non-Current Assets

Non-Current Assets, are Assets used for a Long-term asset, including land, buildings, vehicles, bonds with other companies, insurance, and many more whose full value will not be realized within the accounting year. They are listed on the balance sheet.

5. Prepayments

They are prepaid expenses where the cost has already happened for products or services that have yet to be received but have not yet been consumed. In Odoo, Deferred expenses or prepaid expenses are some examples.

Consider an example of insurance for one year, say $1200. So the company cannot add up the entire expense in the profit and loss report for the current year. It has to be distributed for one year. Each month $100 is consumed, and the expense is posted. Since prepayment is of nature ‘Asset’ and each year asset is decreasing, then prepayment account gets credited, and expense account gets debited as the expense is gradually decreasing.

6. Fixed Assets

Fixed asset account type records the transactions of all fixed assets like land, furniture, machinery, and many more that the organization plans to use over a long period. The nature of a fixed asset is ‘Asset’. So once the fixed asset is purchased, the fixed asset increases, and the fixed asset account is debited. Fixed assets will be listed in the balance sheet.

7. Payable (Creditors)

Payable is the amount owed by the organization to anyone. Payable accounts are used to record all payables to the vendors/supplier. On a supplier bill, the payable account is credited as the type of liability.

8. Credit Card

The amount spent using the credit card for the purchase or to pay any other expenses using the credit card creates some debt that must be paid back within a period, normally less than two months or so. The nature of the account ‘Credit Card’ is Liability and it will be listed on the balance sheet.

9. Current Liabilities

Current Liabilities are short-term liabilities expected to be paid within a year. Taxes and duties, bank overdrafts, short-term loans, salary payable, and many more are included in the current liabilities.

10. Non-Current Liabilities

The long-term liabilities that are due a year or more are listed on the balance sheet. Long-term loans, the bond payable, deferred revenue, and many more come under the account type non-current liability.

11. Equity

Equity is the amount of money that the owners invested for start-up and origin operations. These are recorded under account type equity. It is the value of assets after all liabilities are paid off and listed in the balance sheet. Capital accounts, reserves & surplus, retained earnings, and many more. come under this account group. The nature of equity is Equity(Asset). If an investor invests money, the equity increases, and thus the capital account is credited.

12. Current Year Earnings

The nature of account type ‘Current Year Earnings’ is Equity. The net gain or loss of the organization for the current year is referred to as current year earnings. The current year’s earnings will be affected when a sale or any other transaction has affected the income and expense account. They are listed in the balance sheet.

13. Income & Other Income

This account type is used to represent companies' income or revenue. The account ledgers of type income include the income account of a company, foreign exchange gain account, cash difference accounts, and many more whose nature is income and listed in the profit and loss report.

14. Expenses

‘Expense’ account types include accounts ledgers to record various expenses including production of goods and services, salary expenses, office supplies, advertising, and many more. The nature of this account type is an expense and is listed in the income statement/Profit and loss report.

15. Depreciation

Depreciation account types are generally used to record the fixed asset depreciation. For fixed assets, there will be some depreciation from time to time and thus the value of fixed assets will reduce on each period. This depreciation can be linear or digressive. At the time of asset creation, there will be a book value and a salvage value. Book value is the original cost, and salvage value is the amount that the organization will receive at the time of selling that fixed asset after all the depreciations are expensed. As per the depreciation method used, the expense will be distributed over a period rather than adding the entire expense to the current year. Thus the depreciation account debits an expense account credit.

16. Cost of Revenue

Cost of revenue associated with all the direct expenses created with company goods and services. It includes the manufacturing cost of the product and the cost of delivering them to customers. Their nature is the expense and the effect on the gross profit.