Reconciliation
Reconciliation is the process of matching two sets of records to ensure they are correct and in agreement. The purpose of reconciliation is to guarantee that the money that leaves an account matches the money that is actually spent. This is accomplished by ensuring that the balances after each accounting period are equal.
Odoo follows Payment matching and Bank reconciliation for matching and reconciling entries.
In Payment Matching, the invoice generated or bill generated will be matched with customer payments or vendor payments. For example, a customer invoice is generated and registered payment from the invoice; in this case, the payment matching will be done automatically. But if the customer payment is added, the payment should match with the invoice. This process is defined by payment matching.
Bank reconciliation is to match the system entries with the bank statement. As per the above example the customer invoice is matched with the customer payment. Now the next is to match with bank statements. There will be an entry in the bank statement corresponding to the invoice. Now reconciling with the bank statement will be termed as bank reconciliation.
Types of Accounting in Odoo
Odoo mainly focuses on two types of accounting. One is ‘Continental Accounting,’ and the other is ‘Anglo-Saxon accounting’.
Continental Accounting is the widely used accounting where the expense account is affected at the time of processing a purchase operation. Thus the stock has been accounted for whenever the product reaches the stock. By default, Odoo uses continental accounting. Also, the stock valuation can be manual, and hence stock details have to be posted manually over a particular period or at the year-end.
Anglo-Saxon Accounting is generally used by small communities like in the countries US, UK, Ireland, Canada, Australia, and many more. Since the accounting method is different, Odoo introduces Anglo-Saxon Accounting tool. In order to avail the features of Anglo-Saxon accounting, this feature needs to be enabled from accounting configuration settings. Here the expense account is affected only after the sale has been processed. Another feature in Anglo-Saxon is the price difference between Account and Stock account properties when the inventory valuation is automated. The price difference account is used to record the difference in price between the vendor bill and purchase order.
Accounting Methods
Based on the timing of recording revenue and expense, accounting methods are classified as:
Accrual basis is the default accounting method used in Odoo where the revenues/expense has been recorded at the time of generating revenue or expenses, i.e. transactions are recorded at the time they happened and hence the tax also.
Cash basis method is used where the expense/revenue is recorded when the cash payments have been done. Revenues are recorded only if the payment is gained, and expenses are recorded only when the payment has been made to suppliers or employees. Cash basis can be activated from the accounting configuration setting. Cash basis will also reflect taxes which can be configured in the same way based on invoice or payment.
Terms used in Accounting
Some of the general accounting terms are discussed below:
Entity: An organization or its tributaries involved in a business is considered an accounting entity whose financial statements need to be prepared separately.
Transaction: The exchange of money on a purchase of goods, sale, or any expense can be considered as a transaction that had an impact on the accounting records
Capital: The financial resources invested by investors in business is termed as capital and can be used to fund operations.
Stock: Stock is a common term used to describe the count of available products in the inventory that can be sold.
Goods: Goods are those purchased or manufactured products for selling.
Creditors: The ones who owe money from their customers are creditors or receivables.
Debtors: The ones who owe money to their suppliers are debtors or payables.
Liabilities: The debt of the company is generally termed as liabilities. Liabilities can be current liabilities and non-current liabilities. Current liabilities are short-term liabilities like unpaid bills, loans & advances, and many more, and non-current liabilities are long term liabilities like bank loans, long term bonds, and many more.
Assets: The resources owned by the company having a monetary value and used in the long run. Assets can also be fixed assets and current assets. Land, Machinery, Vehicles are examples of fixed assets. Current assets are those assets whose type can be easily changed. Cash, Bank deposits, stock, and many more are examples of current assets.
Revenue/Income: The amount earned by the company through trading goods or services is termed as the income earned. So the income accounts are credited to the income account. The income will always show in the top line of the Income Statement.
Expenses: The cost that the company has to pay for various operational activities are expenses. The expenses are debited from the expense account.
Profit: The financial gain that the company earned during its revenue generation.
Loss: The financial expenses incurred for the company during its revenue generation. The difference between income and expenses determines the profit and loss.
Equity: The owner’s share in the business is termed equity.
Bookkeeping: Bookkeeping refers to the recording of accounting transactions of the company. This ensures accurate and systematic financial reports at the end of the financial year.
Stakeholders: Stakeholders are those who are interested in the performance of the company. Employees of the company are stakeholders who are interested in the company's growth.
Shareholders: A shareholder is a person who has shares in the company. A shareholder is always a stakeholder as well. But stakeholder may not be a shareholder.
Sales: One of the trading operations, where goods are sold to generate revenue. It can be a cash sale or credit sale.
Purchase: Another trading operation in order to buy assets or goods to sell. It can be a cash purchase or credit purchase.
Ledger: The accounts used in bookkeeping to record all the transaction entries which will be reflected in the balance sheet and income statement are ledgers.
Journal: Journals are records where the same kind of transactions can be recorded. Odoo uses five types of journals, including sale, purchase, cash, bank, and miscellaneous.
Journal Entries: Journal entry is a record of the transaction of any journal. Journal entries consist of journal items respective to the transaction containing a reference number, accounting date, and the ledgers affecting the credit and debit side. If the transaction is a sale, they are recorded in the sales journal.
Odoo, with the dedicated accounting module, will provide the right tools and operations control elements to deal with the financial management aspects of the company. In the next chapter, we will be learning about the Odoo platform providing you with an insight on the operational aspects of the business management and control operations of a company with Odoo.