Principles of Accounitng
Accounting principles are the rules that public companies must use when preparing and disclosing their financial statements. Accounting principles are dictated by core practices.
Accounting Principles Made Simple: A Practical Guide for ERPNext Users
13 core principles, each with a simple rupee example and a clear explanation of how ERPNext handles it.
Accounting basics for ERPNext users · 12 min read
Most "ERP errors" found in client books are not software errors. A trial balance is off because a sale was booked in the wrong month. Stock in the warehouse does not match stock in the balance sheet. A director's personal bill has landed in office expenses. Each of these is a broken accounting principle, not a broken system.
ERPNext posts exactly what has been configured. Once the thinking behind the rules is understood, the system can be set up correctly the first time, and mistakes can be caught before the auditor finds them.
- Every entry has two equal sides, and ERPNext enforces this when a document is submitted.
- Income and expenses follow the invoice date. Cash follows the payment date.
- Stock value in reports must tie to the stock account every month.
- Books are corrected by cancel and amend, never by quiet editing.
ERPNext Accounting in Five Minutes
- Company: the legal entity whose books are kept, with its own Chart of Accounts and currency.
- Chart of Accounts: every ledger account, grouped as Assets, Liabilities, Equity, Income and Expenses.
- Party: a Customer, Supplier or Employee against whom balances are tracked.
- GL Entry: the debit and credit lines written when a document is submitted. Reports are built from them.
Every document moves through three stages:
A submitted entry cannot be quietly changed. It can only be cancelled and corrected, so the trail stays visible. Any document or report named here can be opened by typing its name in the ERPNext search bar.
| Document | Debit | Credit |
|---|---|---|
| Sales Invoice | Debtors | Sales, Output Tax |
| Payment Entry (received) | Bank / Cash | Debtors |
| Purchase Invoice (expense) | Expense, Input Tax | Creditors |
| Purchase Receipt (stock) | Stock In Hand | Stock Received But Not Billed |
| Delivery Note (stock) | Cost of Goods Sold | Stock In Hand |
1 Duality (Double Entry)
Every transaction has two sides. Total debits always equal total credits.
Example. Amazon Inc buys goods worth ₹2,00,000 on credit.
- Submitting a Purchase Invoice, Sales Invoice or Payment Entry creates both sides automatically.
- The Accounting Ledger option on a submitted document lists every debit and credit line.
- A Journal Entry cannot be submitted unless total debit equals total credit.
- The Trial Balance report proves the principle across the whole ledger.
2 Business Entity
The business and its owner are separate in the books.
Example. In a proprietorship, the owner takes ₹20,000 for a family function. This is drawings, not a business expense. For a company, a director's personal spending must never be booked as a company expense.
- Each business is its own Company with a separate Chart of Accounts.
- A Drawings or Owner's Current Account is kept under Equity and used through a Journal Entry. Profit is not affected.
- Expense accounts should be scanned periodically for personal items.
3 Historical Cost
Assets are recorded at what was paid, not at today's market price.
Example. A plot bought for ₹50,00,000 stays at ₹50,00,000 even if it is worth ₹1,20,00,000 today. Cost includes freight, registration and installation.
- The rate on the Purchase Receipt or Invoice becomes the item cost.
- A Landed Cost Voucher spreads freight and duties across items. If 100 fans cost ₹500 and freight is ₹5,000, the true cost is ₹550 each. Without the voucher, margins look ₹50 better than they are.
- Items marked Is Fixed Asset create an Asset with a Gross Purchase Amount, which should include all costs to bring it into use.
4 Going Concern
The business is assumed to continue, so the cost of a long-life asset is spread over its life.
Example. A ₹12,00,000 machine with a 10-year life gives ₹1,20,000 depreciation a year on the straight-line method (no scrap value).
- An Asset Category holds the asset, accumulated depreciation and depreciation expense accounts, plus the method, number of depreciations and frequency.
- Each Asset gets a dated depreciation schedule.
- On each due date, a Journal Entry posts automatically: Debit Depreciation Expense, Credit Accumulated Depreciation.
5 Accrual and Revenue Recognition
Income and expenses are recorded when earned or incurred, not when cash moves.
Example. Goods worth ₹1,00,000 are delivered on 28 March and paid for on 10 April. The sale belongs to March. A ₹12,000 one-year software subscription paid in January is ₹1,000 a month of expense, with the rest held as a prepaid asset.
- The Sales Invoice carries the sale date and books income. The Payment Entry carries the cash date and clears the receivable. Keeping them separate is the principle.
- Accounts Receivable and Accounts Payable reports show what is due as on any date.
- Deferred Revenue and Deferred Expense are enabled on the Item. Amounts are released monthly through Process Deferred Accounting.
6 Matching
The cost of earning revenue is recorded in the same period as the revenue.
Example. 100 fans are bought at ₹500 and 60 are sold at ₹800. Sales ₹48,000, cost of goods sold ₹30,000, gross profit ₹18,000. The 40 unsold fans (₹20,000) stay as stock.
With Perpetual Inventory enabled in the Company master, every stock movement posts an entry:
- Purchase Receipt: Dr Stock In Hand, Cr Stock Received But Not Billed.
- Purchase Invoice: Dr Stock Received But Not Billed, Cr Creditors.
- Delivery Note (60 fans): Dr Cost of Goods Sold ₹30,000, Cr Stock In Hand ₹30,000.
- Sales Invoice: Dr Debtors ₹48,000, Cr Sales ₹48,000.
Each month, Stock Balance should agree with the Stock In Hand account. The Stock and Account Value Comparison report locates any gap.
7 Consistency
A chosen method is kept year after year. Any change is disclosed.
Example. Two lots are bought: 10 units at ₹100 and 10 at ₹120. Selling 10 units costs ₹1,000 under FIFO but ₹1,100 under Moving Average. Same business, different profit.
- The Valuation Method is set in Stock Settings, before the first stock transaction.
- Changing it once transactions exist affects past valuations and needs the auditor's approval.
- The same discipline applies to depreciation methods and the Chart of Accounts.
8 Prudence
Likely losses are recognised early. Gains wait until they are reasonably certain. Caution, not pessimism.
Example. A customer owes ₹3,00,000 and looks unable to pay. A provision of ₹1,50,000 is made now. A promised ₹50,000 supplier incentive is not booked until confirmed.
- The Accounts Receivable report with ageing buckets should be reviewed monthly.
- The Credit Limit on the Customer master warns or blocks orders beyond the agreed outstanding.
- ERPNext does not calculate provisions. A Journal Entry records the estimate agreed with the auditor.
9 Materiality
Attention goes to what could change a reader's decision.
Example. A ₹500 box of stationery is expensed at once, not depreciated over five years. An omitted ₹50 lakh liability would matter a great deal.
- Only items with Is Fixed Asset ticked become assets. Consumables go straight to expense.
- A capitalisation limit is agreed with the auditor and followed when Items are created. ERPNext does not enforce it by itself.
- The result is a clean Asset register without hundreds of tiny schedules.
10 Full Disclosure
Anything that could influence a lender's or investor's decision is disclosed in the statements or notes.
Example. A pending legal case, a guarantee for a group company, a change in accounting method or a related-party transaction.
- The Balance Sheet, Profit and Loss and Cash Flow statements can be viewed monthly, quarterly or yearly.
- Cost Centers and Accounting Dimensions (Project, Region) allow figures to be cut the way a lender asks.
- Contingent liabilities and policy changes are not ledger numbers. The accountant writes them in the notes to accounts.
11 Time Period
Performance is measured in regular periods: monthly, quarterly and annually.
- A Fiscal Year (for example 1 April to 31 March) defines the reporting year.
- The Period Closing Voucher moves the year's profit or loss to retained earnings and zeroes Income and Expense accounts.
- Accounts Frozen Upto in Accounts Settings blocks posting on or before a date. Accounting Period gives a finer lock by document type.
Without locking, a late entry quietly changes figures that have already gone to the bank or tax department.
12 Monetary Unit
Only what can be measured in money, in a stable currency, is recorded. Staff skill and customer loyalty are valuable, but they are not assets.
- Each Company has a default currency in which all books are kept.
- Foreign invoices store the currency and the exchange rate of the day.
- Differences at payment post to an Exchange Gain/Loss account. Exchange Rate Revaluation restates open balances at period end.
13 Objectivity and Reliability
Facts backed by evidence are recorded. Opinions are not.
Example. An expense of ₹8,400 is recorded only when there is a bill for it.
- Supplier bill number and date go on the Purchase Invoice. A reference number and date go on every bank Payment Entry and Journal Entry. The scanned bill is attached.
- The Bank Reconciliation Tool matches bank lines to entries and exposes differences.
- Submitted documents can only be cancelled and amended. Track Changes stores each edit with user and time.
Quick Reference
| Principle | Where it shows up in ERPNext |
|---|---|
| Duality | GL Entries, Journal Entry, Trial Balance |
| Business Entity | Separate Company, Drawings account |
| Historical Cost | Landed Cost Voucher, Gross Purchase Amount |
| Going Concern | Asset Category, depreciation schedule |
| Accrual | Invoice vs Payment Entry, Deferred Revenue/Expense |
| Matching | Perpetual Inventory, Delivery Note, COGS |
| Consistency | Valuation Method, Chart of Accounts |
| Prudence | Receivable ageing, Credit Limit, provision entry |
| Materiality | Is Fixed Asset, capitalisation limit |
| Full Disclosure | Financial statements, Cost Centers, Dimensions |
| Time Period | Fiscal Year, Period Closing Voucher, Frozen Upto |
| Monetary Unit | Company currency, Exchange Rate Revaluation |
| Objectivity | Attachments, Bank Reconciliation, Track Changes |
Five Common Mistakes
- Booking on payment date instead of invoice date. Receivables and payables go wrong.
- Skipping the Landed Cost Voucher. Stock is understated and margins overstated.
- Not reconciling Stock Balance with the stock account. Profit cannot be trusted.
- Mixing personal and business spending. It draws tax queries.
- Leaving old periods open. Someone will post into last year.
Final Thought
The software handles the arithmetic. The principles handle the judgement. When a figure looks wrong in ERPNext, the first question is which principle the transaction has broken, and the answer is usually there.
Once these thirteen ideas are understood, ERPNext stops being a data-entry tool and becomes a system that can be controlled and trusted.
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