Perpetual Accounting
Description
ADempiere implements the modern Accounting Theory referred to here as 'Perpetual Accounting'. It refers to the process of financial reporting especially as it relates to the Year End Closing Process.
Background
Discussion Thread: https://sourceforge.net/forum/forum.php?thread_id=1621218&forum_id=611161
Year End Closing By: Colin Rooney (croo) - 2007-05-15 07:32 There are two basic approaches to accounting... Periodic and Perpetual. Historically with manual bookkeeping the Periodic approach was the norm... mostly because the calculations required for the Perpetual system simply made it unfeasible until computers came on the scene!
The Adempiere approach to accounting is the Perpetual approach. I spoke with an accountant about this and the advice I got was: The whole objective to doing a year end, in traditional accounting terms, is to ensure that the P&L accounts balance to Zero... to basically draw a line under the accounts before beginning the next years accounts. The traditional approach taken to accomplish this was to this was to balance each P&L account to Zero.
With a perpetual system we need only create create a new P&L account (Profit Transfer)... then create a manual GL Journal debiting the new account (assuming profit) and crediting the Balance sheet - Retained Earnings Account. Then using the period control close the year so no more postings can occur.
The benefit of this approach is
- it's very simple
- there is no need to create one-sided entries in the ledger at midnight on the last day of the financial year.. a typically chaotic time!
- the Profit & Loss information is always available for multi-year reporting without the hassle of taking a 13th period into account.
- and, MOST, importantly... if you have multiple reporting calendars say for a parent on 31st Dec & a subsidiaries on 31st March then all you need do is create one journal at 31 Dec and another at 31 March and you can report for both balance dates. With a traditional periodic approach since the balances are reset to zero this is not possible. This is why the larger multinationals use the perpetual approach.
When I asked are both approaches legal he said, “it could be that some jurisdictions do not allow the perpetual approach... I have never checked. But in 30 years of international accounting I have never come across such and I have have learned to regard such suggestions with extreme caution. Typically you find it's not the norm but not illegal.”
Steps to implement
- Add a new Account of type Expense, called something like "Profit Transfer" (suggestion: make it the last of all the P&L accounts) and be sure it doesn't roll up into any other accounts
- Add the Profit Transfer account to Financial Reports that you use for any Trial Balances
- DO NOT ADD the Profit Transfer account to your P&L Statement
- Configure your P&L so that the Report Column/Amount Type uses "Year Balance" not "Total Balance"
- Configure your Balance Sheet so that the Report Column/Amount Type uses "Total Balance"
- At year end, make a single journal entry into Profit Transfer offsetting the Total of the Income and Expense Accounts. Post the other side of the entry to Retained Earnings
- Close the period
