System ledger codes appear in journal entries as default revenue, asset, or liability type accounts that are debited or credited after every transaction.
We'll look at how each default account is used in journal entries to track funds from the moment of sale up until revenue is recognized.
How it Works
1. Default Revenue Accounts
Revenue accounts track income (or value) your business earns. Custom ledger codes are all revenue type accounts, as are 3 other default accounts.
📉 Revenue account balances decrease with debits (less income).
📈 Revenue account balances increase with credits (more income).
1.1 Default Revenue account (0000 - Default ledger code)
An item's revenue is tracked in the custom ledger code assigned to it. If you don't assign a customized ledger code to an item, SmartRec automatically links it to the default revenue ledger code (0000).
This default revenue account (similarly to custom ledger codes) gets a credit for every invoiced service that has occurred or has no occurrence date defined. If an invoice item is canceled, it creates a debit in the account (assuming revenue was already recognized; otherwise deferred revenue is debited).
1.2 Default - Discounts account
Automated discounts and custom rebates reduce your income. They're tracked in a contra revenue account, which has a debit balance (instead of a credit balance) that must be deducted from your gross sales in order to report your net sales.
The Default-Discounts contra revenue account shows how much sales value was lost because of discounts. When a discounted item is sold, it creates a debit in the account. If the discount sale is canceled, it creates a credit in the account.
Say a discounted service is invoiced but hasn't yet occurred. The Default - Deferred Discounts liability account exists so that when the service is actually rendered, the discount is recognized at the same time as the revenue.
📜 Can discounts show as debits from an item's revenue account?
Instead of discounts going to a contra revenue account (as shown above), they can be tracked as debits from the item's revenue account. If the sale is canceled, the item's revenue account is credited.
In the Accounting and Finance > Ledger Codes subtab, check the option and Save. This archives the Default-Discounts and Default-Deferred Discounts ledger accounts.
1.3 Default - Scholarships account (in Beta)
Used scholarship funds are tracked in this contra revenue account. Contra revenue accounts reduce net revenue, similarly to expense accounts. However, while expense accounts represent money flowing out of the business, a contra revenue account represents money that will never be collected by the business (e.g. a sales return).
When scholarship funds are used to pay for an invoice item, it creates a debit in the Default - Scholarships contra revenue account. If the scholarship payment is canceled, it creates a credit in the account.
Once the scholarship payment is reconciled to an invoice, the funds are moved to accounts receivable.
2. Default Asset Accounts
Asset accounts are for amounts that add value to your business. In SmartRec, this equates to payments received and payments still owed to you. Two default asset accounts are provided to automatically track cash and accounts receivable.
📈 Asset account balances increase with debits (more value).
📉 Asset account balances decrease with credits (less value).
2.1 Default - Cash account
This account records all payment types in SmartRec (online store, offline payments recorded by an administrator, installments and subscriptions). Each time a payment is made, it creates a debit in the account. If there's a refund, it creates a credit in the account.
2.2 Default - Accounts receivable account
This account records the value of money that clients owe you. If an invoice isn't paid immediately, it's recorded as accounts receivable (e.g. installments). When an invoice is created, it creates a debit in the account. When a payment is reconciled to an invoice item, it creates a credit in the account.
3. Default Liability Accounts
Liability accounts are for amounts your business owes or will owe (e.g. sales tax, deferred revenue, credits due). Receiving payment in advance of delivering a service is considered a liability on the books and remains so until the service has occurred. Revenue is not recognized yet.
SmartRec generates at least 4 default liability accounts to track account deposits, deferred revenue, sales tax, and unused Multipass liabilities. Go to the Reports tab (under Accrual accounting) and download the Liabilities report to get a snapshot of the balances in your liability accounts (excluding sales tax) on any given day.
📉 Liability account balances decrease with debits (you owe less).
📈 Liability account balances increase with credits (you owe more).
3.1 Default - Account deposit account
This liability account represents a placeholder where money sits until it's reconciled to an invoice item.
Any payment or credit that isn't reconciled to an invoice creates a credit in the Default - Account deposit account. When the payment or credit is reconciled, it creates a debit in the account.
3.2 Default - Deferred revenue account
This account tracks sales revenue of services that will occur in the future. Deferred revenue is a liability, but will be recognized in the proper revenue account on the date the service occurs. If there are multiple occurrences, a proportional amount of the service's value is recognized per occurrence.
Each time an invoice is created for a service that occurs in the future, it creates a credit in the Default - Deferred revenue account. When the service is rendered, or if the sale of that service is canceled (and there's still deferred revenue at the time of cancellation), it creates a debit in the account.
Click here to learn how revenue is deferred based on a service's occurrences.
3.3 Sales tax account(s)
Taxes collected from sales are due to the government, so they're tracked as liabilities. Each sales tax your organization charges is followed in its own default account (named after the tax). In Quebec, we track GST and QST.
Every time a taxable item is sold, it creates a credit in the tax liability account. When a taxable item is canceled, it creates a debit.
3.4 Default - Multipass account
Multipasses can be exchanged in return for a future service. This represents a liability since clients have paid for a service that hasn't yet been delivered.
Multipass liability is tracked in its own ledger account (separately from the deferred revenue account). Instead of deferring revenue for the sale of a Multipass based on a specific time frame or date when a service occurs, the liability is deferred until a pass is redeemed (i.e., each time a pass is used, the value of that pass is recognized).
The sale of a Multipass creates a credit in the Default - Multipass account. As the passes are redeemed, the value of each pass creates a debit.
Click here to see how Multipass revenue is recognized in journal entries.
* Last updated in May 2022
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