PDS Ledger/Payroll uses double-entry accounting. This means every transaction is associated with a debit and a credit that adjusts the total value of the accounts.
Debits decrease the amount and are traditionally placed in the left column. Credits increase the amount and are usually in the right column of the balance sheet.
There are two ways to perform double-entry accounting: cash basis and accrual basis. You can use either method in PDS, and you can switch between the two methods at any time.
Cash vs. Accrual
Cash Basis Accounting
Cash basis recognizes transactions only when there is an exchange of cash. Income or revenue transactions occur only when payment is received. Similarly, expenses are only recognized when payments are received. With cash basis accounting, all of the accounts you need for this method are already set up in your chart of accounts.
Accrual Basis Accounting
Accrual basis is more complex. You can track receivables and payables. Financial transactions are recorded based on when they're earned but the cash transaction (of payment or receipt) has not yet taken place.
If you decide to use accrual basis, you must set up at least one receivables account for uncollected receivables, and at least one payables account for unpaid invoices. If needed, set up additional accounts for different types of income or expense.
This is money that is owed to you, including deposits, income, or revenue. Examples include tithes for churches and tuition for schools.
Receivables are recorded when promised or earned, even if the money hasn't been received yet. When money is owed to you, you record a transaction in accounts receivable. Then, when the money is received, you record another transaction in the cash account to match or offset it.
This is money that you owe, like utility bills or salary. This includes withdrawals or expenses.
Payables are recorded when you receive a bill or invoice. You record the invoice in accounts payable when you receive it. Then when you pay the invoice, you record a transaction in the cash account to match or offset it.
Switch Between Cash and Accrual
You can switch between cash and accrual basis accounting at any time. However, the actual amounts in the cash, receivable, payable, income, and expense accounts may differ between months depending on your starting method. Review the following scenarios before switching.
From Accrual to Cash
- The money is removed from all associated accounts (income, expense, receivable, and payable).
- No cash was paid or received, accounts payable or accounts receivable are not necessary.
- The invoice is ready to be paid, recorded into the expense account, and the receivable may be collected and recorded into the income account.
- The cash account isn't affected.
- The income and expense amounts are moved to the same month that the transactions were completed.
- Receivable and payable accounts are ignored because they each balance out to zero.
From Cash to Accrual
- You're prompted to create payable and receivable accounts.
- Once you create these accounts, the expense and income automatically post to them.
- Transactions are recognized as having been created in a prior period and completed in the following period.
- You're prompted for the payable and receivable accounts, and the debit and credit transactions display as being paid and received.
- The cash account isn't affected, but the income and expense account totals move to the period the transactions were created in.
- The receivable and payable accounts should balance out to zero for the quarter. (The accounts increased during the month when the transactions occurred and decreased during the following period when the transactions were completed, thus balancing out to zero).