I Overview

Chapter 3 Introduction to accounting

The purpose of an accounting system is to keep track of the company’s financial status. The following reports are used to present it:

Balance Sheet

Provides a snapshot of the financial position of a company, listing its possessions (assets), debts (liabilities) and residual value (equity).

Income Statement

Also known as the “Profit & Loss Statement”, summarizes the income generated over a specific period and the expenses associated with it, resulting in “Net Result”.

Cashflow Statement11 1 Not currently implemented in LedgerSMB

Summarizes the incoming and outgoing cash flows over a specific period, resulting in “Free Cash Flow”.

Statement of Owner’s Equity2

Summarizes the changes in equity over a specific period.

Trial Balance

An intermediate report used for preparing the Balance Sheet and Income Statement, tallies transactions over the reporting period; used to assert that all accounts in the General Journal are balanced.

The accounting system is composed of these parts:


Contain the company’s transactions with extensive additional data; they are the first point of entry for transactions, ordered by order of entry.


Contain aggregated data from the journals, ordered by date.

Chart of Accounts

The categories by which financial data are classified.

All accounting data ends up summarized in the GL. Transactions may be entered in a different (sub)ledger before ending up in the GL; e.g. the Sales Ledger. With the advent of computerized accounting, the use of journals is in decline: transactions are classified while directly being entered into ledgers.

In addition to the parts mentioned above the following terms are used throughout this document:


Money and anything that can be converted into money without reducing the net equity of the business. Assets include money owed, money held, goods available for sale, property, etc.


Debts owned by the business such as bank loans and unpaid bills.


What would be left for the owner if all the assets were converted to money and all the liabilities paid off.


Income from business activities.


Money paid to operate the business.

Cost of Goods

Money that was spent to acquire material and services to build a product being sold.

Operating Expenses

Expenses that are consumed to administer the business.

Accounts Receivable

An asset on the books as a claim for a future payment from a customer.

Accounts Payable

A liability on the books for a future payment to a supplier or vendor.