Accounting Fundamentals for ERP

Every transaction in an ERP system — a sales invoice, a purchase bill, a salary payment, a stock transfer — ultimately ends up in the accounting ledger. You do not need to be a chartered accountant to use Udyamo ERP Lite, but understanding basic accounting concepts will help you interpret reports, catch errors early, and have informed conversations with your auditor. This chapter covers the foundational ideas that underpin every financial record the system creates.

What You Will Learn

• The principle of double-entry bookkeeping and why it matters
• The accounting equation and how it stays in balance
• The five account types and the debit/credit rules for each
• How the Indian financial year (April to March) structures your books
• The relationship between journals, ledgers, and trial balance
• How ERP automates the flow from transaction to financial report
• The difference between accrual and cash basis accounting
• Accounting considerations specific to manufacturing

Prerequisites

• Familiarity with the Udyamo ERP Lite dashboard (covered in Chapter 4)
• No prior accounting knowledge is assumed

Double-Entry Bookkeeping

Double-entry bookkeeping is the foundation of modern accounting. The principle is simple: every financial transaction affects at least two accounts, and the total debits must always equal the total credits. This is not a software design choice — it is an accounting rule that has been in use since the 15th century and is mandated by Indian Accounting Standards.

Consider a practical example. Your factory purchases raw steel worth 50,000 from a vendor on credit:

• Debit Raw Materials (Asset) 50,000 -- the value of materials you now hold increases
• Credit Accounts Payable (Liability) 50,000 -- you now owe the vendor this amount

Both sides record 50,000. The books are in balance. When you later pay the vendor:

• Debit Accounts Payable (Liability) 50,000 -- your obligation to the vendor is reduced
• Credit Bank (Asset) 50,000 -- your bank balance decreases

Again, debits equal credits. This self-balancing mechanism is what makes accounting reliable. If the books do not balance, something has gone wrong, and the system will flag it.

In Udyamo ERP Lite, the JournalEntry model enforces this rule. Every journal entry contains one or more journal lines, and the system validates that total_debit equals total_credit before allowing the entry to be posted.

The Accounting Equation

The accounting equation expresses the fundamental relationship between what a business owns, what it owes, and what belongs to the owners:

Assets = Liabilities + Equity

This equation must always hold true. Every transaction either affects both sides equally or rearranges items within one side. Here are manufacturing examples:

Revenue and expenses flow through the Profit & Loss statement and ultimately affect equity. When your factory earns revenue, equity grows. When it incurs expenses, equity shrinks. This is how daily operations connect to the balance sheet.

The Five Account Types

Udyamo ERP Lite classifies every account into one of five types. Understanding these types and their debit/credit behaviour is essential:

Tip: A simple mnemonic — assets and expenses normally have debit balances (they increase with debits). Liabilities, equity, and income normally have credit balances (they increase with credits). If you remember this, you can reason through any transaction.

The Indian Financial Year

In India, the financial year runs from 1 April to 31 March, as prescribed by the Companies Act, 2013 and the Income Tax Act, 1961. Udyamo ERP Lite is configured to follow this convention. Your financial year determines:

• Opening balances -- Account balances carried forward from the previous year, effective 1 April
• Period of reporting -- Trial balance, Profit & Loss, and Balance Sheet reports default to the current April-March period
• Closing procedures -- At year-end (31 March), income and expense accounts are closed to Retained Earnings, and the cycle begins fresh

When you set up your organization in Udyamo ERP Lite (Chapter 5), you define the starting financial year. All subsequent years follow automatically.

Books of Account: Journal, Ledger, Trial Balance

Three core records form the backbone of any accounting system:

Journal. The journal is a chronological record of all financial transactions. Each journal entry records the date, a description, and the debit and credit lines. Think of it as a diary of everything that happened financially, in the order it happened.

Ledger. While the journal records transactions chronologically, the ledger organizes the same transactions by account. The "Raw Materials" ledger, for example, shows every debit and credit to that account, with a running balance. The ledger answers the question: what is the current position of this account?

Trial Balance. The trial balance is a summary that lists every account and its closing balance (debit or credit) as of a given date. If total debits equal total credits, the books are in balance. The trial balance is the starting point for preparing the Profit & Loss statement and Balance Sheet.

In Udyamo ERP Lite, these correspond directly to the data models: JournalEntry and JournalLine for the journal, LedgerEntry for the ledger, and the trial balance report generated from ledger data.

How ERP Automates Accounting

In a manual accounting system, a bookkeeper records every transaction by hand — first in the journal, then posted to the ledger. In Udyamo ERP Lite, this happens automatically:

1. You create a sales invoice for finished goods worth 1,18,000 (1,00,000 + 18% GST)
2. The system generates a journal entry — Debit Accounts Receivable 1,18,000; Credit Sales Revenue 1,00,000; Credit GST Payable 18,000
3. Ledger entries are created for each affected account, updating running balances
4. Reports update instantly — the trial balance, Profit & Loss, and Balance Sheet reflect the new invoice

The same automation applies to purchase bills, payments received, payments made, and any other transaction that has accounting implications. The invoice and bill models carry a journal_entry_id field that links them directly to their corresponding journal entries.

Tip: You do not need to manually create journal entries for routine transactions. The system handles sales, purchase, and payment postings automatically. Manual journal entries are reserved for adjustments, provisions, and non-routine transactions (covered in Chapter 33).

Accrual vs. Cash Basis

Accrual basis recognizes revenue when earned and expenses when incurred, regardless of when cash changes hands. If you deliver goods in March but the customer pays in April, the revenue is recognized in March.

Cash basis recognizes revenue and expenses only when cash is received or paid. The same delivery would be recorded as revenue in April when payment arrives.

Indian Accounting Standards (Ind AS) and the Companies Act, 2013 require the accrual basis for all companies. Udyamo ERP Lite follows accrual accounting by default — an invoice creates revenue and a receivable at the time of invoicing, not at the time of payment.

Warning: Do not confuse cash flow with profit. A business can be profitable on an accrual basis while running short of cash if customers delay payments. The Cash Flow report (Chapter 46) helps you monitor actual cash movement separately from accrual-based profit.

Manufacturing Accounting Specifics

Manufacturing introduces accounting concepts that trading or service businesses do not encounter:

Inventory as an asset. Raw materials, work-in-progress (WIP), and finished goods sitting in your warehouse are assets on your balance sheet, not expenses. Raw steel becomes an expense only when it is consumed in production (issued to a production order). This distinction is critical for accurate profit calculation.

Cost of Goods Sold (COGS). COGS represents the direct cost of producing the goods you sold during a period. It includes raw material consumption, direct labour, and manufacturing overheads. The formula is: Opening Inventory + Purchases - Closing Inventory = COGS. This appears on your Profit & Loss statement and directly affects gross profit.

Work-in-Progress (WIP) valuation. At any point in time, your factory will have partially completed production orders. The materials and labour already invested in these orders have value and must be accounted for. WIP is classified as a current asset on the balance sheet.

Depreciation. Factory machinery, moulds, vehicles, and the factory building lose value over time. Depreciation is the systematic allocation of an asset's cost over its useful life. Under the Companies Act, 2013, depreciation rates and methods are prescribed in Schedule II. Depreciation is an expense that reduces profit but does not involve any cash outflow.

Tips & Best Practices

Tip: Even if you are not an accountant, review the trial balance monthly. If total debits do not equal total credits, investigate immediately. The earlier you catch an imbalance, the easier it is to fix.

Tip: Keep your Chart of Accounts clean and consistent from the start. A well-structured CoA makes reporting straightforward. A poorly structured one creates confusion that compounds over time. Chapter 32 covers this in detail.

Tip: If you are transitioning from a manual or Tally-based accounting system, enter accurate opening balances for all accounts as of 1 April of your starting financial year. Incorrect opening balances will distort every report from day one.

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