Using Novulo Finance components, your ERP or insurance application will be able to create automated Journal Entries for core concepts including invoices, deliveries, stock movements, claims. (See also: Novulo Finance: Ledger Administration and Sub Administration )
This is the first of a series of topics that cover:
- The general logic that’s covered by Novulo finance components
- The numbers of the components to be used
- Any Novulo-specific or typical functionality
This post describes the core principles of double-entry bookkeeping and financial ledger accounting and how this is implemented in various Novulo components.
The post is written with implementation consultants with limited prior knowledge in financial accounting in mind, but also contains useful references for advanced users.
In this post, the first of a series, we’ll run basic Finance processes, adding more complexity along the process for both ERP (trade, production) as well as insurance.
The core principles of double-entry bookkeeping are older dan computer systems. To explain the functionality, for each step, first the accounting principles are described in a no-computer setting. Then, we’ll explain how it works in Novulo.
On-line, much information about double-entry bookkeeping can be found and we strongly recommend to search online for more information on this process. A good start is Double-entry bookkeeping - Wikipedia.
Setting up a Financial Ledger: Administrations, Journals and Ledger accounts
In this very first example, we work with our fictive company Alpha. It needs to have a Ledger Administration for bookkeeping purposes. In the Ledger Administration, we keep track of all flows of money related to business.
In this example, we will use the Novulo components as a pure Financial Ledger Administration to show the basics. In the next posts, we’ll connect it with the ERP and Insurance software to benefit from the integrations offered by the Novulo platform.
In practice, we see that all Novulo customers use their Financial ledger together with other components. Pure financial ledger is practically used for holding entities linked to the operational entities.
Components needed
In order to use the pure financial ledger administration, you’ll need to add the following components to your model. (see: The Novulo Composer)
In several cases, multiple alternative components can be used. In this example, the one mentioned first is used.
- M3009 is the core for the Administration
- M3272 is always needed with M3009.
- (For a technical reason, this is a separate component. In the 3.9 Platform, there is a solution available for this issue and M3272 might merge into M3009 in 2025).
- M3317 for various tax types (M3321 for VAT only)
- M3357 for linking tax to the financial ledger
- M6101 for single-currency handling (M6100 for multi-currency)
- M6331 for outstanding amounts on invoices in a single currency (M6332 for multi-currency)
- M6796 to register pay-before dates in pure ledger applications (M3143 when integrating with Novulo invoices and other components)
- M3270 to settle invoices (accounts payable and receivable) without using current accounts (M3271 with current accounts)
- M3387 for SSRS Reports (this will be phased out late 2024, but is needed for now)
Ledger accounts
We use one administration with the following 11 Ledger Accounts to have the bare minimum for any administration. In real-world situations, you’ll have many more ledger accounts and we’ll add them during the series of posts.
For example, here we have only added one VAT-tariff for one country.
- 1001 Cash (B) - to keep track of the flow of cash money
- 1101 Bank (B) - tracks the money on the bank account
- 1200 Accounts receivable (B) - to track money others need to pay to us
- 1300 Accounts payable (B) - to track money we need to pay to others
- 1701 VAT payable NL 21% (B) - the VAT that we need to pay for the Netherlands, 21%
- 1751 VAT receivable (B) - the VAT that we need to claim, Netherlands, 21%
- 4010 Indirect costs (P&L) - all other costs
- 7000 Costs of sales (P&L) - all the money we spend directly related to revenue
- 8001 Revenues NL 21% VAT (P&L) - to track the money we made doing business, taxed in the Netherlands with 21% VAT
- 9000 Equity (B)
- 0400 Long-term debt (loans) (B)
Balance and profit & loss
- B: Balance
- P&L: Profit & Loss
Balance accounts just keep track of movements of money, liabilities or future cash flows. Changes (entries) here won’t influence the profit or loss of your company.
Profit & Loss accounts entries will influence the profit or loss of your company.
When accounting, these accounts look the same - but reading the ledger accounting, it’s important to know it entries influence profit or loss, or not.
Journals
Journals are the point of entry when creating journal entries. Before computer systems were used, journals were the physical books where transactions were written. Nowadays, it’s mostly used to categorise journal entries.
There are 5 types of Journals:
- Sales - transactions that originate from sales
- Purchase - transactions that originate from purchases
- Bank - transactions that originate from bank statements
- Cash - transactions that originate from cash changes, other than sales and purchase
- General - all others
You can have multiple journals per type.
In typical applications, we see customers using:
- Two sales journals (automatic and manual)
- Two purchase journals (automatic and manual)
- A bank journal for each bank account
- A cash journal for each safe
- Multiple general journals
Automatic sales and purchase journals are relevant when creating automated journal entries from sales and purchase invoices, as will be discussed in the next posts.
For bank and cash journals, the journals have a link to the ledger account for that same bank account or safe.
Setting-up administration and ledger accounts
In your application, you’ll need an initial set-up of an Administration with Journals and Ledger Accounts.
When using Novulo Finance components without any connector, there is no link between the Administration and the My Organization.
Datamodel of Novulo Finance - Leder accounting
For the core of Novulo Ledger accounting, the following datamodel applies:
For implementing a financial administration in Novulo, it means you need to create:
- An administration for each My Organization
- The current accounting year (after the first year, add the next)
- The journals to be used - typically at least Sales, Purchase, Bank, Cash, General
- The ledger accounts to be used, as mentioned above
Within the accounting year, you will need to ensure the accounting periods within the year. Depending on the setting at Administration level, there are 12 (months) or 13 (4-week periods). These are created automatically after adding the accounting year.
Also, the (technically relevant) table that links Ledger accounts and Accounting periods is filled automatically.
Set-up in the Novulo application
First, create the Administration at Settings → Administrations
When adding the administration, you don’t have journals and ledger accounts yet, so leave them empty.
Then, for this administration, you will need to add additional information, starting with the Accounting year.
Add ledger accounts to administration
Then, you’ll need to add the ledger accounts that you want to use. This can be different for each customer, depending on their preferences or legal requirements.
Ledger accounts can be added manually by adding them through the More-menu. As large administrations can have hundreds of ledger accounts, it’s often more efficient to import them using available Excel-sheets to import Ledger accounts.
When you already have one administration and want to add a second, it’s also possible to copy all ledger accounts from an existing administration.
To get started with the explanation of functionality, you can add the ledger accounts mentioned above. Of course, if you already know the ledger accounts and the numbers you want to use, you can add your own accounts.
The functionality for Densification will be discussed in a separate post, as well as ‘manual entry disabled’.
For “Show at entry”, typically, only for Accounts Payable and Accounts Receivable, “Contact/invoice number” is selected; for others, description. The impact will be shown in the next posts.
Add journals to administration
Now, add the journals you want to use. If you don’t have journals defined yet for your implementation, you can create 5 journals based on the 5 general journal types described before.
- Sales
- Purchase
- Bank
- Cash
- General
Each journal must be linked to one of the specific types.
When adding a journal of the types Cash of Bank, you will need to select a linked ledger account. For Sales, Purchase and General Accounts this is not relevant.
The code of the journal is used as part of the identifier of Journal Entries, as will be shown later. The number of entry lines can be set to 5; the impact is seen when creating entries in the “how to make an entry”. Like with the ledger accounts, we will allow manual entries in this stage.
This results into a basic journal set-up like below:
Add accounting years to Administration
In the menu ‘accounting years’, click add. Add the start date of the accounting year. The Balance ledger account is not created yet so can remain empty for now.
After clicking OK, the and date and the periods are created automatically. Accounting years do not need to start on 1 January - alternative periods are also supported.
Add VAT Handling
Most countries in the world have VAT or sales tax. This must be added to the Ledger administration. It will be used to make the correct entries needed for your VAT tax returns.
To set this up, it’s needed to add the VAT Type, the VAT Percentages and link them to the ledger accounts.
Tax types contain the generic tax types to be applied. In a European retail set-up, typically you create tax types for VAT for each country that you deliver to, so for example.
- VAT Netherlands (BTW)
- VAT Germany (MwSt)
- VAT Belgium (BTW/TVA)
- etc
In an insurance set-up, you’ll typically (also) have
- Insurance tax Netherlands
- Insurance tax Belgium
- etc
Then, the Tax codes are used to register the different percentages and rules for this specific tax.
So for example
- VAT Netherlands
- High tariff goods, 21%
- Low tariff goods, 9%
- No VAT applicable, 0%
- Reverse charge for high tariff goods, 0%
- Reverse charge for low tariff goods, 0%
- VAT for pre-owned products
- VAT Germany
- High tariff goods, 19%
- etc
- etc
The next step is to link the Tax codes to the ledger, using Tax scenario’s. This is separate from the Tax codes, as this can differ from ledger administration to ledger administration. For example, in a Dutch ledger scheme, Belgian VAT can be on a different account than the same Belgian VAT on a Belgian ledger scheme.
In the below example, it says that:
- For administration Alpha
- For the tax type VAT Netherlands
- For the tax code VAT Netherlands 21% (high)
- In case of sales, where you have to charge VAT to your customer and pay it to the government
- These entries will be booked on ledger account 1701
- For reporting, the tax box is 1A (this easily varies between countries)
Additional components for Ledger administration
In addition to the core components mentioned above, the following components are available:
In order to link it with the ERP or Insurance, there are various components to connect these, depending on your needs:
-
M3143 links sales invoices to the ledger administration
- For insurance applications, add M4657
- For all other applications, add M4544
-
M3608 links stock-movements and inventory-related purchases and sales to the Ledger administration. When using inventory counts, add M5041.
-
When using Cost Centers, add M3856, M6004 and M7682 to support Cost Centers at Journal Entry Lines. Then, it depends on how you want to determine cost centers.
- M10642 allows to link cost centers to departments
- M10099 allows to link cost centers to deprecation
- (to be expanded)
Next topics
- Add opening balance
- Process results
- Cost centers
- automated entries
- inventory
- bank statements5