Chapter 3

Setting up General Ledger

Lesson Outcomes

At the end of this Chapter, you should be able to.

LO 1 Explain how to restore a backup file or open a company file.

LO 2 Explain the meaning of the general ledger and its interactions with other sections
in the system.
LO 3 Describe the principles relating to accounts numbering/ coding.
LO 4 Explain different account types available in Sage 50.
LO 5 Explain how to create, modify, and delete a chart of accounts; and
LO 6 Explain how to set default information relating to the general ledger.

3.1Restoring Backup Files (LO 1)

Before discussing the general ledger, let's see how to restore the latest backup file.

Steps:
Select File in the menu bar - Select Restore – Select Browse – Select Drive – Select Folder –
Select the Backup File – Click Open – Click Next – Tick New Company – Click Next – Click
Finish.
Or

Select the System navigation bar – select Restore Now - Click Browse – Select Drive – Select
Folder – Select the Backup File – Click Open – Click Next – Tick New Company – Click
Next – Click Finish.

Once you have restored the backup File, you are ready to work. However, if you are working on
the same computer, you can open the company file using the following steps (as shown in Figure
3.1).

Steps:
Select Open Existing Company Button – Select your company name from the List – Click
OK.

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Figure 3.1: Sage Starting Window

3.2General Ledger: (LO 2)

The General Ledger stores information relating to all financial activities of your company. All
business transactions are eventually posted to the accounts that make up General Ledger. This set
of accounts is called the Chart of Accounts (COA). General Ledger helps us to create the
financial statements of the company. We need to set the chart of accounts properly to cover all
the necessary accounts to develop the business's financial statements.

The chart of accounts consists of all the Assets, Liabilities, Equity, Income, and Expenses
accounts of the organization. The journals are updated when transactions are posted in Accounts
Receivable, Accounts Payable, Inventory, and Payroll. The journals, in turn, update General
Ledger. Entries made to the General Journal also update General Ledger. The interaction
between General Ledger and the other sections in Sage 50 is illustrated in Figure 3.2.

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Figure 3.2: Interaction between General Ledger and the Other Sections in Sage 50

Accounts Payroll
Accounts Inventory
Payable
Receivable

Journals

General General
Ledger Journal

As we are not using a sample chart of accounts, we need to create the chart of accounts before
any other activities.

3.2.1 Account Numbering/ Coding: (LO 3)

Sage 50 allows using numbers and characters in an account numbering/ coding system.
However, an account numbering system should be established understandably. When developing
a numbering system requires following generally accepted rules. Table 3.1 shows the starting
number of different account types. Further, you must decide the number of digits of an account
code. The number of digits depends on the existing and future requirements of the accounting
system.

Table 3.1: Starting Number of Different Account Types

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 Account Code Account Types
1 XXX Assets (PPE, Cash, Accounts Receivable, etc.)
2 XXX Liabilities (Accounts Payable, Borrowings, etc.)
3 XXX Equity (Stated Capital, Retained Earnings, etc.)
4 XXX Income (Sales, Rent Income Etc.)
5 XXX Cost of Sales
6 XXX – 9 XXX Expenses (Salaries, Electricity, etc.)

Sage 50's sample companies use numbering schemes similar to those in the table above. As we
choose not to use a sample chart of accounts, a few other rules and guidelines should be
followed when an account numbering system is established.

1. Up to 15 alphanumeric characters can be used in an account ID.

2. Asterisks (*), question marks (?), and plus signs (+) cannot be used in an account ID.
3. Leading or trailing spaces are not permitted in an account ID. However, spaces
between characters are allowed.
4. Account numbers are sorted alphabetically, with numbers in the account ID sorted
before letters. For example, account ID "2" lists after account ID "1000" and before
an account ID starting with "AR." Account numbers are not case sensitive; therefore,
CASH and Cash are the same account ID.
5. There can only be one account assigned an account type of Equity--Retained
Earnings.

3.2.2 Account Types (LO 4)

Account types are used to group similar accounts. They also determine where the accounts will
appear on financial statements and whether the account typically carries a debit or credit balance.
Sage 50 has a wide variety of account types available.

At the end of the fiscal year, the balances of the Income, Expense, Cost of Sales, and Equity -
Gets Closed account types become zero. The net difference of these accounts is added to the
Equity-Retained Earnings account. Balances of other account types, i.e., Assets, Liabilities, and
Equity Don't Close, are carried forward to the next financial period. Table 3.2 shows the account
types available in Sage with examples.

Table 3.2: Available Accounts Types in Sage

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 Account Type Example/s
Accounts Payable Creditors control
Accounts Receivable Debtors control
Accumulated Depreciation Accumulated depreciation - Furniture
Cash Cash in hand, Cash at banks
Cost of Sales Cost of sales
Equity - Doesn’t Close Capital, Stated Capital
Equity - Gets Closed Drawings, Dividends
Equity - Retained Earnings Retained Earnings
Expenses Salaries, Rent
Fixed Assets Buildings, Furniture
Income Sales, Other Income
Inventory Inventory
Long Term Liabilities Bank loans, Debentures
Other Assets Goodwill, Brand name
Other Current Assets Prepayments, Other receivables
Other Current Liabilities Accruals, Other payables

Each account type is described in the following section.

a) Accounts Payable:

AP represents balances owed to vendors for goods, supplies, and services purchased on an open
account. Accounts payable balances are used in accrual-based accounting, are generally due in
30 or 60 days and do not bear interest. Select this account type if you set up open vendor
accounts or credit card (purchase) accounts.

b) Accounts Receivable:

AR represents amounts owed by customers for items or services sold to them when Cash is not
received at the time of sale. Typically, accounts receivable balances are recorded on sales
invoices that include payment terms. Accounts receivable are used in accrual-based accounting.
Select this account type if you are setting up accrued income that customers owe.

c) Accumulated Depreciation:

AD is a contra asset account for depreciable (fixed) assets such as buildings, machinery, and
equipment. Depreciable basis (expense) is the difference between an asset's cost and estimated
salvage value. Recording depreciation is a way to indicate that assets have declined in service
potential. Accumulated depreciation represents the total depreciation taken to date on the assets.
Select this account type if you set up depreciation accounts for known fixed assets.

d) Cash:

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It represents deposits in banks available for current operations, plus cash on hand consisting of
currency, undeposited checks, drafts, and money orders. Select this account type if you set up
bank checking accounts, petty cash accounts, money market accounts, and certificates of deposit
(CDs).

e) Cost of Sales:
COS represents the general cost to your business for items or services when sold to customers.
The cost of sales (also known as cost of goods sold) for inventory items is computed based on
the inventory costing method (FIFO, LIFO, or Average Cost ). Select this account type if you set
up cost-of-goods-sold accounts to be used when selling inventory items.

f) Equity - Doesn't Close (Corporations):

It represents equity from year to year (like Ordinary shares). Equity is the owner's claim against
the assets or interest in the entity. These accounts are typically found in corporation-type
businesses. Select this account type if you are a corporation and want to record Ordinary shares
or other equity intended as owner investment.

g) Equity - Gets Closed (Proprietorship):

It represents equity zeroed out at the end of the fiscal year, with their amounts moved to the
retained earnings account. Equity, also known as capital or net worth, is owners' (partners' or
stockholders') claims against assets they contributed to the business. Select this account type if
your business is a proprietorship and you want to record dividends paid to partners or if you
are a corporation and want to record dividends paid to stockholders.

h) Equity - Retained Earnings:

It represents the earned capital of the enterprise. Its balance is the cumulative, lifetime earnings
of the company that have not been distributed to owners. You can have only one retained
earnings account in Sage 50.

i) Expenses:

These represent the costs and liabilities incurred to produce revenues. The assets surrendered or
consumed when serving customers indicate company expenses. If income exceeds expenses, net
income will result. The business is said to be operating at a net loss if expenses exceed income.
Select this account type if you are setting up accounts such as operation, supplies, salary, wages,
travel, or charity expenses.

j) Fixed Assets:

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These represent property, plant, or equipment assets acquired to be used in a business rather than
for resale. They are called fixed assets because they are used for long periods. Select this account
type if you are setting up any of the following fixed assets:

 Land: property, storage space, or parking lots.

 Buildings: structures in which the business is carried out.
 Machinery: heavy equipment used to carry out business operations. For example, you
may want to set up any of the following: store equipment or fixtures, factory equipment
of fixtures, office equipment or fixtures (including computers and furniture), and delivery
equipment (including autos, trucks, and vans used primarily in making deliveries to
customers).

k) Income:

Income (also known as revenue) represents the inflow of assets from selling products and
services to customers. If income exceeds expenses, net income will result. The business is said to
be operating at a net loss if expenses exceed income. Select this account type if you are setting
up sales revenue accounts. It is common practice to create different income accounts for each
category of revenue that you want to track (for example, retail income, service income, interest
income, and so on).

l) Inventory:

It represents the quantity (value) of goods on hand and available for sale at any time. Inventory is
considered to be an asset that is purchased, manufactured (or assembled), and sold to customers
for revenue. Select this account type if you are setting up assets intended for resale. It is common
practice to create different accounts for each category of inventory you want to track (for
example, retail, raw materials, work in progress, finished goods, and so on).

m) Long Term Liabilities:

It represents those debts that are not due for a relatively long period, usually more than one year.
Portions of unpaid long-term loans and notes payable with a maturity date of at least one year or
more beyond the current balance sheet date are considered long-term liabilities. Select this
account type if you set up long-term liabilities (for example, long-term loans and noncurrent
notes payable).

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n) Other Assets:

It represents those assets considered nonworking capital and are not due for a relatively long
period, usually more than one year. Notes receivable with maturity dates at least one year or
more beyond the current balance sheet date are considered "noncurrent" assets. Select this
account type if you are setting up assets such as deposits, organization costs, amortization
expenses, noncurrent notes receivable, etc.

o) Other Current Assets:

It represents those assets considered nonworking capital and are due within a short period,
usually less than a year. Prepaid expenses, employee advances, and notes receivable with
maturity dates of less than one year of the current balance sheet date are considered to be
"current" assets. Select this account type if you set up assets such as prepaid expenses, employee
advances, current notes receivable, etc.

p) Other Current Liabilities:

It represents those debts that are due within a short period, usually less than a year. The payment
of these debts usually requires the use of current assets. Select this account type if you are setting
up accrued expenses from a vendor, extended lines of credit, short-term loans, sales tax payables,
payroll tax payables, client escrow accounts, suspense (clearing) accounts, and so on.

3.2.3 Set up the Chart of Accounts for the First Time

If you are currently using a manual system for your accounting, there are several things you need
to know when you set up a chart of accounts:

 Determine a conversion date, and gather balances as of that date. You use this information
for your beginning balances.

 If you are setting up a new chart of accounts (instead of copying from one of Sage 50's
sample businesses), you must have all your account numbers and names written down.

 Have all of your transactions after the conversion date ready to enter to bring your accounts
up to date.

Opening Chart of Accounts (LO 5)

The chart of Accounts window can be opened using one of the following ways. Figure 3.3 shows
the Chart of Accounts window.

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Steps:
Select Maintain from the Menu - Select Chart of Account.

Or

Select List from the Menu - Select Chart of Account – Click New

Figure 3.3: Maintain Chart of Accounts Window

The Maintain Chart of Accounts window is used to enter new accounts, edit existing accounts,
and enter account beginning balances. Fields of interest are described below:

• Account ID: Identifies the account in the chart of accounts, lookup lists, transactions, and
reports. The ID can be up to 15 characters.

• Description: Enter an explanation for the account. This description prints on reports and
financial statements.

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 • Inactive: Select this check box to make the ID inactive. Inactive records are deleted
when the purge utility is run if they have not been used in any transactions in an open
fiscal year. Inactive records can be used in transactions, but a message appears,
reminding you of the inactive status.

• Account Type: Select a type from the drop-down List (Refer to the 3.2.2 section of the
Chapter). Accounts are grouped by account type on financial statements.

a) Create Ledger Accounts

When you create new ledger accounts, the following steps can be used.

Steps:

Open Maintain Chart of Accounts Window - Enter the Account ID - Enter the Description -
Select the Account Type - Click Save.

Class Activity 3.1 (ILO 1,2,3,4 & 5)

Create the following ledger accounts for AFMA 2022 (Pvt) Ltd.
Account ID Description Account Type
1000-CL Lands
1010-CL Buildings
1015-CL Provision for depreciation - buildings
1020-CL Motor vehicles
1025-CL Accumulated depreciation – motor vehicles
1026-CL Patent Right
1050-CL Inventory
1100-CL Trade Receivables
1150-CL Other Receivables
1160-TR Other Receivables
1200-CL Cash in Hand
1250-CL BOC
1260-CL HNB
1270-TR HNB
2000-CL Trade Payables
2050-CL Other Payables
2100-TR Other Payables
2200-CL Bank Loan - HNB
3000-CL Stated Capital
3100-CL Retained Earnings
3200-CL General Reserve

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 4000-CL Sales
4050-TR Training Income
4100-CL Interest Income
4150-CL Other Income
5000-CL Cost of Sales
6000-CL Salaries
6010-TR Salaries
6020-CL Electricity
6030-CL Water
6040-CL Training Materials
6050-CL Telephone & Internet
6060-CL Depreciation - Buildings
6070-CL Internet Expenses
7000-CL Distribution Costs
7010-CL Advertising
7020-TR Advertising
7030-CL Depreciation – Motor vehicles
8000-CL Interest Expenses
8010-CL Other Expenses
8020-TR Other Expenses
8030-CL Damage Inventory

b) Modifying Ledger Accounts: (LO 5)

In the Maintain Chart of Accounts window, you can edit existing accounts or delete accounts
that have no activity. You can also enter beginning balances for the accounts. However, the
beginning balances section will be covered in Chapter 4.

i. Changing Account Descriptions

Use one of the following ways to change the descriptions of accounts:

Select List from the menu bar – Select Chart of Accounts – Select the required account
– Click the Open button – Change the Description - Click the Save button.

Or

Select Maintain from the menu bar – Select Chart of Accounts - Enter or select account
code/ number in the Account ID lookup list - Change the Description - Click the Save
button.

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Class Activity 3.2 (ILO 5)
Change the description of the following ledger accounts of AFMA 2022 (Pvt)Ltd.

Account ID New Description

1015-CL Accumulated depreciation - buildings
7020-TR Business Promotion
8020-TR Other Expenses - Training

ii. Changing Account ID

Use one of the following ways to change the descriptions of accounts:

Select List from the menu bar – Select Chart of Accounts – Select the required account
– Click Open button –Change ID tool button – Enter the New ID Number –Click OK.
Or

Select Maintain from the menu bar – Select Chart of Accounts - Enter or select account
code/ number in the Account ID lookup list - Click the Change ID tool button – Enter
the New ID Number –Click OK.

Class Activity 3.3 (ILO 5)

Change Account IDs of the following ledger accounts of the AFMA 2022 (Pvt)Ltd.

Account ID New Account ID

1026-CL 1030-CL
6040-CL 6040-TR

iii. Deleting Accounts

Some accounts are not needed so they can be deleted. Use one of the following ways to
change the descriptions of accounts:

Select List from the menu bar – Select Chart of Accounts – Select the required account
– Click Open button – Click Delete tool button –Click YES.
Or

Select Maintain from the menu bar – Select Chart of Accounts - Enter or select account
code/ number in the Account ID lookup list - Click Delete tool button –Click YES.

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Class Activity 3.4 (ILO 5)
Delete the following ledger accounts of AFMA 2022 (Pvt)Ltd.

Account ID Description
6070-CL Internet Expenses
8030-CL Damage Inventory

How to see the Changes on the Chart of Accounts?

3.3 Use one of the following ways to see the Chart of Accounts.
Select List from the menu bar – Select Chart of Accounts

Or

Click the Reports icon in the toolbar of the Maintain Chart of Accounts window and-
from the drop-down list, select Chart of Accounts. This will open the report on your
screen.

3.3.1 General Ledger Defaults: (LO 6)

Here we need to set the defaults related to rounding any odd amounts on financial statements. Set
up the Rounding Account. The following steps can be used.

Steps:
Select the Maintain menu, Default Information, and General Ledger from the submenu.

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General ledger default information consists of two tabs: Rounding Account Tab and the Account
Segments Tab.

a) Rounding Account Tab:

The Rounding Account is an account in your General Ledger used by Sage 50 to store rounding
differences on Financial Statements. This account can be either a balance sheet or an income
statement. Typically, the Retained Earnings account is used as the rounding account. Figure 3.4
shows the Rounding Account tab.

Figure 3.4: Rounding Account Tab

Class Activity 3.5 (ILO 6)

Set 3100-CL: Retained Earning as a rounding account for AFMA 2022 (Pvt)Ltd.

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b) Account Segments Tab:

On the Account Segments tab, you can create or change segments for your chart of accounts ID.
It will allow you to take full advantage of the masking and filtering features of Sage 50 when you
print reports and financial statements.

You can use this feature to print reports filtered by department, division, account ID, or any other
segment you create. When you initially create your company in New Company Setup, Sage 50
allows you to divide your Account ID into segments, but you can also do it here.

If your chart of accounts is already set up and you change the segment structure, Sage 50 will
scan your chart of accounts and inform you if any accounts do not fit the new segment structure.
You can then print your Chart of Accounts report to identify those accounts. You can segment
your chart of accounts ID by creating descriptions, lengths, and separators for up to five
segments. Figure 3.5 shows the Account Segment tab.

Figure 3.5: Account Segment Tab

Backup your Company

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