How an Invoice is transformed into GL Account Entries

We will use an example to explain how TeemWork transforms an invoice into its corresponding GL Account Entries. 

In this example, an invoice is issued when a product, a kitchen stove, is sold to a restaurant.  Several weeks later the sales office receives a payment.

Two business transactions are involved.

The first business transaction records that something was sold. The second transaction records that a payment was received.

Each of these two business transactions are transformed separately into their corresponding GL Account Entries. 

How an ISSUED Invoice is transformed into GL Account Entries

This business transaction is used to record that something was sold. Every transaction always involves two GL account entries.  

In our example, the first entry is used to record that revenues have increased. The second entry records that the amounts that are to be received have increased.

In our example, the revenue account that is increased is 'Goods Sold'. The Accounts Receivable GL account is used to to record that the receivables have increased.  

The revenue increase is entered in the Debit column and the amount to be received is entered in Credit column. TeemWork does this automatically when an invoice is issued.

Click here to learn how TeemWork determines when an amount is to be posted as a debit or a credit.

Every GL account can be represented as a 'T' account.  Below are the two GL accounts involved in the first transaction.

The GL account, 'Goods sold' is credited 6500 dollars and the GL account, 'Accounts Receivable' is debited 6500 dollars.  

The debit and credit for this transaction are equal, as they must be.

In TeemWork, entering an invoice does not involve any GL entries.  In other words, an  invoice that is 'ToBeIssued' has no accounting impact. Accounting kicks in when an invoice is issued. 

When an invoice is issued, its status changes from 'ToBeIssued' to 'UnPaid'. TeemWork then automatically generates two GL account entries to record that revenues and 'accounts receivables' have increased.

How a PAYMENT is transformed into GL Account Entries

The second business transaction occurs when the invoice is paid.  The status of the invoice then changes from 'UnPaid' to 'Paid'.

This business transaction records that a Bank Account has increased and that 'accounts receivables' have decreased. 

Two GL account entries are involved. Both of this entries involve Asset type GL accounts. Assets increases are Debits and decreases are Credits.  Click here to learn how this determination is made.

1st GL account entry	2nd GL account entry

Again , the debit and credit amounts are equal as they must be.

Summary

When the $6500 invoice was issued, our Revenues were increased by $6500 and our Accounts Receivables were also increased by $6500.  

This transaction was entered as follows:

When the payment was received, one of our bank accounts was increased by $6500 and our Accounts Receivable was decreased by $6500. 

Once the payment is received, the two entries for GL Account '1200 Account Receivable' cancel each other. The remaining relevant GL Account entries are:

How does TeemWork know which 'Accounts Receivable' GL account to use?

In TeemWork, each GL Account of Type 'Revenue' is associated with another GL Account that has a Code of 'AR'.  

When an invoice is issued, a GL Account is used to record that revenues have increased. At the same time, another GL account is used to record that the amounts that are to be eventually received have increased. 

When revenue is posted to a GL Account, TeemWork automatically posts the amount that is to be eventually received to an 'accounts receivable' account. 

The 'accounts receivable' account that is used to record the monies that are to be received is the GL Account that is in the 'AR Account' column of the selected GL revenue Account. The 'Manage GL Accounts' window is used to specify which account is to be used.

Multiple Revenue entries in one Invoice

It is possible to issue one invoice that involve several Revenue GL accounts.  

As an example, suppose that you work for a firm that sells network equipment and programming services. You issue a single invoice for both networking equipment and programming services.

Issuing this invoice and receiving payment involves four business transactions.

When the invoice is issued: 

• GL accounts 'Goods Sold' and 'Accounts Receivables' increase, and

• GL accounts 'Services Sold' and 'Accounts Receivables' also increase.

When the payment is received for the networking equipment:

• A Bank Account is increased and an 'Accounts Receivables' account is decreased by the same amount.

When the payment is received for the programming services:

• A Bank Account is increased and an 'Accounts Receivables' account is decreased by the same amount.

Below are the 'T' accounts illustrating the 4 entries.  The 3rd and 4th accounts entries involve the 'Accounts Receivable.'

1st GL account entry	2nd GL account entry	3rd and 4th GL account entries

All three GL accounts were increased.  

The Revenue increases were entered in the Credit column and the amounts to be received were entered in the Debit column.

Click here to learn how TeemWork determines when an amount is to be posted as a debit or a credit.

When the payment is received, two business transactions are involved and four GL account entries are used to record them.

Below are the 'T' accounts illustrating the 4 entries. 

1st and 2nd GL account entries	3d and 4th GL account entries

Invoices can be issued for the sale of Assets  

Invoices can also be used to sell Assets. Assets could be cars, equipment, buildings or furniture.  

In this next example, a company issues an invoice after selling its 3 older model photocopiers. 

Two GL account Entries are used to record this business transaction.

The first GL account entry involves the 'Office Equipment' GL account. It is an account of type 'Asset' and it is decreased.  Decreased Assets are entered in the Credit column.  

The second entry involves an Accounts Receivable GL account.  It is increased.  The entry is recorded as a Debit.  

Below are the 'T' accounts illustrating the 2 entries.

1st GL account entry	2nd GL account entry

When payment is received, a second business transaction is triggered.

This business transaction decreases the Accounts Receivable and increases a Bank account.

Below are the 'T' accounts illustrating the 2 entries that record the payment.

1st GL account entry	2nd GL account entry

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