In previous articles we configured accounting functionality in OFBiz and entered double-entry accounting transactions for Kristine’s Biz, our fictitious sole trader company modelled on Chapter 3: Section 4: Example 1 of Open Tuition’s FA Lecture Notes.
In this article we will produce reports on the first month of trading. These reports are:
- Statement of Profit or Loss (SoPL)
- Statement of Financial Position (SoFP)
The OFBiz Statement of Profit or Loss / Income Statement
In Chapter 3: Section 7 – Closing off the accounts of Open Tuition’s FA Lecture Notes (video lecture) they show a manual process of moving balances from Income and Expenditure accounts – such as sales, rent, purchases accounts – at the end of a time period to a new T-account named Statement of Profit or Loss.
This manual process has the effect of:
- Zeroing the balances of the Income and Expenditure T-accounts at the end of the time period, so that they may be reused from the start of the next time period.
- Collecting data together for calculating whether a profit or loss was made during the time period.
Section 8 – Preparation of the Financial Statements of Open Tuition’s FA Lecture Notes then shows how the Statement of Profit or Loss (SoPL) report is produced based on the Statement of Profit or Loss T-account, and then how the Profit is reported in the Capital section of the Statement of Financial Position.
What should be apparent is that production of the financial statements depended on following the closure process for the month.
With OFBiz we can produce financial reports without closing the month, although these should really be termed interim reports.
The OFBiz Statement of Profit or Loss / Income Statement
In OFBiz, information for the Statement of Profit or Loss (SoPL) for any period of time can generated by viewing the Income Statement report.
To view the Income Statement, visit the Organization GL Settings screen and click the Accounting button for Kristine’s Biz.
Next click the Reports button and select the Income Statement report. Enter the From Date as midnight 1st January 2023 and the Through Date as midnight 1st February 2023, then click the Submit button.
To run this report, OFBiz identifies all GL Accounts in the Kristine’s Biz Chart of Accounts that are part of the Expense or Income class hierarchies. For those GL Accounts it then finds any transaction entries which have a transaction date falling in January 2023.
For each of the GL Accounts, a balance of transaction entries is calculated and displayed in the relevant part of the report.
From the above Income Statement we can see that $400 of profit was made in January 2023.
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The OFBiz Statement of Financial Position / Balance Sheet
The information needed for the Statement of Financial Position (SoFP) is found in the OFBiz Balance Sheet report.
To view the Balance Sheet, visit the Organization GL Settings screen and click the Accounting button for Kristine’s Biz. Next click the Reports button and select the Balance Sheet report. Enter the Through Date as midnight 1st February 2023 and then click the Submit button.
The balance sheet gives a breakdown of the various GL account balances for asset, liability and equity accounts.
Note that there is a problem with the above balance sheet.
Total Assets: $5500
Total Liabilities: $200
Total Equities: $4900
Total Liabilities and Equities: $5100
The accounting equation is that:
Total Assets = Total Liabilities + Total Equities
But our balance sheet shows a difference of $400 between total assets and the sum of total liabilities and total equities. How can we explain this discrepancy?
From the Income Statement earlier we saw that Kristine’s Biz earned a profit of $400 in January 2023 and this profit should be represented in the balance sheet in an equity (capital) account. To allow this to happen we need to configure the Kristine’s Biz Chart of Accounts with an account with TYPE Retained Earning.
Here we are using the term, TYPE, rather than CLASS to described the Retained Earnings account.
OFBiz uses account CLASSES (e.g. Asset, Liability, Expense, etc) to describe how a GL account will be handled with respect to reporting.
GL Account TYPES are used in OFBiz to identify the accounts that should be used in various automations, such as tax calculations, booking inventory into a facility, discounting invoices, etc.
When calculating the profit for a time period, OFBiz identifies the GL Account to assign the profit to using the type, Retained Earnings.
Creating the Retained Earnings Global GL Account
For our example, we shall create a new account, named Retained Earnings, with class, Equity. We shall leave the global GL Account Type for this account unassigned, instead assigning the type specifically within the Kristine’s Biz Chart of Accounts.
On the accounting application navigation bar, click the Global GL Settings and then click the Navigate Accounts button.
Enter details for the new Retained Earnings account.
|Gl Account Type ID
|Gl Account Class ID
|Gl Resource Type ID
|Gl Xbrl Class ID
Click the Add button to add the new GL Account to the global chart of accounts.
Assign the Retained Earnings account to Kristine's Biz
To assign the new global GL Account to the Kristine’s Biz Chart of Accounts, navigate to the Organisation GL Settings screen and click the Setup button.
On the accounting setup screen, click the Chart of Accounts button.
Select the Retained Earnings account, set the From Date to midnight on 1st January 2023 and then click the Create Assignment button.
Set the Retained Earnings account type default
We now need to which account in the Kristine’s Biz Chart of Accounts to be used for holding the retained earnings (i.e. profit) earned by the organisation.
To do this, navigate to Kristine’s Biz accounting setup screen by selecting Organization GL Settings and clicking the Setup button.
On the GL Account Type Defaults screen, select the Retained Earnings GL Account Type, choose the Retained Earnings GL Account ID, and then click the Save button.
OFBiz is now configured to apply any retained earnings (profits) to the Retained Earnings GL Account.
Re-running the OFBiz Statement of Financial Position / Balance Sheet
Navigate back to the accounting screens for Kristine’s Biz and select the Balance Sheet report.
Run the report with Through Date set to midnight on the 1st February 2023.
With the new Retained Earnings GL Account configured for Kristine’s Biz, the profit earned is now correctly included in the Balance Sheet / Statement of Financial Position.
The retained earnings entry has been synthetically generated for the report. Until the time period is closed, there won’t be any GL Account entries related to the earnings recorded in OFBiz.
In the next article we will close the January 2023 time period and see how OFBiz produces real entries in the retained earnings account as a result.