In Part 5 we learned that
- every GLA has a category – possible values are income, expenditure, asset and liability.
- every category has a type (flow or balance) that determines which financial statement the values represented by any given GLA roll up into.
Below we learn about Retained Income and how we use use this ‘special’ GLA to assist in the creation of the Balance Sheet.
#30 – Gla Categories drive Financial Statements
Lets revisit our five events from #21 – assume these are the only events encountered by our organisation :
|EVENT‑1||Sale for cash||Revenue → 200 → Bank||Revenue (200)|
|EVENT‑2||Sale on credit||Revenue → 64 → Customer||Revenue (64)|
|EVENT‑3||Customer pays off debt||Customer → 64 → Bank||Customer (64)|
|EVENT‑4||Pay electricity bill||Bank → 13 → Electricity||Bank (13)|
|EVENT‑5||Record rent owed to landlord||Landlord → 900 → Rent||Landlord (900)|
Here is the ledger representation which is the tabularazation of the journals raised under #21 :
|Event-1||22-DEC-2018||Revenue||( 200 )||USD|
|Event-2||22-DEC-2018||Revenue||( 64 )||USD|
|Event-3||28-DEC-2018||Customer||( 60 )||USD|
|Event-4||22-DEC-2018||Bank||( 13 )||USD|
|Event-5||22-DEC-2018||Landlord||( 900 )||USD|
|Net : 0|
From previous tutorials, the financial report and type for each GLA is easily resolved via the GLA category – think of this as our chart of accounts:
|GLA||GLA Category||GLA Type||Report|
Let’s mimimic the behaviour of all accounting packages – by first applying a GLA aggregation and then sorting by type:
|GLA||GLA Category||GLA Type||Amount||Symbol|
|Revenue||Income||Flow||( 264 )||USD|
|Landlord||Liability||Balance||( 38 )||USD|
|Net : 0|
From here, it is a short step to preparing the income statement and balance sheet :
Income Statement (covering all trading until today)
Balance Sheet (as of today)
#31 – Retained Income is a ‘fake’ GLA
Our balance sheet ‘balanced’ because Assets minus Liabilities  equates to Retained Income  .
But where in our chart of accounts do we find the actual GLA representing Retained Income? Good question.
We skipped its inclusion from our chart of accounts because it never participates directly in day-to-day business activities. You can confirm this by reviewing the complete set of business events , 1 through 5 under #30 above.
So here’s what happened:
- The Income Statement is self-evident – our report for the period ending “today”, subtracts expenditure from income resulting in the net income reporting line item.
- If you squint, you could turn that net income flow into a balance as of “today” and that’s exactly what we do – we take the net flow, pretend it is a balance accumulating in the previously undefined Retained Income GLA. Now our Balance Sheet balances.
Going forward, you should view Retained Income as a ‘pro-forma’ general ledger account that generally never participates in day-to-day journals. (with notable exceptions such as take on balances)
In this tutorial we learned that Retained Income is a ‘special’ general ledger account. Its use is generally confined to straddling the land of flow and balance thereby enabling the balancing of the Balance Sheet.
In the previous parts, we focused our attention on the categorisation of movements largely assuming all such movement took place in a single year. In the next part we will cover the implications of accounting movement across more than one period.