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The Virtual Accountant
1. Introduction
 
The Virtual Accountant is an online Accounting System specifically designed for IT Contractors. It's a lightweight system which simply manages Sales Invoices, Purchases Invoices, Expenses and Salaries. The Virtual Accountant tracks VAT and PAYE/PRSI and facilitates the preparation of VAT3, VAT RTD, P30 and P35 Tax returns by the production of relevant reports, which provide the required information for these returns. The Virtual Accountant is easy to use and designed to facilitate the accurate representation of the current financial state of an IT contractor's business.
 
1.1. The Problem
 
Most IT contractors maintain an Excel spreadsheet to track their business's financial transactions. The problem with this way of tracking the day-to-day activity is that it is non-standard and difficult to maintain. It is error prone, since spreadsheet formulae are often copied and pasted without the formulae being properly updated. Rows are often inserted between existing rows resulting in more errors. At the end of the Financial Year this spreadsheet is then given to the IT contractor's accountant, along with a box full of receipts and invoices. It takes the accountant the best part of a day to put order on this mess, and that's before the Accountant even gets a chance to structure this information into Ledger Accounts and a Trial Balance. In short the Accountant has a lot of work to do before it is possible to prepare the books for the business in question. Accountants don't work for free (currently about €60 per hour), so the best way for an IT Contractor to get value for money is to simplify the interaction with their Accountant and ultimately reduce the amount of work the Accountant needs to do for them. The Virtual Accountant facilitates this by formalising the interface between the IT contractor and the Accountant.
 
1.2. The Solution
 
The Virtual Accountant allows the user to perform the everyday tasks which an IT contractor needs to do in order to run their business. These tasks include:
  • Preparation of Sales Invoices
  • Registration of Purchases Invoices
  • Tracking of Expenses
  • Tracking of Bank Account/Credit Card transactions
  • Registration of Salaries
  • Reporting
 
The Virtual Accountant uses the information entered via the high level activities above to maintain a set of underlying Ledger Accounts and a Trial Balance. The interaction with the system is Task Oriented in that the IT contractor simply performs high level Tasks or Actions, such as the preparation of a Sales Invoice and the Virtual Accountant automatically posts the relevant transactions to the underlying Accounts, hence relieving the IT contractor of the headache of formalised bookkeeping.
 
In order to start using the system the initial balances on the underlying Ledger Accounts need to be set. This may seem like a daunting task, particularly if you have no idea about Accounting, but your Accountant should be able to provide you with these figures (See Getting Started below for more details). Once the initial balances have been entered into the system, and the initial Trial Balance balances, the Virtual Accountant is ready for use.
 
At the end of the Financial Year, the IT contractor needs to do an End-Of-Year Procedure which automatically closes off the current Financial Year, and resets the Ledger Accounts and Trial Balance for the new Financial Year. Once the End-Of-Year procedure has been performed, the IT Contractor's Accountant is notified by email. The Accountant subsequently logs in via the Accountant Interface to the System, and accesses the IT Contractor's Accounts for the Financial Year just completed. The Accountant can then prepare the formalised set of books for the Companies Registration Offices (CRO) with minimal interaction with the IT Contractor.
 
During the process of preparing a formalised set of books, the Accountant normally has to make some adjustments to the submitted Accounts due to posting errors made by the IT contractor during the year. The Virtual Accountant supports this seamlessly by applying Adjusting Journal Entries to the underlying accounts. Adjusting Journal Entries allow the accountant to make modifications to the underlying accounts by applying overall balancing transactions to the Trial Balance. In short the Adjusting Journal Entry mechanism provides a seemless transition between financial years, so that the IT Contractor can proceed blissfully unaware of any the posting errors.
 
Don't be put off with all the Accounting terminology. In short, the Virtual Accountant simply needs to be initialized before it can be used. Once you start using it, don't be afraid of making errors, as any errors made during the financial year can be rectified afterwards by the Accountant.
 
2. Getting Started
 
As you may have noticed there are 10 tabs in the Virtual Accountant section's sub-navigation. Initially only two of these are enabled i.e. Company Details and Ledger Accounts. The first thing you need to do is inform the System about your Company Details. This information is used for invoicing and informing the System of important dates such as your End-Of-Year (EOY) date and your Annual Return Date (ARD).
 
Once the Company Details have been entered you will need to bootstrap the Ledger Accounts with their initial balances. If the business existed prior to the current financial year then some of the Ledger Accounts will most likely have a balance brought forward and hence the Ledger Accounts will need to be initialised.
 
As soon as the Ledger Accounts have been initialised, the initial balances need to be locked. This is to prevent the user from inadvertently changing them throughout the year. Once the initial balances have been locked the remaining tabs in the Virtual Accountant become active.
 
2.1. Company Details
 
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This screen allows the user to configure the Virtual Accountant with important information about the business. Most of this information is simply used for Invoicing, but some details are used to tailor the behaviour of the system. Most of fields are self explanatory, but some of the fields require some explanation. You should fill in as much information as possible to get the most from the Virtual Accountant.
 
Invoice Prefix: This field can be used to specify a textual pattern to apply before your Sales Invoice Numbers e.g. if the Invoice Prefix is "HH-INV-", invoice number "1" will be displayed as "HH-INV-00001"
 
Next Invoice Number: This field is used to set the next invoice sequence number. This value is incremented automatically after each Sales Invoice has been prepared. This value can be changed at any time e.g. if an invoice has been prepared and subsequently deleted for some reason, you may want to step the invoice number back.
 
VAT Model: This drop down informs the Virtual Accountant of when VAT should become due. There are two possible values, namely Immediate and Deferred. The Immediate model (or Accrual Basis) tells the Virtual Accountant that VAT is due immediately when invoices are prepared. The Deferred model (or Cash Basis) tells the system that VAT is payable only when the invoices have been settled. You should ask your accountant which model applies to you.
 
Accountant Name: The accountant you want to use. If you want to use the Hook Head Accountant simply select Hook Head Accountant. If your accountant is not listed or you do not want to involve your accountant directly simply select none.
 
Start Next Year?: If you have signed up for the Virtual Accountant before the financial year you intend to start using the system then ensure that this check box is checked. If you have signed up for the Virtual Accountant and intend adding all your transactions retrospectively for the current financial year then ensure that this checkbox is unchecked e.g. if you signed up for the Virtual Accountant in November 2005 and intend using the Virtual Accountant starting in January 2006, then ensure that this checkbox is checked. If you signed up for the Virtual Accountant in February 2006 and intend retrospectively adding all transactions for 2006 then ensure that the checkbox is unchecked.
 
2.2. Ledger Accounts
 
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Ledger Accounts are used to track the details of the individual transactions that are produced using the Virtual Accountant. Ledger Accounts can be categorised into 2 types of Account, namely Balance Sheet Accounts and Profit and Loss Accounts.
 
2.2.2 Balance Sheet Accounts
 
Balance Sheet accounts are long-lived Ledger Accounts, the balances of which are carried from one Financial Year to the next. There are 3 types of Balance Sheet Accounts, namely Assets, Liabilities, and Owners Equity.
 
2.2.3 Profit and Loss Accounts
 
Profit and Loss accounts are short-lived Ledger Accounts. The are used to track Income and Expenditure throughout the Financial Year. Their balances are totalled (or compressed) at the end of the Financial Year into one balance, and this balance is then applied to the Balance Sheet Profit and Loss Account to be brought forward into the next Financial Year. The initial balances on the Profit and Loss accounts are then cleared for the new Financial Year. This process is known as the End-Of-Year Procedure. We will discuss this later in the Actions sections.
 
2.2.1. Debit and Credit: The Great Misconception
 
Most people associate a debit balance with a negative balance or a balance which is not in their favour. This association stems from people looking at their Bank Statements which have a credit balance when the balance is in their favour and a debit balance when the balance is in the banks favour. This seems reasonable, until you consider whose Accounting System you are looking at. Your bank statement is a printout of your Account, which is part of your Bank's Accounting System, so when you see a credit balance on your Bank statement, this should be read as "Monies owed to me by the bank" i.e. a credit balance on your bank statement is actually a liability or a negative balance for the bank. This implies, within an Accounting System, that a credit balance on an account is actually a negative balance or a liability. This also means that within your Accounting System, when you have a credit balance on your Bank account, that this is actually money owed to the bank. Conversely, a debit balance is money owed to you. In short, if this is a revelation for you, you need to turn your current understanding of credit and debit completely on its head.
 
Accountant's often say Debit the receiver, Credit the giver, which effectively means that if you move funds from account A to account B, you should credit account A and debit account B with the amount being transferred.
 
It is critical that this concept is clear in order to set the initial balances on the Ledger Accounts. If you are still not clear on this you should re-read this section again.
 
2.2.4. Setting the Initial Balances
 
To bootstrap the Virtual Accountant, the initial balances on the Balance Sheet accounts need to be set. Remember that Balance Sheet accounts are long-lived and for the most part will have an initial balance. Profit and Loss accounts are short-lived and will all have a zero balance at the start of the Financial Year and as a result, these balances do not need to be set. If you do not know all the initial balances on your Balance Sheet Accounts (which is most likely the case) you will need to do a little bit of homework to figure them out. For the most part, this should be pretty straight forward, but some may take a little bit of effort. Again if you make some mistakes, this shouldn't put you off, since your accountant will be able amend the initial balances at any point during the year.
 
The following describes how to set the initial balances on your Balance Sheet accounts.
 
Note: All balances refer to amounts owed or owing on the relevant account on the first day of the financial year. When setting initial balances, please ensure that you use the balances as they were on the first day of the financial year. If setting accounts retrospectively, do not use your knowledge of transactions which occured in the Financial Year to affect the initial balances e.g. if one of your Sales Invoices got paid in the first few days of the Financial Year, you still should enter it as outstanding on the first day of the Financial Year.
 
2.2.4.1. Check your Bank balance
 
Let's say your statement says €1580.00 CR. This means you have €1580.00 in the bank. Your bank balance will then be €1580.00 DR (debit, since this is your accounting system)
 
2.2.4.2. Check your Credit Card balance (if any)
 
Let's say your statement says €500.00 DR. This means that you owe €500.00 euro on your Credit Card. The balance on your Credit Card Account will then be €500.00 CR.
 
2.2.4.3. Director's Expenses
 
If your business owes you any money for out of pocket expenses, then add these up and set the balance on your Director's Account to the total as a credit balance. Let's say the business owes you €200.00. The balance on your Director's Account will be €200.00 CR.
 
2.2.4.4. Sales Control Account
 
Add any monies owed to the business (including VAT) from Customers which have not yet been received i.e. the total of all Sales Invoices outstanding on the first day of the financial year. Notice the Sales Control Account effectively tracks Sales Invoices which have been issued but not settled. Let's take an example whereby the business was owed €2420.00 inclusive of VAT from Customers.
 
2.2.4.5. Purchases Control Account
 
Add any monies owed by the business (including VAT) to Suppliers which have not been paid. Notice the Purchases Control Account effectively tracks Purchases Invoices which have been issued, but not settled. Let's take an example whereby the business owes €1210.00 inclusive of VAT to Suppliers.
 
2.2.4.6. Net Salaries Control Account
 
Add any monies which are owed in salaries, exclusive of PAYE and PRSI i.e. the net salary payments. In the example we'll use €1000.00
 
2.2.4.7. VAT / PAYE / PRSI
 
You'll need to figure out how much is owed on VAT, PAYE and PRSI. You should have this information to hand, as you should have done VAT3 and P30 returns at the end of the financial year. As an example lets say the business owes €210.00, €200.00 and €50.00 for VAT, PAYE and PRSI respectively. This will result in the amounts €210.00 CR, €200.00 CR, and €50.00 CR being posted to VAT Control Account, PAYE Control Account and PRSI Control Accounts respectively. Again view these control accounts as holding areas for monies owed, but not yet settled.
 
2.2.4.8. Accruals (if any)
 
If you have any accrued revenue for purchases / expenses for the previous financial year then you should set the balance here. If in doubt leave this balance at 0.00
 
2.2.4.9. Share Capital
 
The Share Capital Account represents the value of any shares issued by the company. For a small one-man-band company this is normally a small token amount e.g. €15.00 or so. Again if in doubt leave this balance at 0.00 for the moment.
 
If we tally up these figures we get the following, which represents the opening Trial Balance.
 
Trial Balance (first attempt)
Account DR CR
Bank 1580.00  
Credit Card   500.00
Diretor's Account   200.00
Sales Control Account 2420.00  
Purchases Control Account   1210.00
Net Salaries Control Account   1000.00
VAT Control Account   210.00
PAYE Control Account   200.00
PRSI Control Accoun   50.00
Accruals Account   0.00
Share Capital Account   0.00
Profit and Loss Account   ???.??
Total 4000.00 3370.00
 
Notice that we have an unknown balance for the Profit and Loss Account. We will set this balance to be the difference between our Credits and our Debits i.e. we will use this account as a balancing account in order to get our Trial Balance to balance. In this case we will set the Profit and Loss balance to be €630.00 CR. At this point, we don't care that the Profit and Loss Account balance is wrong. We want the "important" initial balances to be correct and are quite happy to let the accountant straighten out the discrepancy in the Profit and Loss account later.
 
Trial Balance (second attempt)
Account DR CR
Bank 1580.00  
Credit Card   500.00
Diretor's Account   200.00
Sales Control Account 2420.00  
Purchases Control Account   1210.00
Net Salaries Control Account   1000.00
VAT Control Account   210.00
PAYE Control Account   200.00
PRSI Control Accoun   50.00
Accruals Account   0.00
Share Capital Account   0.00
Profit and Loss Account   630.00
Total 4000.00 4000.00
 
2.2.4. Setting the Initial Balances
 
Once you are happy with the figures, try adding them to the relevant Ledger Accounts. Check the Trial Balance to track your progress. Once the Trial Balance balances you will be in a position to lock your initial balances by clicking the Lock Initial Balances button. The underlying accounts will be locked and the remaining tabs will become enabled.
 
Congratulations!. You have just completed the only difficult part of using the Virtual Accountant i.e. the bootstrapping phase. Your Trial Balance is now balanced, and from now on, any transactions which are applied can only affect your Ledger Accounts (and Trial Balance) in an overall balancing manner.
 
3. Tasks / Actions
 
Now that the Trial Balance balances, You are now ready to start using the Virtual Accountant. As mentioned previously the Virtual Accountant allows the user to manage both Sales and Purchases Invoices, Salaries, Expenses, Bank and Credit Cards, and Reporting - effectively all the things an IT Contractor needs to do to effectively manage their finances. The following sections describe each of these areas in detail.
 
3.1. Sales Invoices
 
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The Sales Invoices tab allows you to register new Customers and prepare Sales Invoices. You will need to add your existing Customers using the "Create New Customer" item in the drop-down list box. Add a much detail about your Customers as possible. This information will be used when populating your Sales Invoices.
 
To create a new Sales Invoice simple select the Customer in question from the "Create New Invoice" drop-down list box and you will be brought to a screen which prompt you for the relevant information required to prepare the Sales Invoice. Again, most of the fields are self explanatory but some of the fields may require a little explanation.
 
3.1.1. VAT Only Invoice / VAT Only Amount
 
If your company is new, you may not have your VAT number when you issued your first few Sales Invoices and as a result will not have charged VAT. In this case you will need to subsequently issue a VAT Only invoice to your Customers. Use these fields to tell the system to produce a VAT only invoice.
 
3.1.2. Account Code
 
Select the type of sale that this invoice refers to. For contractors this will most likely be Services Sales. If you have sell some software then set this to Product Sales. In short the Account Code is simply used to categorise the type of sale the invoice refers to. It also defines which Income Account the related transactions will be applied to.
 
Make sure you hit the "Update Details" if you have changed any of the default settings for the invoice before proceeding to Add Invoice Items to the invoice.
 
3.1.3. Invoice Items
 
Invoice items allow you to add billable entries to the invoice. Notice that the Net, VAT and Gross amounts are automatically calculated.
 
Once the invoice has been fully prepared you can view the invoice from the list of invoices on the main Sales Invoices page. Notice the red ball which indicates that the invoice is still outstanding.
 
If you select the invoice under the ID column, the selected invoice will be opened. It is possible either to send the invoice to your customer by cutting and pasting the invoice URL into an email, or click the Print View or Open in MS Word buttons if you prefer to print the invoice.
 
Notice also that your company logo appears on the invoice if you have added your logo using the Network Drive and have selected the logo under the Company Details page.
 
3.2. Purchases Invoices
 
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The Purchases Invoices tab allows you to register and track any Purchases Invoices. This is similar in principal to the Sales Invoices tab, except a lot simpler as only Purchases Invoices totals are tracked and not the individual items. Purchases Invoice do not need to be printed which simplifies the process considerably.
 
3.3. Expenses
 
Images:  [1] [2] [3] [4] [5] [6] [7] [8]
 
The Expenses tab allows the user to enter and track Director's Expenses. Director's expenses are expenses incurred on behalf of the company, but paid for out of the director's pocket. This means that the company owes the director for any such expenses and these also need to be tracked.
 
The Expenses tab is divided into two areas namely Expenses and Recurring Expenses. Expenses are once-off expenses which have been incurred by the business. Recurring expenses are expenses which occur on a regular basis and the Recurring Expenses area is simply a storage area for storing Recurring Expenses which can be easily imported as real Expenses when they occur. Recurring Expenses have a period associated with them e.g. monthly, bi-monthly etc. Notice that Recurring Expenses are pre-selected for import if the date matches the period of the Recurring Expense. Recurring Expenses do not affect the underlying books as they are not real until they are imported.
 
3.4. Salaries
 
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The Salaries tab allows the user to track Salary registrations and payments. Again this is similar to the Invoices tabs where entries can be added, amended or deleted. Adding Salary registrations does not mean that the salaries must be paid immediately, but rather they become due for payment, a little like receiving a Purhcases Invoice. See the Net Salaries, PAYE and PRSI Control Accounts in the Trial Balance to see the effect of adding Salary registration.
 
3.5. Bank / Credit Card
 
Images:  [1]
 
This is the heart of the Virtual Accountant in terms of tracking movement of funds in the system. Up until now we have simply used the Virtual Accountant to track Sales Invoices, Purchases Invoices, Expenses and Salary Registrations. No money has changed hands e.g. the Bank Account balance has not changed. The Bank / Credit Card tab allows the user to register receipts and payments, transfer funds between accounts and effectively drive the Virtual Accountant engine.
 
The Bank / Credit Card screen allows the user to Make Payments, Register Receipts and Transfer funds between accounts. Payments can either be Direct or against Purchase Invoices, both Registered and Unregistered. Registered Purchases Invoices are Purchases Invoices which were prepared within the Virtual Accoutant whereas Unregistered Purchases Invoices are invoices which were not prepared within the Virtual Accountant and as such are not explicitly known to the System. Outstanding Purchases Invoices are listed for the user's convenience. Payments can also be registered by clicking the red ball beside the Purhcases Invoice in the Purchases Invoices screen.
 
Receipts are similar to Payments in that Receipts can be Direct or against Sales Invoices, both Registered and Unregistered. Outstanding Sales Invoices are listed for the user's convenience.
 
Inter-Account transfers are also supported by using the Account Transfer feature. Account transfers, as the name implies simply allow the user to move funds between accounts.
 
3.6. Actions
 
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The actions screen allows the user to perform actions on the Virtual Accountant. Actions include:
  • Select Financial Year to view
  • View Trial Balance
  • Print the Accounts
  • Contact the real Accountant
  • Do P30 return
  • Do VAT3 return
  • Do P35 return
  • Do VAT RTD return
  • Transfer Accruals
  • Do End-Of-Year procedure
 
3.6.1. Select Financial Year
 
The Virtual Accountant stores all transactions for a user for up to 7 years. The user can set the Financial Year and view their accounts for any of the previous years.
 
3.6.2. View Trial Balance
 
The Trial Balance can be viewed at any time throughout the year to determine how the business is doing. It is possible to drill down into the Trial Balance to see details of the underlying transactions.
 
3.6.3. Print the Accounts
 
The books for the selected Financial Year can be printed or exported as an Excel spreadsheet if desired.
 
3.6.4. Contact the real Accountant
 
The E-mail address of the your accountant is here for your convenience.
 
3.6.4. Do a P30 return
 
This feature prepares a report to help with the P30 submission to the Revenue. P30 returns should be committed in order to lock down the underlying transactions.
 
3.6.5. Do a VAT3 return
 
This feature prepares a report to help with the VAT3 submission to the Revenue. VAT3 returns should be committed in order to lock down the underlying transactions.
 
3.6.6. Do a P35 return
 
This feature prepares a report to help with the P35 submission to the Revenue.
 
3.6.7. Do a VAT RTD return
 
This feature prepares a report to help with the VAT RTD submission to the Revenue.
 
3.6.8. Transfer Accruals
 
Accruals are used to move funds from one financial year to another e.g. if you know an expense is coming early in the next financial year, you might want to accrue some funds for it from this year's revenue. The Accruals account is used for this purpose. Once the expense comes in you would settle it as usual and then offset the accrued amount against the expense by an Accrual transfer.
 
This Accrual Transfer feature facilitates the transfer of accrued revenue. An Accrual transfer is simply a transfer of funds from the Accruals account to another account, but the amount being transferred is negative which essentially is a transfer of a positive amount in the oppositive direction. This is a little unintuitive, hence the dedicated button to activate the feature.
 
3.6.9. Do End-Of-Year procedure
 
The End-Of-Year procedure is a procedure which is executed at the end of the Financial year in order to close off the current Financial Year and start the next Financial Year. The procedure involves:
  • Making a copy of the existing Ledger Accounts for the new Financial Year
  • Archiving all the old Ledger Accounts
  • Totalling (or compressing) the balance of the Profit and Loss accounts into one figure which is then applied to the Balance Sheet Profit and Loss Account
  • Clearing the Profit and Loss accounts for the new Financial Year
 
3.7. Transactions
 
The transactions screen allows the user to view transactions chronologically as they were entered into the system. This screen is purely for informational purposes and provides no real additional functionality.
 
3.8. Adjusting Journal Entries
 
The Adjusting Journal Entries screen allows the accountant to correct posting errors made by the IT Contractor during the financial year. The accountant can move funds between individual Balance Sheet accounts in overall balancing transactions. A typical example might be if the Contractor purchased a laptop and filed it against the Computer Equipment account code, the accountant might decide to change the account code to Computer Supplies to effectively write off the purchase as an expense rather than a capital investment.
 
The Adjusting Journal Entries screen allows the User to View adjustments made by their accountant for the previous year. Normally the IT Contractor doesn't need to do anything in this screen unless they have chosen not to involve their accountant, in which case they will need to manually enter any adjustments made by their accountant after the End-Of-Year procedure has been performed.
 
4. Summary
 
As you can see the Virtual Accountant takes away a lot of the pain associated with keeping track of an IT Contractors business. There is still a small amount of work involved in keeping on top of things, but the amount of time that will be saved interacting with your Accountant wiil be drastically reduced. Not only that, but due to the Virtual Accountant being an online service, you can run your business from anywhere. The Virtual Accountant starts at €250.00 per year for the service and can be augmented by use of the Hook Head Accountant for as little as €1950.00 per year. To sign up for the Virtual Accountant please REGISTER HERE.