Accountants Guide to Pakk

Welcome to this introductory guide to accounting, bookkeeping and financial control in Pakk.

Perhaps you’re an accountant whose client has started using Pakk, or perhaps you’re the person responsible for accounting and bookkeeping within your company and need a primer or refresher on the basics of accounting in Pakk. Either way, this guide is for you.

TLDR;

Pakk has built-in, double-entry bookkeeping designed to be used as the merchant’s primary accounting system in place of platforms like Quickbooks, Xero or Sage. The Pakk accounting system works in a similar way to accounting systems you might be used to, with a few possible differences:

• A system of ‘parallel journal entries’ is used to distill transaction lines to accounting impacts. Transactions don’t impact the accounts themselves, they generate journal entries that do.

• Debits and credits are simplified to positive and negative numbers.

• There is no account hierarchy, account organisation is flat.

• All accounts are multi-currency and record the exact amount in the source currency rather than translating to base currency. Conversion is dealt with at reporting time.

Background: What is Pakk?

If you’re not familiar with Pakk, you might be wondering why your client has started using it and how it differs to other eCommerce/ERP platforms out there, so in this section we’ll try to outline the salient differences, mainly from an accounting and financial viewpoint.

The first and most important point is that Pakk is an all-in-one system. It is designed from the ground up to take care of bookkeeping and accounting without integrations into other platforms like Xero or Quickbooks.

One of the motivating factors in the design and conception of Pakk was to overcome the hard barrier between eCommerce platform and accounting platform that plagues most eCommerce businesses. eCommerce means a constant flow of purchases, sales, credits, refunds and adjustments. Most eCommerce business rely on a connector or bridge to move data backwards and forwards between their operational platform (like Shopify) and their accounting platform (like Xero). The problem is that these connectors rarely capture the full complexity of all eCommerce transactions and product movements. Pakk means an end to questions like:

• Which system should have the up-to-date selling price of an item?

• Which system should have the discounts and sale prices set up?

• Which system should have the correct purchase price?

• Which system should record purchases and supplier invoices?

• Which system shows the correct amounts owed by customers?

• Which system shows the correct amounts owed to suppliers?

• Which system knows the correct value of stock on hand?

• Which system knows the current COGS value?

• Where do I enter payments from customers?

• Where do I enter payments to suppliers?

• Where should I write off damaged stock?

• Where do I enter returns, credits and refunds? Will stock levels update?

In Pakk these are non-problems because there is only a single source of truth which is 100% up-to-date all the time as you conduct your daily business. Furthermore, Pakk is completely strict about value movements. There is no way to just ‘enter’ stock on the system, for example. Each value movement must be represented with a transaction (like a Purchase Order or Stock Adjustment), meaning that all value movements are journaled and accounted for.

The Basics of Accounting in Pakk

Setup

First of all, accounting can be completely turned off. So make sure to ‘Enable Accounting’ on the ‘Accounting’ tab in ‘Account Settings’. There are a few other setup and high level choices to be made:

• Account Currency: this cannot be changed once you’ve started to use Pakk, so make sure it’s correct from day 1.

• Rounding Technique: rounding is complex and there are multiple ways to handle it. There are a couple of other guides which explain fully the differences between the techniques on offer. Be sure to read and understand those guides and choose the technique that best fits your business. This choice can be changed at any time, but there are some knock on effects, so it’s better to get it right from the start.

• Lock Journal: locks the journal to a particular date so that no entries can be made before that date, nor can any existing entries be updated

• Default Accounts: choose default accounts for many of the built in income, expense, asset and liability scenarios, like sales income or VAT on purchases.

• Exchange Rates to Update: get automatic exchange rate updates for currencies that you commonly work with.

Journal Entries

Accounting in Pakk is structured around Journal Entries, making it transparent and easy to understand. Only Journal Entries affect the accounts, nothing else.

Journal entries are created and maintained automatically and in parallel to system transactions. This means that when a transaction, like a Sales Order, is created, a parallel Journal Entry is also created to reflect the value movements of the transaction. Whenever that Sales Order is edited, the respective Journal Entry is updated automatically. You can view the Journal Entry for any transaction simply by clicking on the link to the Journal Entry from the transaction detail page. The following transaction types cause Journal Entries to be created/updated:

• Sales Orders

• Customer Credits

• Purchase Orders

• Supplier Credits

• Returns

• Expenses

• Stock Adjustments

• VAT Adjustments

Such system-generated Journal Entries are automatically maintained and cannot be manually edited. As you would expect though, you can create manual Journal Entries to impact the accounts for whatever reason, such as common accounting adjustments like recording depreciation, tax payments or ad-hoc corrections.

Journal Entries in Pakk work in a very similar way to Journal Entries in common accounting systems, with a few notable differences:

• Journal Entries have a date which will dictate the impacting date for each line, unless that line overrides the main date.

• There is no requirement for all the lines in a Journal Entry to be in the same currency.

• When all lines are in the same currency, the system will enforce the Journal Entry to be in balance before you can save it.

• If however, multiple currencies are present in the Journal Entry, it does not have to balance (in fact, the discrepancy represents the implicit rate of exchange) and it’s up to you to ensure you have the correct amounts for the different currencies.

• We simplify debits and credits by using signed numbers - positive for inflows to an account, negative for outflows from an account.

Chart of Accounts

Your chart of accounts is available under Accounting > Accounts.

You can create any new accounts that you need for internal organisation, rename existing accounts and potentially assign your accounts to default roles, like sales income or VAT on purchases (see Setup). Note that there is no account hierarchy nor account numbers in Pakk. You can simulate both by careful account naming, for example “Expenses:Warehouse:Electricity”.

A key difference between Pakk and some other accounting systems is that all accounts in Pakk are multi-currency - they allow journal entries in any currency and maintain separate currency balances. Another way to think about it is is to treat each account as multiple ‘virtual’ accounts, each with its own currency, for example “Sales Income [GBP]” and “Sales Income [EUR]”. This philosophy means that translation to account base currency is done at reporting time, rather than when amounts are written to the journal.

For example, if your account currency is GBP and you make sales in both EUR and GBP, the Accounts Receivable will record and tally amounts in both currencies separately, rather than using the exchange rate on the day of each transaction to write only amounts in the base currency. Once of the advantages of this technique is that it negates the need for periodic ‘Exchange Rate Loss/Gain’ adjustments on Asset/Liability/Equity accounts.

Most accounting reports in Pakk allow you to see amounts either in original currencies, or translated to base currency for official reporting.

Exchange Rates

Exchange rates are used by the system to translate amounts to base currency for reporting purposes. Exchange rates are entered and maintained within Pakk under Accounting > Exchange Rates. They can be entered as frequently as you want (e.g. daily, weekly, monthly) and simply require a date and a rate. One thing to note is that the rate is entered as BASE to FOREIGN, so if your base currency is GBP and the current exchange rate is 1.2 EURO per GBP, the rate is entered as 0.833.

If you’d like to forget about having to manually enter exchange rates, enter the currencies you use in Account Settings > Finance and the system will download daily rate updates.

Stock Valuation and COGS

One of the key benefits of an accounting system that lives right alongside the operational system is in stock valuation and particularly COGS. Here’s how this works in Pakk:

Stock valuation is at purchase price and is taken from the Purchase Order in which the stock was acquired (except in the case of Stock Adjustments, where you are required to specify valued). As all stock control is lot-based in Pakk, you can maintain different average unit values for the same product by splitting up stock receipts into different batches - this gives you very granular accuracy. If you don’t need such accuracy, you can just use a single batch for receiving and selling stock, in which case the average value will fluctuate as you purchase stock at different prices and sell existing stock (i.e. average cost basis, rather than FIFO or LIFO). You can always view average unit values and total stock value at both product and lot level, direct from the product detail page.

When selling stock then, the system will impact COGS with the exact value of the items being sold derived from the average unit value of the item/batch. In this way, COGS is maintained accurately and in real-time as you trade.

Paperwork Archiving

Pakk allows you to upload PDF documents and attach them right into the transaction to which they pertain. For example, you can scan and upload supplier invoices and attach them to the representation of that invoice in the system.

Financial Reports

Standard financial reports like 'Profit and Loss' and 'Balance Sheet' are available in the 'Reports' section of Pakk. Describing how each is built is beyond the scope of this article, but it is worthy of note that Pakk takes the approach of automatically 'rolling up' account balances for Income and Revenue for the 'Trial Balance' report and likewise generates automatic entries for rolling up the current and previous financial year profits and losses in the 'Balance Sheet'. It is therefore unnecessary to manual zero out Income and Revenue accounts at the start of every financial year - nor do you need to make manual journal entries for Retained Profits.

UK VAT Reporting

A standard UK VAT report is included in the roster of financial reports. Again, a full description of how this report is created is beyond the scope of this article, but the following points are worth of note:

• The VAT report is collated from transaction records, not journal records*. This is so that the VAT report has full access to each line transaction with its corresponding VAT code, VAT percentage etc, to allow the required level of detail in creating the VAT report.

• Therefore, you should not make journal adjustments to VAT accounts (apart from quarterly roll ups to a 'VAT Return Liability' account) as they will not be reflected on the VAT Return

• For logging quarterly PVA (Postponed Import VAT) statements, you should use 'VAT Adjustments' which are available under the 'Accounting' menu in Pakk

• VAT codes that you create in Pakk can be marked with several options depending on their desired treatment in VAT Reports: reverse charge, Northern Ireland and/or 'Exclude from VAT Report' (for scenarios like purchasing from a non-VAT-registered merchant, which is technically different from both 'Exempt' and 'Zero-Rated'