Bookkeeping Guide
What is Double-Entry Bookkeeping? All businesses, whether they use the cash-basis accounting method or the accrual accounting method, use double-entry bookkeeping to keep their books. Double-entry accounting is a practice that helps minimize errors and increases the chance that your books balance. This method gets its name because you enter all transactions twice. When it comes to double-entry bookkeeping, the key formula for the balance sheet (Assets = Liabilities + Equity) plays a major role. In order to adjust the balance of accounts in the bookkeeping world, you use a combination of debits and credits.
Bookkeeping Guide For Small Business
You may think of a debit as a subtraction because you’ve found that debits usually mean a decrease in your bank balance. And, you’ve probably found unexpected credits in your bank or credit card account that mean more money has been added in your favor. Now forget what you’ve learned about debits or credits. In bookkeeping, their meanings aren’t so simple. The only definite thing when it comes to debits and credits in the bookkeeping world is that a debit is on the left side of a transaction and a credit is on the right side of a transaction. Double-entry bookkeeping example: Purchasing an item with cash Here’s an example of the practice in action.
Suppose you purchase a new desk that costs $1,500 for your office. This transaction actually has two parts: You spend an asset — cash — to buy another asset — furniture. So, you must adjust two accounts in your company’s books: the Cash account and the Furniture account. Here’s what the transaction looks like in a bookkeeping entry: Double-Entry Bookkeeping: Purchasing an Item with Cash Account Debit Credit Furniture $1,500 Cash $1,500 In this transaction, you record the accounts impacted by the transaction. The debit increases the value of the Furniture account, and the credit decreases the value of the Cash account.
For this transaction, both accounts impacted are asset accounts, so, looking at how the balance sheet is affected, you can see that the only changes are to the asset side of the balance sheet equation: Assets = Liabilities + Equity Furniture increase = No change to this side of the equation Cash decrease. In this case, the books stay in balance because the exact dollar amount that increases the value of your Furniture account decreases the value of your Cash account. At the bottom of any journal entry, you should include a brief description that explains the purpose for the entry. Double-entry accounting example: Purchasing items on credit To show you how you record a transaction if it impacts both sides of the balance sheet equation, here’s an example that shows how to record the purchase of inventory. Suppose that you purchase $5,000 worth of widgets on credit.
Bookkeeping Guidelines
These new widgets add value to your Inventory Asset account and they also add to your Accounts Payable account. (Remember, the Accounts Payable account is a Liability account where you track bills that need to be paid at some point in the future.) Here’s how the double-entry bookkeeping transaction for your widget purchase looks: Double-Entry Accounting Example: Purchasing Items on Credit Account Debit Credit Inventory $5,000 Accounts Payable $5,000 Here’s how this transaction affects the balance sheet equation: Assets = Liabilities + Equity Inventory increases = Accounts Payable increases + No change In this case, the books stay in balance because both sides of the equation increase by $5,000. You can see from the two example transactions how double-entry accounting helps to keep your books in balance — as long as you make sure each entry into the books is balanced. Balancing your entries may look simple here, but sometimes bookkeeping entries can get very complex when more than two accounts are impacted by the transaction.
Bookkeeping is vital to properly managing your business resources. Additionally you will need these records for tax purposes. Whether you DIY or hire someone to keep track of everything you should understand the importance and the basics of bookkeeping. Keeping good records of operations will alert you to any cash flow issues and potential legal problems as well. Here are a few basics that should always be standard practice to keep in your books. Revenue and Expenses Every transaction should be recorded. How much is coming in and how much is going out and where is it is all coming from and going to.
Bookkeeping Guidebook By Steven Bragg
Cash It is important to record the cash your business spends so you'll have an accurate number of expenses each year. Writing reimbursable checks and keeping detailed petty cash records are both valid methods of documenting cash expenditures. Inventory Maintain records of all inventory!
This will help you to forecast for the upcoming year by tracking trends, prevent stealing and misplacing merchandise, keep inventory holdings to a minimum. Dates purchased, stock numbers, purchase prices, dates sold, and sale prices are all relevant information for inventory records. Accounts Receivable and Payable Always keep track of what customers owe you and what debts you owe others. It's prudent to record as much data as possible including invoice dates, numbers, amounts, terms, dates and amounts paid or due, balances, and client information in real time. Employees Hiring even one employee invokes your responsibility to file and pay forms and payroll taxes and each state has its own tax obligations. Employers are responsible for maintaining employee forms such as the W-4 (Withholding Allowance Certification) and the I-9 (Employment Eligibility Verification). You are responsible for maintaining records on withholding, employer matching, unemployment, and worker's compensation.
If you decide to do your own bookkeeping you should consult with an expert especially at the beginning to make sure that you are on track. As your business grows you may want to bring someone on and/or deploy more sophisticated bookkeeping software. How do you keep your books up to date and on track? Additional Resources. Bookkeeping Basics, Part 1:.
Bookkeeping Basics, Part 2:.