Examples of Bookkeeping

The following example outlines the most common types of bookkeeping – Single & Double Entries. Bookkeeping is the systematized recording of financial transactions of a company. It is a recording of day-to-day financial transactions of the business. Bookkeeping brings the books of accounts to the stage where trial balanceTrial BalanceTrial Balance is the report of accounting in which ending balances of a different general ledger are presented into the debit/credit column as per their balances where debit amounts are listed on the debit column, and credit amounts are listed on the credit column. The total of both should be equal.read more can be generated. The company’s profit & Loss statement and Balance sheet are prepared from the data recorded in the bookkeepingBookkeepingBookkeeping is the day-to-day documentation of a company’s financial transactions. These transactions include purchases, sales, receipts, and payments.read more process.

Types of Bookkeeping with the Examples

The following are the types of bookkeeping with examples.

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Single Entry System

In the single entry systemSingle Entry SystemThe Single Entry System is an accounting approach under which every accounting transaction is recorded with only a single entry towards the results of the business enterprise, shown in the statement of income of the company.read more of bookkeeping, financial transactions are recorded as a single entry in books of accounts. This system follows the cash basis of accounting, so the important information captured in this system is cash receiptsCash ReceiptsA cash receipt is a small document that works as evidence that the amount of cash received during a transaction involves transferring cash or cash equivalent. The original copy of this receipt is given to the customer, while the seller keeps the other copy for accounting purposes.read more and payments. Assets and liabilities are usually not captured in a single entry system. The single entry system is used for manual accounting systems.

ABC Corp maintains its books of accounts in a single entry bookkeeping system. The following are the financial transactions in July.

Analysis 

In the above-presented case of “ABC Corp.,” only the cash receipts and payments have been considered in the single entry system. Consequently, the corresponding assets or liabilities are not considered in the books.

This system helps ABC Corp to keep track of its cash flowCash FlowCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. read more position on a day-to-day basis. However, it can be considered useful only if all the financial transactions happen in cash. If there are any receivables or payables, then tracking the same will be severe in a single entry system as assets and liabilities are not captured.

Double Entry System

In a double-entry bookkeeping systemDouble-entry SystemDouble Entry Accounting System is an accounting approach which states that each & every business transaction is recorded in at least 2 accounts, i.e., a Debit & a Credit. Furthermore, the number of transactions entered as the debits must be equivalent to that of the credits. read more, accounting transactionsAccounting TransactionsAccounting Transactions are business activities which have a direct monetary effect on the finances of a Company. For example, Apple representing nearly $200 billion in cash & cash equivalents in its balance sheet is an accounting transaction. read more affect two ledger accountsLedger AccountsLedger in accounting records and processes a firm’s financial data, taken from journal entries. This becomes an important financial record for future reference. It is used for creating financial statements. It is also known as the second book of entry.read more because every entry to an account requires a corresponding entry in another account. The entries may impact the asset, liability, equity, expense, or revenue accountRevenue AccountRevenue accounts are those that report the business’s income and thus have credit balances. Revenue from sales, revenue from rental income, revenue from interest income, are it’s common examples.read more. The double entry system has two corresponding sides, known as Debit and Credit. This system follows the accrual basis of accountingAccrual Basis Of AccountingAccrual Accounting is an accounting method that instantly records revenues & expenditures after a transaction occurs, irrespective of when the payment is received or made. read more.

Accounting Equation:

In the double-entry system of bookkeeping, the total amount of assets should always be equal to the total amount of Equity & liabilities at any point in time.

In January 2019, Sam started his business ABC, Inc. The first transaction that Sam recorded for his company was his investment of $50,000 in exchange for 10,000 shares of ABC’s stock. As a result, ABC Inc.’s accounting system increases its cash account by $50,000 and its shareholders’ equity accountShareholders’ Equity AccountShareholder’s equity is the residual interest of the shareholders in the company and is calculated as the difference between Assets and Liabilities. The Shareholders’ Equity Statement on the balance sheet details the change in the value of shareholder’s equity from the beginning to the end of an accounting period.read more by $50,000. Both of these accounts are balance sheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders’ equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner’s capital equals the total assets of the company.read more accounts.

After Sam enters this transaction, ABC Inc.’s balance sheet will look like this:

Analysis

In the present case, the financial transactions of ABC Inc. are captured from its incorporation. In the double-entry system, every effect in the transaction is captured (i.e.) both debit and credit. When Sam started the business, he invested cashInvested CashCash investment is the investment in short-term instruments or saving account generally for 90 days or less that usually carries a low rate of interest or the return with a comparatively low rate of risk compared to other forms of investment.read more of $50,000 in return for which he got the shares of ABC Inc.

Both asset and liability have been given effect, unlike the single entry system. Since all transactions are recorded entirely, it helps to understand the overall position and performance of the organization. This system helps prepare both Balance sheets and Profit & Loss statements for the business. It gives a proper audit trailAudit TrailThe audit trail is the chronological record bearing the documentary evidence to certify the source of financial data of the company. It even traces the series of activities undertaken by the business in a certain period to ensure data accuracy.read more.

Joe purchased a car worth $50,000. He made payment for the same from his bank A/c. The financial transaction is recorded as follows:

In this case, Joe purchased a car by paying $50,000. In double-entry, both the asset bought (i.e.) Car has been added, and the corresponding reduction from the bank balance has been recorded entirely.

Hannah purchased raw materials for her business for $5,000. She paid $2,000 in cash, and the remaining $3,000 shall be paid after the credit periodCredit PeriodCredit period refers to the duration of time that a seller gives the buyer to pay off the amount of the product that he or she purchased from the seller. It consists of three components - credit analysis, credit/sales terms and collection policy.read more of 30 days.

After 30 days, Hannah paid the balance of $3,000 to the vendor.

Here, the purchase of raw material for $5,000 is recorded, with the cash payment of $2,000, and trade payables of $3,000 are captured. The double-entry system helps track all the credit transactions and helps us know the business’s fund requirements as the credit transactions need to be settled after the due date. It acts as a check for the cash flow position of the business.

X Corp provides consultancy services. They have the credit policy that 50% of the payment shall be paid on receipt of service, and the remaining 50% shall be paid post-credit period of 15 days. They have charged a customer $1,500 for the services rendered.

After 15 days, X Corp receives the remaining 50% payment from the customer.

In this case, X corp. Renders service gets paid 50% and gives a credit period of 15 days for the remaining 50% to its clients. The double-entry system captures both the cash receipt for the services rendered and payments to be received from the client after credit days. This system helps keep track of the trade receivablesTrade ReceivablesTrade receivable is the amount owed to the business or company by its customers. It is also known as account receivables and is represented as current liabilities in balance sheet.read more and helps follow up with the appropriate clients.

Conclusion

Bookkeeping is vital for all business models. For example, if proper tracking of financial transactions doesn’t happen, it leads to business failure due to improper financial management. Moreover, as per the present laws, bookkeeping is a must to meet the requirements of audits, tax obligations, etc.

It helps in financial planningFinancial PlanningFinancial planning is a structured approach to understanding your current and future financial goals and then taking the necessary measures to accomplish them. Because this does not begin and end in a specific time frame, it is referred to as an ongoing process.read more for the business. Investors will get a clear picture of how their funds are being utilized. Overall, bookkeeping plays a vital role in the progress and performance of the business.

This article is a guide to Bookkeeping Examples. Here we discuss single entry and double-entry bookkeeping types and examples and detailed explanations. You can learn more from the following articles –

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