Bookkeeping: In-Depth Explanation with Examples

In the normal course of business, a document is produced each time a transaction occurs. Bookkeeping first involves recording the details of all of these source documents into multi-column journals (also known as books of first entry or daybooks). bookkeeping templates For example, all credit sales are recorded in the sales journal; all cash payments are recorded in the cash payments journal. Most individuals who balance their check-book each month are using such a system, and most personal-finance software follows this approach.

What exactly does a bookkeeper do?

For example, interest earned by a manufacturer on its investments is a nonoperating revenue. Things that are resources owned by a company and which have future economic value that can be measured and can be expressed in dollars. Examples include cash, investments, accounts receivable, inventory, supplies, land, buildings, equipment, and vehicles.

The cost of the hours worked through December 31 must be included in the company’s December expenses and in the liabilities as of December 31. Other assetsThis category often includes costs that have been paid but are being expensed over a period greater than one year. Under the accrual method of accounting, any payments for future expenses must be deferred to an asset account until the expenses are used up or have expired. The outstanding checks and deposits in transit do not involve errors by either the company or the bank. Since these items are already recorded in the company’s accounts, no additional entries to the company’s general ledger accounts will be needed.

Cash Flow Statement

The process of comparing the amounts in the Cash account in the general ledger to the amounts appearing on the bank statement. The objective is to be certain that there is consistency between the amounts and that the company’s amounts are accurate and complete. A record in the general ledger that is used to collect and store similar information. For example, a company will have a Cash account in which every transaction involving cash is recorded. A company selling merchandise on credit will record these sales in a Sales account and in an Accounts Receivable account. Similarly, the hourly payroll processed during the first few days in January and paid on January 6 is likely to include the cost of employees working during the last few days in December.

Method of Bookkeeping

The income statement is also known as the statement of operations, the profit and loss statement, or P&L. It presents a company’s revenues, expenses, gains, losses and net income for a specified period of time such as a year, quarter, month, 13 weeks, etc. The accounts for non-operating expenses and losses will have debit balances since they cause stockholders’ equity to decrease. Accrued Revenues/ReceivablesUnder the accrual method of accounting, revenues are to be reported when goods or services have been delivered even if a sales invoice has not been generated. This account will report the amounts that a company has a right to receive but the sales invoices have yet to be prepared or entered in Accounts Receivable. To reduce the normal credit balance in stockholders’ equity accounts, a debit will be needed.

Therefore, a positive net income reported on the income statement (which is the result of revenues being greater than expenses) will cause stockholders’ equity to increase. Something similar to Situation 2 occurs when a company purchases equipment to be used in the business. Let’s assume that the equipment is acquired, paid for, and put into service on May 1.

• To reduce the normal credit balance in stockholders’ equity accounts, a debit will be needed.
• A key part of a bookkeeper’s job is to create and track customer invoices to check that payments are collected on time.
• It presents a company’s revenues, expenses, gains, losses and net income for a specified period of time such as a year, quarter, month, 13 weeks, etc.
• The adjusting entries are prepared in order to report a company’s revenues and expenses in the proper accounting period.

Better tax preparation

Companies often outsource the organization of their finances to independent professionals, then hire accountants for more complex issues and tax filing. While any competent employee can handle bookkeeping, accounting is typically handled by a licensed professional. It also includes more advanced tasks such as the preparation of yearly statements, required quarterly reporting and tax materials. While they seem similar at first glance, bookkeeping and accounting are two very different mediums.

This means that the money counters at a church need to be different from the person who updates the church members’ donation records. Requiring that two people be involved in a process instead of only one greatly reduces the odds of employee theft. A class of corporation stock that provides for preferential treatment over the holders of common stock in the case of liquidation and dividends. For example, the preferred stockholders will be paid dividends before the common stockholders receive dividends. In exchange for the preferential treatment of dividends, preferred shareholders usually will not share in the corporation’s increasing earnings and instead receive only their fixed dividend.

Property, plant and equipmentThis category of noncurrent assets includes the cost of land, buildings, machinery, equipment, furniture, fixtures, and vehicles used in the operations of a business. InvestmentsThis classification is the first of the noncurrent or long-term assets. For example, advertising expense is one of the operating expenses of a retailer.

• Bookkeeping is the practice of recording and organizing a business’s daily financial transactions and maintaining accurate financial records.
• When the balance in this account is combined with the balance in Accounts Receivable, the resulting amount is known as the net realizable value of the receivables.
• To determine whether errors had occurred, the bookkeeper prepared a trial balance.
• LandThis account represents the property portion of the balance sheet heading “Property, plant and equipment.” It reports the cost of land used in a business.
• The amount in the Insurance Expense account should report the amount of insurance expense expiring during the period indicated in the heading of the income statement.

This data provides a clear picture of your financial health and helps you make informed business decisions. Bookkeepers generate core reports such as income statements (profit and loss), balance sheets, and cash flow statements. These documents provide critical insight into business performance and financial stability. Well-organized reports also help investors, lenders, and business partners evaluate the company’s health.

For example, if a company car is sold for $10,000 and its book value is $9,000, there will be a gain of $1,000. Common StockIf a corporation’s common stock has a par value or a stated value, only the par or stated value of the shares issued will be recorded in this account. However, if a corporation’s common stock has neither a par value nor a stated value, the entire amount received by the corporation at the time that the shares were issued will be recorded in this account. Assets include the things or resources that a company owns, that were acquired in a transaction, and have a future value that can be measured.

The permanent accounts are all of the balance sheet accounts (asset accounts, liability accounts, owner’s equity accounts) except for the owner’s drawing account. This account is a non-operating or “other” expense for the cost of borrowed money or other credit. At the bottom of the cash flow statement, the net totals of the three sections are reconciled with the change in the cash and cash equivalents that are reported on the company’s balance sheet. The changes in the noncurrent liabilities, stockholders’ (or owner’s) equity, and short-term loans are reported in the financing activities section of the cash flow statement.