4. Entering Transactions and Preparing Financial Reports

Everything is recorded in a journal using debits and credits. Two different methods used is bookkeeping to enter your business transactions are single-entry bookkeeping and double-entry bookkeeping,

Single-entry Bookkeeping

With single-entry bookkeeping, you enter each transaction only once. If a customer pays you a sum, you enter that sum in your asset column only. This is not a good method for small business accounting unless your business is simple— say you work out of your home, and the business does not use any equipment or have inventory and you do not many cash transactions, you might consider single-entry bookkeeping, But it is not recommended.

Single-entry bookkeeping gives a one-sided picture of transactions recorded in the cash register. In double entry, changes due to one transaction are reflected in at least two accounts. In a single entry, there is no method for error correction or detection.

Double-entry Bookkeeping

Double-entry bookkeeping on the other hand is an accounting technique that records a debit and credit for each financial transaction occurring within a company. … Companies benefit greatly from using double-entry bookkeeping because it aids inaccurate financial reporting and reduces errors and fraudulent activity.

Double entry, states that every financial transaction has equal and opposite effects in at least two different accounts. Using debits and credits as an example of double-entry accounting, if you were going to record sales revenue of $1200 you would need to make two entries: a debit entry of $1200 to increase the balance sheet account called “Cash” and a credit entry of $1200 to increase the income statement account called “Revenue.”

Recording Transactions

To record a transaction, you must first determine the accounts that will be debited and credited.  For example, imagine that you’ve just purchased new equipment for your business. You paid $500, in cash for the equipment.

The transaction will affect two accounts:
Cash (an asset account) and
Equipment (an asset account).
Because you’re decreasing your cash and increasing your equipment, you would record a $500 debit (on the left) for the equipment account and a $500 credit for the cash account (on the right).

When you tally up account debits and credits—often at the end of the quarter or year—the totals should match. This means that your books are “balanced.”

Balancing The Books

Balancing the books occurs at the end of the period, you’ll “post” the debit and credit entries to the accounts themselves in the general ledger and adjust the account balances accordingly.

For example, if over the course of the month your cash account has had $4,000 in debits (increases) and $5,000 in credits (decreases), you would adjust the cash account balance by a total of $1,000 (as a decrease). Follow this method to adjust the balances for each account in your ledger. At the end of this process, you’ll have what’s called an “adjusted trial balance.” When you combine accounts types, the adjusted balances should meet the accounting equation:

Assets = Liabilities + Equity

If two sides of the equations don’t match, you’ll need to go back through the ledger and journal entries to find errors. Post corrected entries in the journal and ledger, then follow the process again until the accounts are balanced. Then you’re ready to close the books and prepare financial reports. Always consult your account before making any changes to your records.

Financial Reports

Once the books are balanced the next step is to, summarize the flow of money in each account. Some of the most common financial reports created in bookkeeping are:

  • Balance sheet. This document summarizes your business’s assets, liabilities, and equity at a single period of time. Your total assets should equal the sum of all liabilities and equity accounts.
  • Profit and loss (P&L) statement. Also called an income statement, this report breaks down business revenues, costs, and expenses over a period of time (e.g., quarter). The P&L helps you compare your sales and expenses and make forecasts.
  • Cash flow statement. The statement of cash flow is similar to the P&L, but it doesn’t include any non-cash items such as depreciation. Cash flow statements help show where your business is earning and spending money.

Bookkeeping can take time away from your business and unless you’re experienced in accounting principles, bookkeeping can be a challenging task. Getting help—whether by hiring a bookkeeper, outsourcing to an accounting service, or using accounting software it will give you more time to focus on your business.