Examples of Bookkeeping
The following example provides an outline of 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 balance can be generated. Profit & Loss statement and Balance sheet of the company are prepared from the data recorded in the bookkeeping process.
Types of Bookkeeping with the Examples
The following are the types of bookkeeping with the examples.
Single Entry System
In the single entry system 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 receipts 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 system of bookkeeping. The following are the financial transactions in July.
In the above-presented case of “ABC Corp.,” only the cash receipts and payments have been taken into consideration in the single entry system, the corresponding assets or liabilities are not considered in the books.
This system helps ABC Corp to keep track of their cash flow position on a day to day basis. However, it can be considered useful only if all the financial transactions are happening 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 in it.
Double Entry System
In a double-entry system of bookkeeping, accounting transactions affect two ledger accounts because every entry to an account requires a corresponding entry in another account. The entries may have an impact on the asset, liability, equity, expense, or revenue account. The double entry system has two corresponding sides, known as Debit and Credit. This system follows the accrual basis of accounting.
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.
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Bookkeeping Example #1
In January 2019, Sam started his business ABC, Inc. The first transaction that Sam recorded for his company is his investment of $50,000 in exchange for 10,000 shares of ABC’s stock. ABC Inc.’s accounting system shows an increase in its cash account for $50,000 and an increase in its shareholders’ equity account by $50,000. Both of these accounts are balance sheet accounts.
After Sam enters this transaction, ABC Inc.’s balance sheet will look like this:
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 cash of $50,000 in return for which he got the shares of ABC Inc.
In this, 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 in preparing both Balance sheet and Profit & Loss statement for the business. It gives a proper audit trail.
Bookkeeping Example #2
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 making a payment of $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.
Bookkeeping Example #3
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 period of 30 days.
Post 30 days, Hannah paid the balance $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 to track all the credit transactions and helps us to know the fund requirement of the business 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.
Bookkeeping Example #4
X Corp provides consultancy services. They have the credit policy of 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.
Post 15 days, X Corp receives the remaining 50% payment from the customer.
In this case, X corp. renders service and 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 to keep track of the trade receivables and helps to follow up with the appropriate clients.
Bookkeeping is vital for all business models. If proper tracking of financial transactions doesn’t happen, it leads to the failure of business due to improper financial management. As per the present laws, bookkeeping is a must to meet the requirements of audits, tax obligations, etc.
It helps in financial planning 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 has been a guide to Bookkeeping Examples. Here we discuss single entry and double-entry bookkeeping types along with examples and detailed explanations. You can learn more from the following articles –