How to Record
Common Bookkeeping Entries
Journal Entry Examples
So You Avoid Common Bookkeeping Errors
Today, we'll look at how to record some common bookkeeping entries using accounting journal entry examples for the do-it-yourself business owner ... just so you get the journal entry right the first time. :0)
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In this chat, I'll try to keep this really practical. I'm going to start off with the not-so-routine bookkeeping entries and provide accounting journal entry examples ... as I am going to assume that if you are doing your own bookkeeping, you know how to book routine, everyday accounting journal entries.
... ;-) Gee I sure hope that's not a bad assumption on my part! If it is, I'll address some of the more routine, everyday bookkeeping entries in the future ...
... Anyway, I'll just keep adding bookkeeping entries to this list on an ongoing basis ... so you may want to check back regularly as I may not put in on the RSS Feed every time I make an addition ... but instead wait until I have a few bookkeeping entries added.
Soooooo ... do you have your nice hot cup of tea all poured? Are you ready? Are you comfortable? ... Then let's get started.
Four of the Most Common Bookkeeping Errors
The four most common bookkeeping errors are:
- expensing assets
- recording loan proceeds or owner's contributions as income
- treating customer deposits and prepayments as earned revenue.
- recording gross proceeds from the sale of an asset as income.
The following article should help you to avoid these errors.
It is also a good idea to learn when it is appropriate to delete, void, reverse, or correct bookkeeping entries. Read more here to help you decide.
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Please consider donating $5.00Bookkeeping Entries - The Necessity of Learning Debits and Credits
So first things first.
If you are having trouble with debits and credits ... it can be very confusing at first ... you need to take a peek at the "cheat" table
.
Keep the "cheat" table open while you work your way through the journal entry ... really, really try to figure it out for yourself ... then check your best guess with what you see here on this page.
To help you, I will start each entry with Mr. Sands's method of describing (1) what you received or what you bought and (2) where it came from or what you gave.
If you do this, you will learn faster than just copying the bookkeeping entries I have here.
You want (yes you do ... you just don't know it yet!) to learn how to think your way through booking an entry.
The easiest way to do that is to become familiar with your chart of accounts and have a basic understanding of debits and credits.
If you are using computer software like QuickBooks®, this article will help you see exactly what is happening when you book your entries.
I don't know about you, but if I understand something, I am less likely to make mistakes in the future.
All right, with that said ... here we go ...
Accounts Receivable
InventoryCapital AssetsBankingAccounts PayableTaxesYear-End ... Closing The Books
How to Record the Sale of an Asset
Updated April 23, 2010
What you received (debit) - cash ... Where it came from (credit) - sale of asset in this example office furniture was sold but it could just as easily have been a vehicle sold
Selling of an asset requires more than one bookkeeping entry.
In this bookkeeping entry you need to record the cash received in the sale AND remove the net book value of the asset sold ... so that all that is left on your books is the gain or loss from the sale of the asset ... DO NOT record the the gross proceeds from the sale as income ... otherwise you will be paying more tax than you need to.
Do not confuse accumulated amortization (a contra account in the capital asset section of your balance sheet) with amortization expense (on your income statement).
Before you record the sale of the asset, you need to book the bookkeeping entry for the partial year amortization expense relating to the asset sold, in this case office furniture. Prorate your annual amortization amount to the end of the month of your sale ... Let's say the sale date was May 18, that means you would take five months of amortization expense.
Debit (Increase) Amortization Expense (income statement) - for 5/12ths of the annual amortization amount
Credit (Decrease) Accumulated Amortization - or the proper account where the amortization was booked (capital asset on your balance sheet) - for 5/12ths of the annual amortization amount
Once your amortization has been booked, you are now ready to record the sale that will remove the asset from the books and capture the gain or loss.
Debit (Increase) Cash in Bank (current asset on your balance sheet)
Debit (Decrease) Accumulated Amortization - Office Equipment - or the proper account where the amortization was booked (capital assets section on your balance sheet)
Credit (Decrease) Office Equipment - or the proper account where the original cost was booked (capital asset on your balance sheet)
Credit (Increase) GST Payable (current liability on your balance sheet)
Credit (Increase) PST Payable (balance sheet if you have a registered PST account with your provincial minister of finance ... if not, book this tax to your office equipment account)
Credit (Increase) Gain on Sale of Asset (other income account on income statement)
If the sale had resulted in a loss, you would change your bookkeeping entry TO debit Loss on Sale of Asset FROM credit Gain on Sale of Asset. The loss account would be an other expense account on the income statement.
If you sell a lot of assets on a regular basis, you might want to consider adding sub-accounts to the gain/loss accounts. One to capture the proceeds on disposition and another to capture the net book value (original cost less accumulated amortization).
Keep all your paperwork for this type of transaction including the bill of sale, so that you meet CRA record retention requirements.
How to Record the Purchase of an Asset
What you bought (debit) - an asset in this example equipment was purchased but it could just as easily have been a vehicle purchase ... Where it came from (credit) - cash in bank or from loan proceeds.
Debit (Increase) Equipment (balance sheet)
Debit (Decrease) GST payable (balance sheet)
Debit (Decrease) PST payable (balance sheet if you have a registered PST account with your provincial minister of finance ... if not, code this tax to the Equipment account)
Credit (Increase) Equipment Loan OR Cash in Bank (balance sheet)
A discussion on equipment purchases is included in the article on Capital vs Operating Leases.
Keep all your paperwork for this type of transaction including the bill of purchase, so that you meet CRA record retention requirements.
How to Record a Loan from the Owner
What you received (debit) - cash contribution ... What you gave (credit) - the owner's money.
It is very important to carefully track and have supporting documentation for your incoming cash sources that are not sales revenue ... so they don't get included as income during a tax audit.
Debit (Increase) Cash in bank (current asset on balance sheet)
Credit (Increase) Owner's Loan (long term liability on balance sheet)
If you are wanting reimbursement for business expenses paid from your personal funds, then you want to submit an expense report NOT book a loan. Click on the link for the bookkeeping entries.
If you aren't expecting the business to pay you back this money, then the cash contribution should be booked to the Owner's Contributions account (owner's equity on balance sheet) instead of the Owner's Loan account.
Debit (Increase) Cash in bank (current asset on balance sheet)
Credit (Increase) Owner's Contribution (equity on balance sheet)
If you contributed your own personal assets, you have to bring them into your business at fair market value. Instead of debiting cash, you would debit the appropriate asset account.
You will find a tip here on what paperwork you should keep regarding these types of transactions.
How to Record the Receipt of General Loan Proceeds, or Company Loan, or Bank Loan
What you received (debit) - cash from loan proceeds ... Where it came from (credit) - bank loan
Track your incoming cash ... classify it correctly.
It is very important to properly record cash coming into the business. If you classify it incorrectly, it may end up being allocated to sales revenue ... which would increase your bottom line ... and then increase your income taxes to be paid.
Debit (Increase) Cash in Bank (current asset on your balance sheet)
Credit (Increase) Bank Loan (long term liability on your balance sheet)
If you use QuickBooks®, this type of cash transaction is entered a bit differently than a customer payment. Record your loan proceeds bookkeeping entry by making a direct entry through Make Deposit found in the banking section. Before you do this, make sure you have setup a long term liability account.
When completing the Make Deposit screen, you can use Quick Add when you complete the Received From field if the payee name is not in your name list yet. Next, select the long term liability account you created for your account number. Take the time to fill in the memo with the details of the loan.
If the loan was for purchase of a specific asset and the loan money was never directly deposited to your bank account, then instead of debiting Cash in Bank, in your bookkeeping entry, you would debit the asset account pertaining to your purchase such as Office Equipment, Vehicle, or Equipment.
Debit (Increase) Specific Asset Purchased (capital asset on your balance sheet)
Credit (Increase) Bank Loan (long term liability on your balance sheet)
Keep all your paperwork regarding loan proceeds in your permanent files. If you are ever audited, you need to be able to prove the proceeds were not revenue or a contribution from you.
Remember to be careful when you record your loan payment bookkeeping entries each month.
The Bookkeeper's Tip
Current Portion LTD
At year-end, your accountant will make an adjusting entry for the current portion of your long term debt. The adjusting entry will reclassify the amount of principle due in the coming year to a current liability account. You don't need to concern yourself with this entry or this account during the year. The bookkeeping entry to reclassify the current portion of long term debt will be DR Long Term Debt (Long term liability account on the balance sheet)
CR Current Portion LTD (Current liability account on the balance sheet). Its purpose is informational as it lets readers of the financial statement know how much debt is due in the coming twelve months. Book all your loan payments to the long term liability account.
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How to Record the Disposal and Purchase of a Vehicle
What you bought (debit) - a new vehicle ... What you gave (credit) - a bank loan, cash down and a trade-in allowance for an old vehicle.
If you are just selling a vehicle, then go to How to Record the Sale of an Asset.
If you are just making a vehicle purchase with no trade-in, go to How to Record the Purchase of an Asset.
This is how to book the entry in Canada. If you are from the U.S., the accounting treatment is a little different. You'll find the U.S. bookkeeping entry here.
When you have a vehicle purchase AND a vehicle sale through a trade-in allowance, two separate bookkeeping entries are required ... one to write-off the net cost of the old vehicle and one to record the purchase of the new vehicle.
To remove the old vehicle:
Debit (Decrease) Accumulated Amortization - Vehicle - or the proper account where the amortization was booked (capital assets section on your balance sheet)
Credit (Decrease) Vehicle (capital asset on balance sheet)
Debit or Credit Gain (Loss) on Sale of Assets (on income statement)
To record the purchase of the new vehicle:
Debit (Increase) Vehicle at full purchase price to recognize the acquistion (capital asset on balance sheet)
Credit (Increase) Bank Loan net proceeds received (long term debt on balance sheet)
Credit (Decrease) Cash in Bank for down payment (current asset on balance sheet)
Debit or Credit Gain (Loss) on Sale of Assets (on income statement) the remaining difference is the gain or loss made on the trade-in of the old vehicle.
The total gain or loss on the disposal of the vehicle is calculated in two steps as you can see.
If you feel confident, you could book these two entries in one journal entry using just one line to record the gain or loss.
Keep all your paperwork regarding the purchase and loan proceeds of your new vehicle in your permanent files. If you are ever audited, you need to be able to prove the proceeds were not revenue or a contribution from you.
Check here on how to record the bookkeeping entries for your monthly vehicle loan payment.
You may also want to become familiar with how to claim business use of your personal vehicle.
How to Record a Capital Lease and Capital Lease Payments
Updated May 22, 2010
What you bought (debit) - an asset in this example a vehicle (but it could just as easily be equipment) ... Where it came from (credit) - a capital lease, cash down and a trade-in allowance.
You can find a discussion on capital vs operating leases in Is Your Vehicle Lease An Expense, An Asset, or A Liability?.
You can find the bookkeeping entries for UK hire-purchase financing in The Bookkeeping Forum.
Capitalized lease entries recognize the acquisition at the beginnning of the lease, not at the end when the ownership transfers. It is recorded like this:
Debit (Increase) Leased Asset at purchase price to recognize the acquistion (balance sheet)
Credit (Increase) Lease Liability excluding the trade-in, downpayment and imputed interest component (long term liability on balance sheet)
You have to read your lease agreement to see how they handled the taxes ... you are looking for when the taxes are paid.
If the lease includes GST paid on the total amount at the start of the lease, then you would adjust the bookkeeping entry above to code the GST amount to GST Payable. If the GST is not paid in total at the start of the lease, then the GST is payable and accounted for when you make your lease payments.
If you are not a GST registrant, the GST would be coded to the Leased Asset account ... but only if it is included in the lease amount ... otherwise you code the GST amount to the Leased Asset account at the time you make each lease payment.
Then make an entry to reduce the lease liability by the amount of any trade-in allowance or cash put down.
Debit (Decrease) Lease Liability (long term liability on balance sheet)
Debit (Decrease) Accumulated Amortization - Vehicle - or the proper account where the amortization was booked (capital assets section on your balance sheet)
Credit (Decrease) Cash in Bank (current asset on balance sheet)
Credit (Decrease) Vehicle (capital asset on balance sheet)
Debit or Credit Gain (Loss) on Sale of Assets - the difference is the gain or loss on trade-in of your old vehicle (on income statement)
The last entry above was really two entries that I combined into one. One entry removes the old vehicle from your books and the other entry records the down payment.
If it is easier for you to figure out and understand, split the combined entry into two separate bookkeeping entries.
Next, create an amortization schedule from the information located in the agreement. There should be a stated interest rate. The term and taxes should also be visible in the agreement. When drawing up your schedule, omit the final amount due for ownership to transfer.
Here is a financial calculator might help you out with that task. It is a Canadian version of the loan amortization calculator.
The periodic capitalized lease payments for your vehicle or equipment are recorded each month over the length of the lease. The monthly bookkeeping entries are as follows:
Debit Interest expense - from your amortization schedule (income statement)
Debit Lease liability - principal payment (balance sheet)
Debit GST payable - do not record this if GST was accounted for at the onset of the lease (balance sheet)
Credit Cash in Bank (current asset on balance sheet)
Each year-end, your bookkeeper or accountant will make an adjusting entry pertaining to the classification of the lease. The current liabilities section of your balance sheet will reflect the current portion of your long term capital lease obligations owing. They will also book an amortization entry for the vehicle.
When your lease expires, you will have to make a bookkeeping entry to "purchase" the vehicle for the bargain purchase amount stated in the conditional sales agreement.
Keep all your paperwork regarding lease agreements in your permanent files.
How to Record Cash or Cheques For Bank Deposits
What you received (debit) - cash or cheque ... Where it came from (credit) - sale from the customer.
If you are not extending credit to your customer, your bookkeeping entry for bank deposits would be:
Debit (Increase) Cash in Bank
Credit (Increase) Sales (if they paid immediately)
If you are using QuickBooks®, record this transaction through Sales Receipt in the Customer section of the flow chart or the drop down menu.
If you extended credit to your customer and are now receiving a payment to apply to their account, your bookkeeping entry for the bank deposits would be as follows:
Debit (Increase) Cash in Bank
Credit (Increase) Accounts Receivable
If you are using QuickBooks®, you would make this transaction through Receive Payment in the Customer section of the flow chart or the drop down menu.
Accounting / Bookkeeping Entry For Deposits in QuickBooks®
For both of the transactions above, to record your bank deposit if you are using QuickBooks®, use the Make Deposit function found under Banking ... but only after you have recorded the payment correctly. It is a two step process and Make Deposit is the second step.
Let's Chat About ...
How QuickBooks® Undeposited Funds Account Works
If you use QuickBooks®, the accounting entry for the bank deposit transaction is broken into two pieces ... one to record the receipt of the customer payment and another transaction to record the physical bank deposit of the customer payment.
When the money is received, a clearing account called Undeposited Funds is debited. Then when you make the actual bank deposit through Make Deposit function, Undeposited Funds is credited and Cash in Bank is debited.
Normally you would only directly enter a bank deposit through the Make Deposit function if the deposit is NOT associated with a sales invoice or a sales receipt which indicates it is a customer payment.
Using the Undeposited Funds account for all customer payments is a good internal control measure. It helps prevent booking income twice or recording a a payment receipt twice. It also enables you to use and present valuable reporting in the event of dispute.
Amy Vetter, CPA suggests the small business owner review this account regularly to ensure the amounts are being deposited to your business bank account(s) ... instead of a manual bookkeeping entry to a fictitious bank account. Consider it an internal control procedure that gives you a quick way to reduce the chance of fraud.
-- End of Chat on Undeposited Funds --How to Record and Apply a Customer Deposit, or Prepayment, or Receipt of an Advance Payment
What you received (debit) - cash in advance of work ... Where it came from (credit) - the customer's money.
Normally when you receive a cheque, credit card payment or cash from a customer, the bookkeeping entry you would make is to:
Debit (Increase) Cash in Bank
Credit (Increase) Sales (if they paid immediately) OR Accounts Receivable (if you extended credit).
But when you receive a customer deposit or customer prepayment, the transaction is a little different.
For one thing, you do not charge tax on customer deposits. Customer deposits are unearned revenue and so no tax is due until you perform the work or deliver the product. (See CRA GST Memoranda G300-6-8 Deposits points 6&7.)
I will show you two different accounting methods for the customer prepayment bookkeeping entries ... yes, it requires more than one entry. At the end, you can choose to use whichever set of bookkeeping entries you want.
Option One
The liability method for prepayment of invoices is in conformance with GAAP ... so no adjusting entry is required at year-end ... unless you forgot to apply the customer payment when the job was complete.
When you receive the payment, make the following entry:
Debit (Increase) Cash in Bank (current asset on balance sheet)
Credit (Increase) Customer Deposits (current liability on balance sheet)
If you are using QuickBooks®, make sure you setup a Service Item for prepayments with the default account set to Customer Deposits ... then treat it as a cash sale by using the Sales Receipt form ... which will book the payment to the Undeposited Funds account (if you have been following my internal controls advice). Select the prepayment item you created to record the customer deposit. This allows you to keep track of the deposit using your Sales Report ... and the customer deposit is not booked as revenue.
Using QuickBooks®, your bookkeeping entry will be slightly different than the one above. It will be debit Undeposited Funds (instead of Cash in Bank) and credit Customer Deposits.
When the work or job is complete, invoice the customer as shown in the other method below. Apply the deposit to the customer's account with the following bookkeeping entry:
Debit (Decrease) Customer Deposits (current liability on balance sheet)
Credit (Decrease) Accounts Receivable (current asset on balance sheet)
If you are using QuickBooks®, do this entry at the same time you prepare your invoice by ... adding a line to the invoice by selecting the prepayment item. It will clear the liability and reduce the amount the customer owes. You will have to enter the amount on your invoice as a negative number.
This method requires more accounting knowledge to understand why you are doing it ... beginner's get confused because if you study the first entry you will notice that the customer prepayment is both an asset and a liability at the same time.
This method also creates extra work because you will have to remember to reconcile the liability account each quarter to make sure it reflects only your outstanding deposits on work in progress or product not delivered yet.
If you use QuickBooks®, you will want to create a customized report to track customer deposits.
Option Two
Your next option requires less accounting knowledge (which I like) and you are less likely to get it wrong (which I really like). I think it is more intuitive in that this is probably how you want to do the bookkeeping entries ...
This method is the easiest way (especially if you use QuickBooks) to book your customer deposits. It is not technically correct (as in - not GAAP) but it gets the job done for you and will allow you to serve your customers quickly and efficiently. (Remember , you may think you are the boss ... but in reality ... your customers are your boss.)
This method puts your customer's account into a credit balance.
Because this method of booking prepayment of invoices is NOT in conformance with GAAP, it will require your bookkeeper to make an adjusting entry for outstanding deposits at year-end. The entry will reclassify any outstanding customer prepayments as a liability because ...
... you have not earned the revenue until you perform the service or produce the product. This meant it is a liability to you until you complete the work or supply the product.
When you receive the payment, make the following bookkeeping entry:
Debit (Increase) Cash in Bank (current asset on balance sheet)
Credit (Decrease) Accounts Receivable (current asset on balance sheet)
If you are using QuickBooks®, use the Receive Payment screen to record the deposit ... but do NOT apply the payment to an outstanding invoice. If your customer requires a receipt, print out a credit memo.
At year-end, if the work or job has not been done yet, you need to move (reclassify) this money to a current liability account by booking the adjusting entry as follows:
Debit (Increase) Accounts Receivable (current asset on balance sheet)
Credit (Increase) Customer Deposits (current liability on balance sheet)
Remember to reverse your year-end adjusting entry on the first day of your new fiscal year ... so you don't forget that the customer prepaid you.
Also, to keep a clean set of books and reduce the amount of work required at year-end for a clean accounts receivable report, take the time to go back into Receive Payments and use the Discounts & Credit button to Apply Credits ... this clears to the year-end adjusting journal entry.
When you have completed the work or job, invoice your customer with following bookkeeping entry:
Debit (Increase) Accounts Receivable (current asset on balance sheet)
Credit (Increase) Sales Revenue (income on income statement)
Credit (Increase) GST payable (balance sheet)
Credit (Increase) PST payable (balance sheet if you have a PST account ... if not, omit this line)
... and if you are using computer software like QuickBooks®, apply the prepayment to the invoice at the same time you prepare the invoice using Apply Credit.
Which method to use? ... Both are right but ...
... my preference is the second method (could you tell?) ... I like saving time, there is less room for error, and you still come out with same result.
If you want to see an excellent video on how to book customer prepayments in QuickBooks®, head on over to qbquicktips.com/blog and look under special transactions.
How to Record a Deposit on a Purchase
What you bought (debit) - a down payment on an order with a supplier before receiving product/service ... What you gave (credit) - cash, cheque or credit card payment.
If your business put a deposit down on a purchase (before receiving it), then you would just book it the opposite to receiving a customer deposit (explained above).
Here's two ways you can choose for the bookkeeping entry.
Debit (Increase) Deposits / Retainers (other asset on your balance sheet if it will be outstanding longer than one year)
Credit (Decrease) Cash in Bank OR (Increase) Line of Credit
Debit (Decrease) Accounts Payable (current liability on your balance sheet if it will be outstanding less than one year)
Credit (Decrease) Cash in Bank or Credit Card
If you choose the second entry, your aged accounts payables report will show a negative balance for the vendor you placed your deposit with.
How to Record Bad Debt Allowance and Write-Off a Bad Debt
What you received (debit) - an estimate of bad debts ... Where it came from (credit) - the reserve allowance.
Do not confuse booking an allowance with an actual bad debt on a specific customer's account. The allowance is just an estimate of the accounts receivable that may not be collectible.
The allowance bookkeeping entry can be done monthly or annually. My recommendation for a home business is to only book (or revise) this entry annually ... and as it is an adjusting entry, it's even better if you leave this entry for your bookkeeper or accountant to do.
If you want your allowance to be in accordance with GAAP, use either the Estimation of Bad Debt Expense method or the Net Realizable Value of Current Receivables method (neither of which will be discussed here).
To book the allowance, at year-end your bookkeeper or accountant will make the following entry:
Debit (Increase) Bad Debt Expense (excluding taxes) (expense account on the income statement)
Credit (Increase) Allowance for Doubtful Accounts (excluding taxes) (a contra account in the current asset section of your balance sheet)
Notice that the bookkeeping entry did NOT remove the amount from the accounts receivable ledger. The contra account for accounts receivable is the allowance account. It is used to reduce your accounts receivable by the anticipated bad debt amount, allowing the credit history for each individual customer to be retained.
Up until now, you have only booked the expectation that it will be a bad debt. Once you have decided the invoice is uncollectible, you need to do the actual write-off.
You can write-off a bad debt if it has been outstanding for twelve months or there is little probability of recovering the debt such as the customer has gone bankrupt or the customer has moved and you cannot locate their new residence.
To book the reality that the bad debt is uncollectible, make the next bookkeeping entry.
To book an actual bad debt write-off, you remove the accounts receivable from the allowance account NOT the expense account. Here is the bookkeeping entry:
Debit (Decrease) Allowance for Doubtful Accounts (net of tax) (a contra account in the current asset section of your balance sheet)
Debit (Decrease) Sales Tax payable (select the correct current liability account on your balance sheet)
Credit (Decrease) the customer's account in Accounts Receivable including tax (current asset)
Bad debt allowance is NOT used for tax purposes. You can find more on this topic including the bookkeeping entries when a bad debt is recovered in the article Home Business Taxes Part 2. While there, make you sure you read about how bad debt affects your GST/HST return.
If you use QuickBooks and want to write off a specific account (as opposed to booking a journal entry), here is the best way to do it.
How to Manage Petty Cash
Setup, Expense Recording & Replenishment, Increasing Petty Cash
These bookkeeping entries have to been moved to their own page.
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