Are you ready to embark on an exciting adventure in the world of bookkeeping? It is one of the keys to success because it helps you track your cash flow, uncover hidden profits and losses, and make brilliant business decisions. Among the multitude of bookkeeping systems, the easy and effective Double-Entry Bookkeeping System is one of the most popular ones. Check out this step-by-step guide to understand its power. Armed with proper knowledge, you can efficiently keep track of your business’s numbers and be on your journey to amazing profits and financial freedom.
Step 1: Embrace the Power of Dates
Imagine a trusty calendar, ready to assist you on your bookkeeping adventure. Take a moment to identify the transaction date. With this essential information in hand, you’ll gain valuable insights into the type of transaction and the amount of money involved. These vital clues will enable you to paint a vivid financial picture and set the stage for success!
Step 2: Identify Debits and Credits
In double-entry bookkeeping, accounts possess a special quality – they can either be debits or credits. When recording a purchase made on account, simply identify the affected asset and liability accounts then note them on your ledger. In doing so, you capture the essence of your financial journey. Here’s an example:
Date | Account | Debit | Credit |
May xx, 2023 | Purchases Accounts payable |
Step 3: Put Debits and Credits in Appropriate Accounts
Sometimes, a transaction may have multiple debits and credits, like a symphony of financial movements. Ensure you input these amounts accurately into the corresponding accounts, letting the melody of numbers play out and create harmony. Check out this example:
Date | Account | Debit | Credit |
May xx, 2023 | Purchases Accounts payable | 100.00 | 100.00 |
If you purchased something worth P150.00 with a downpayment of P50.00 and the rest of the balance on account, it would involve one debit and two credits.
Imagine this scenario: You stumble upon an item worth P150.00. To secure your purchase, you make a downpayment of P50.00 upfront, with the remaining balance to be paid on account. In the realm of bookkeeping, this transaction showcases the artistry of one debit and two credits. Here’s how ledger would capture this:
Date | Account | Debit | Credit |
May xx, 2023 | Purchases Cash Accounts Payable | 150.00 | 50.00 100.00 |
As you record this transaction, the debit entry in the “Purchases” account reflects the value of the item acquired. Meanwhile, the credits in the “Cash” account and “Accounts Payable” account capture the downpayment and the outstanding balance, respectively. With the double-entry bookkeeping, the precise recordings of debits and credits illustrate your financial journey.
Step 4: Record Every Transaction in the Ledger!
As you faithfully record each transaction, your ledger or books become the brilliant beacon, serving as a guide through your financial progress. Without this, all the details/ numbers you encounter daily can be confusing. Notably, there are two key types of ledgers to explore: the general ledger, capturing the overall tale of your company, and the subsidiary ledger, unveiling the stories of specific accounts.
Step 5: The Trial Balance
Here, a cast of ledger accounts takes center stage, revealing their balances. A balancing act unfolds as you ensure that the total debits and credits stand in perfect harmony. Should any discrepancies arise, it’s a cue to inspect your journal entries and ledger for errors.
Step 6: The Art of Adjusting Entries
At the end of the accounting period, a new chapter awaits – the realm of adjusting entries. From accruals to deferrals, these entries fine-tune your financial records. Armed with the transaction date, account names, and amounts, navigate entries and bring balance to your books.
Step 7: Verify and Illuminate with Worksheets!
Prepare the worksheets and incorporate the adjusting entries into these sheets to ensure the total debits and credits are in equilibrium. Prioritize accuracy and let this guide you as you examine these worksheets.
Step 8: Prep the Financial Statements
Once errors are correct, it’s time to reveal the true essence of your business through three financial statements that shed insight into your operations. These are:
- The Income Statement showcases revenues and expenses.
- The Balance Sheet displays the assets, liabilities, and equity.
- Cash Flow Statement captures the ebb and flow of financial currents.
Step 9: Time for Closing Entries
As the accounting period draws to a close, bid farewell to temporary accounts. Through closing entries, revenue, dividends, and expenses balance is restored as accounts settle to zero. This leaves you with a clean slate for the next time frame.
Step 10: Imprint the Closing Entries on the Ledger
Note the closing entries in the ledger. As you carefully post these entries, debit the accounts being closed and credit the corresponding income or equity accounts. This ensures a seamless transition into the next accounting period.
Step 11: Unveil the Post-Closing Trial Balance!
The ledger accounts stand tall, closing temporary accounts and leaving only permanent accounts. Pat yourself on the back as you’ve reached the culmination of your bookkeeping prowess.
Step 12: The Reversing Entry, a Fresh Beginning!
This is optional. When a new accounting period dawns, these entries reverse previous accruals, simplifying your bookkeeping journey. This allows you to embrace the opportunity to start anew and save precious time.
Congratulations! You’ve unleashed the magic of Double-Entry Bookkeeping. If all of these sounds confusing, call our team of CPAs for assistance. We can embark on this journey together and ensure your business thrives, guided by the wisdom of financial organization!
