Disclaimer: I’m not an expert, what I’m sharing are what I’ve learned from various seminars I’ve attended. If you have spotted discrepancies or incorrect information, please feel free to reach out using the contact form.
When I started as Entrepreneur, I never thought that it’s gonna be tough. To be honest, even though I said I’ve been thinking of putting up my own business for a long while, I still missed out important things. One of them is Bookkeeping.
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I know that the reason you’re here, reading my blog, is because you made the same mistake as mine and don’t want to pay a hefty price for an accountant. Don’t feel bad, we got each other’s back. You’re in luck because I’m going to share to you what I have learned and this should guide you through how to write entries on books of accounts.
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What is Bookkeeping?
Bookkeeping is the recording of financial transactions, and is part of the process of accounting in business. Transactions include purchases, sales, receipts, and payments by an individual person or an organization/corporation. There are several standard methods of bookkeeping, including the single-entry and double-entry bookkeeping systems.— Wikipedia.com
No need to explain it.
If you read my previous post, “From Employee to Self-employed: BIR update”, I was given 4 books of accounts.
Before you can even write on those books, you have to understand the accounts and how to classify them under debit or credit. To help you understand, always remember the accounting equation:
Assets= Liabilities + Owner’s Equity
Assets, liabilities and Equities are the 3 major classifications of Balance Sheets account. And each one of those 3 accounts have respective accounts under them.
Under Assets are:
- Cash- Cash includes currency, coins, checking account balances, petty cash funds, and customers’ checks that have not yet been deposited
- Accounts Receivable- Short-term or temporary investments may include certificates of deposit, bonds, notes, etc. that will mature in less than one year
- Accrued Revenues/Receivables- Accounts receivable is a right to receive an amount as the result of delivering goods or services on credit
- Prepaid Expenses- These are future expenses that have already been paid. The amounts appear as assets until the costs have been used up or expire. A common example of a prepaid expense is the payment for vehicle insurance
- Inventory- Inventory is the cost of goods that have been purchased or manufactured and have not yet been sold
- Supplies- Supplies could be office supplies, manufacturing supplies, packaging supplies or other supplies that are on hand. The cost of the supplies that remain on hand is reported as an asset
- Long-term Investments- This account or asset category will be reported on the balance sheet immediately following current assets. It may include investments in the common stock, preferred stock, and bonds of another corporation. It also includes real estate being held for sale and also the money that is restricted for a long-term purpose such as a building project or the repurchase of bonds payable
- Land- It reports the cost of land used in a business
- Buildings- This account will report the cost of the building used in the business. The cost of buildings will be depreciated over their useful lives
- Equipment- This account reports the cost of the machinery and equipment used in the business. The cost of equipment will be depreciated over the equipment’s useful life
- Vehicles- This account reports the cost of trucks, trailers, and automobiles used in the business. The cost of vehicles is to be depreciated over the useful lives
- Furniture and Fixtures- This account reports the cost of desks, chairs, shelving, etc. that are used in the business. The cost of furniture and fixtures is to be depreciated over the useful lives
- Accumulated Depreciation- Accumulated Depreciation is known as a contra asset account because it has a credit balance instead of a debit balance that is typical for asset accounts. Whenever Depreciation Expense is debited for the periodic depreciation of the buildings, equipment, vehicles, etc. the account Accumulated Depreciation is credited. The credit balance in Accumulated Depreciation will continue to grow until an asset is sold or scrapped. However, the maximum amount of the credit balance is the cost of the asset(s). It is also known as non-cash expense
- Allowance for Doubtful Accounts- Is a contra-asset account since its balance is intended to be a credit balance or a zero balance. Used under the allowance method of reporting bad debts expense
Under Liabilities, the accounts are:
- Notes Payable- The amount of principal due on a formal written promise to pay. Loans from banks are included in this account
- Accounts Payable- This current liability account will show the amount a company owes for items or services purchased on credit and for which there was not a promissory note. This account is often referred to as trade payable (as opposed to notes payable, interest payable, etc.
- Salaries Payable- The current liability account which reports the amount of salaries earned by a company’s employees, but which have not yet been paid by the company
- Wages Payable- A current liability account that reports the amounts owed to employees for hours worked but not yet paid as of the date of the balance sheet
- Interest Payable- This current liability account reports the amount of interest the company owes as of the date of the balance sheet
- Other Accrued Expenses Payable- Obligations that a company has incurred, but have not yet been routinely recorded in Accounts Payable. For example, if the interest on a bank loan is paid on the 10th of each month, then on the last day of each month approximately 20 days of interest expense is an accrued expense payable
- Income Taxes Payable- A current liability account which reflects the amount of income taxes currently due to the federal, state, and local governments
- Customer Deposits- A liability account on the books of a company receiving cash in advance of delivering goods or services to the customer. The entry on the books of the company at the time the money is received in advance is a debit to Cash and a credit to Customer Deposits
- Warranty Liability- A liability account that reports the estimated amount that a company will have to spend to repair or replace a product during its warranty period
- Lawsuits Payable- A liability account that reports the amount payable as of the balance sheet date
- Unearned Revenues- A liability account that reports amounts received in advance of providing goods or services
- Bonds Payable- Generally a long term liability account containing the face amount, par amount, or maturity amount of the bonds issued by a company that are outstanding as of the balance sheet date
The last, Owner’s/ Shareholder’s Equity, there are:
- Common Stock- The type of stock that is present at every corporation (some corporations have preferred stock in addition to their common stock)
- Preferred Stock- A class of corporation stock that provides for preferential treatment of dividends: preferred stockholders will be paid dividends before the common stockholders receive dividends
- Paid-in Capital from Treasury Stock- A stockholders’ equity account with a credit balance
- Retained Earnings- A stockholders’ equity account that generally reports the net income of a corporation from its inception until the balance sheet date less the dividends declared from its inception to the date of the balance sheet
- Accumulated Other Comprehensive Income- A separate line within stockholders’ equity that reports the corporation’s cumulative income that has not been reported as part of net income on the corporation’s income statement
So now, we have the definitions of the accounts, let’s go back to the equation:
Assets= Liabilities + Owner's Equity
The accounting equation shows the relationship between assets, liabilities and equity. It is the basis upon which the double entry accounting system is constructed. For you to know which account is debit or credit, here’s a tip. All the accounts on the left side of the equation are Debit and on the right are Credit. But that’s not always the case, that’s just the general idea. The accounts increase and decrease depending on the business’ transactions. For example, Cash is under Asset so generally, it’s debit. but when Cash is spent, the Asset is decreasing. In this situation, Cash can become credit. And if so, that means, the owner is not profiting from the business. It’s either the owner covers the expenses from their own pocket or from loan.
Asset accounts. A debit increases the balance and a credit decreases the balance.
Liability accounts. A debit decreases the balance and a credit increases the balance.
Equity accounts. A debit decreases the balance and a credit increases the balance.
VAT vs NON-VAT
There are two kinds of Taxpayers- VAT and NON-VAT.
VAT or Value Added Tax is given to business entities if the capital amount upon business registration reached the threshold of 3 million pesos. The business is subject to 12% sales tax on its gross sales or receipts. Usually the business is given Sales Journal, Cash Disbursement and General Ledger as books of accounts.
NON-VAT is given to business entities if the capital amount is less than 3 million pesos upon business registration. That means, exception from paying 12% instead, paying only 3% or more (based on exception code) on its gross sales or receipts. The books given are Cash Receipts, Cash Disbursement, General Ledger, and Sales Journal (for accounts that doesn’t fall under Cash Receipts or Disbursement).
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How to write on Books of Accounts
You should write on Cash Receipts your sales based on your receipts given to the customers. The minimum amount to issue receipt is 25 pesos. There are only 2 accounts in this book— Cash and Sales.
Refer to the example below. As noticed, the Cash is debit and Sales is Credit. That’s because Cash is an Assets and Sales is Owner’s Equity. The sales of product or services cause the two accounts to increase because the idea is that, we receive sales, with sales there’s money. On the Tips to Remember section above, if the Assets account increases, it’s debited. If the Owner’s Equity increases, it’s credited.
On the example below, there are more than two accounts. The Cash is now credit because it is an outgoing cash, meaning to say, it diminishes the cash asset. Now, there are more debit accounts as you noticed. It’s important to list them as individual accounts for proper documentations and avoid confusions. And Rent Expense, Utilities and Equipment expense caused Owner’s Equity to decrease that’s why they are debit.
This one is a book for those accounts that don’t fit under Cash Receipts and Cash Disbursement. It has only two accounts:
The last book you want to write on is the General Ledger. Here is where all of the accounts from the 3 first books will be summarized. The usual frequency you can write on here is monthly or quarterly. In our examples above, we only have 6 accounts, namely: Cash, Sales, Rent, Utilities, Equipment and Loan Payable.
It’s important that you allot one whole page for each account. If you’re writing on your books manually, you can simply write the page number at the top corner of the page. If you’re using excel, it should look like the illustration below.
At the bottom of the excel, as you notice there is a number and a name. That number is the page number and the name such as Cash, Revenue, Equipment, etc., are the titles.
The format should look like this;
The page is divided into 2 columns; for Debit and Credit. Don’t forget the Particulars and reference number section. They are also important.
Now let’s begin writing on General Ledger. The first account we have is Cash. Let’s look at the examples above. The Cash Receipts, Cash Disbursement and General Journal have Cash in them.
On Cash Receipts, the Cash total is 4 030 and it’s debit. Write that down on your General Ledger page allotted for Cash. It should look like this;
After you write that in you General Ledger, go back to your Cash Receipts book, write a page number at the top corner just like you do in General Ledger. Let’s make our Cash Receipts example above Page 1. On General Ledger reference number field, write CR1.
That means, we got that information from Cash Receipts page 1. Same thing with Cash Receipts book, under the total amount, write the reference number GL1.
That means, you’ve written the information in General Ledger page 1.
The next book we have Cash is on Cash Disbursement. On example above, we have 14 000 total for Cash and it’s Credit. So on General Ledger, it should look like this;
Reference number is CD1 for Cash Disbursement Page 1. On the Cash Disbursement, under the
14 000, write GL1. Do the same thing with General Journal. Remember we’re still working on our Cash account. Once you’re done summarizing Cash in your General Ledger, it should look like this;
The reference number GJ1 means the information was from General Journal Page 1.
As you can see, I’ve added everything, but that’s not done yet. We need to do one more computation, that is, to subtract the Credit amount of 14 000 from Debit amount of 55 580.
The difference will be 41 580. If the difference is not negative, that means, it belongs to the Debit side.
Do the same thing to all other accounts. For your reference, I’ll include the screenshots of the finished examples of the other 5 accounts below.
So there, I hope this blog helps you in writing your journal entries. It’s a little bit confusing at first, but once you understand the logic, it’ll be so much easier. It only takes practice to be good at this.
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