This bookkeeping example shows what happens step-by-step to business transactions in the bookkeeping records when they are entered into journals, ledgers, reports and cashbook. You can trace the money trail through the different forms / spreadsheets.
This example has screenshots of manual bookkeeping - using paper books and handwriting...
...and at the bottom of this article are screenshots from computerized bookkeeping software.
I have used two business transactions to illustrate the process.
We, the bookkeeper, look at the cash deposit slip and the purchase receipt in the folder.
We enter the transactions into the books in the following order:
Journals and ledgers are books used in the double-entry method of bookkeeping.
The Cashbook topic is covered further down this page.
Journals are always done first before ledgers.
Journals show which ledger accounts will be changed by the transaction.
The source of information for the journal is the document; in this example it is the deposit slip and invoice for the income, and the General Store receipt for the expense.
Transactions are entered in date order going down the page of a journal book.
There is always a one-line gap between transactions.
When the page is full, turn the page over and carry on.
Every transaction has:
…all placed one line under the other with no line spaces.
Some transactions might have more than one debit entry if one payment made covers different types of expenses.
Some transactions might have more than one credit entry if one payment received covers different types of income.
This bookkeeping example is just for one type of income and one type of expense.
The one income journal is split into two ledgers.
The one expense journal is split into two ledgers.
So, you can see from this journal bookkeeping example that the Bank entry is flipped from a debit entry on the income transaction, to a credit entry on the expense transaction.
How do you know when to debit an account or when to credit it?
You can check how from our topic on debits and credits and get a cheat sheet.
Once a transaction is entered as a journal, it is transferred to the general ledger accounts book using the journal as the source of information.
The ledger account numbers are set by the business and can be any numbering system – there is no hard rule about it.
Businesses that use bookkeeping software may find that the numbering system is already set by the software based on the software company’s numbering choice. However, they most often allow for the numbering system to be edited to your choice.
Below is our example of a manual chart of ledger accounts. The general ledger accounts used in the bookkeeping example on this page have been highlighted in yellow.
You can download a free PDF of the Chart of accounts by clicking on the graphic below.
You can find out more about the ledger books and formats here.
Debits are always on the left-hand side of the ledgers
Credits are always on the right-hand side of the ledgers.
At the end of the month the closing balance of each ledger is calculated so that we can produce a report.
The closing balances are generally written on the side of the ledger that corresponds to whether a debit or a credit increases that account.
If the bank account went into overdraft then the closing balance would be on the right-hand side of the ledger.
The closing balance of the bank ledger on the last day of the month needs to be reconciled against the Statement of account from the bank. In other words, does the closing balance in the ledger match the closing balance of the bank statement.
The final thing is to prepare a Profit and Loss Report at the end of the month to show to the business owner so he can see if he made a profit or a loss.
Of course, this bookkeeping example has only two transactions for the whole month, which is not realistic but simply serves to show you what happens.
We must look at the ledgers to get the figures for the report.
Income always goes first on the report, so in this example the Sales ledger total of $100 goes first on the report.
Then we know that next comes expenses and so the $25.00 on the Purchases ledger is entered onto the report.
The net profit is calculated by subtracting expenses away from income; it comes to $75.00.
Another way to look at tracking business transactions through the bank is to keep a cash book.
A cash book is like a bank ledger but is formatted differently.
It is possible to maintain a manual cashbook for a small business and produce a Profit and Loss Report from just the cashbook without having journals and ledgers.
It’s called single-entry bookkeeping and is the simplest method of bookkeeping.
In this simple cashbook bookkeeping example, you can see that each transaction is entered in date order down the page with one description column, one income column and one expense column.
You could have a cashbook with more than one income or expense column as in this bookkeeping example below.
Learn more about cash books here.
Here is a screenshot of the Bank Transactions window in the free Manager accounting software. This is the first place computerized business transactions are entered. They are not displayed like a manual journal book, but this is fine. The software knows where to 'post' everything. So this Bank Transactions window is kind of like your Journal or your Cashbook.
Manager does not show *journal entries for transactions entered in the bank transactions window. The general ledger in the example below shows the debit and credit accounts affected by the transactions.
(*Manager does allow manual journals to be entered if any of the ledger accounts need adjusting/correcting - these will not affect the bank balance).
Looking at the above general ledger example you will see that:
This is what we would expect to see because every debit should have a balancing credit and vice versa.
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