How to Record Basic Bookkeeping Entries
Part 1 - Get It Right The First Time!

Published November 2011 | Edited June 4, 2024

Today, we'll look at how to record some basic bookkeeping entries using examples from my method of recording your accounting journal entries for the do-it-yourself business owner ... just so you get the bookkeeping entry right the first time. :0)

INDEX for Common Bookkeeping Entries Series

Basic Bookkeeping Entries - Tips For Learning Debits and Credits

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The easiest way to develop a basic understanding of debits and credits is to become familiar with your chart of accounts.

If you are having trouble with debits and credits ... it can be very confusing at first ... you need to take a peek at my "cheat table" .

Keep my "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 learn how to work your way through learning your debits and credits, I will start each entry with Mr. Sands's method (see the cheat sheet) of describing:

1. What you received or what you bought ... the debit side of the transaction ... the use of funds; and 
2. Where it came from or what you gave ... the credit side of the transaction ... the source of funds.

You want (yes you do ... you just don't know it yet!) to learn how to think your way through booking an entry.

If you are using computer software like QuickBooks®, this article will help you see exactly what is happening when you book your entries. You can also use Ctrl + Y to open up the journal entry and see your debits and credits posted.

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 ...

• What you received (debit) - cash to deposit to bank account
• Where it came from (credit) - sale of a product or service

Debit (Increase) Cash in Bank (current asset on balance sheet)

Credit (Increase) Sales Revenue (on income statement)

Credit (Increase) GST/HST Payable and PST Payable if applicable (current liability on balance statement)

• What you received (debit) - cash to deposit to bank account
• Where it came from (credit) - payment on outstanding account receivable with discount taken

To calculate a 2% discount on a $100 customer invoice = $100 x 2 = $2 discount (if paid within 10 days). Therefore the amount owing if paid within 10 days is $98 not $100.

If you recorded the customer invoice at n/30 (e.g. at $100) but the customer pays in time to take the 2/10 discount, then you would make the following entry:

Debit (Increase) Cash to Deposit to Bank Account (current asset on balance sheet) $98

Debit Sales Discounts (Increase) $2 to record the discount taken by the customer

Credit (Decrease) Accounts Receivable (current asset on balance sheet) $100 to clear the receivable

• What you received (debit) - reduction of outstanding account payable with discount taken
• What you gave (credit) - cheque written on bank account

To calculate a 2% discount on a $100 invoice = $100 x .02 = $2 discount (if paid within 10 days). Therefore the amount due if paid within 10 days is $98 not $100.

If you recorded the vendor invoice at n/30 (e.g. at $100) but pay in time to take the 2/10 discount, then you would make the following entry:

Debit (Decrease) Accounts Payable (current liability on balance sheet) $100 to clear the payable

Credit (Decrease) Cash in bank (current asset on balance sheet) $98 to write the cheque

Credit (Increase) Purchase Discounts (on income statement) $2 to record the deposit taken

If you recorded the vendor invoice at 2/10 (e.g. at $98) but did not pay in time to take the discount, then you would make the following entry:

Debit (Decrease) Accounts Payable (current liability on balance sheet) $98 to clear the payable

Debit (Decrease) Purchase Discounts (on income statement) $2 to record the deposit taken

Credit (Decrease) Cash in bank (current asset on balance sheet) $100 to write the cheque

• 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 basic 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. See below for the basic bookkeeping entries.

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. See below for the basic bookkeeping entries.

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. Here's how the above entries change when using QuickBooks:

Step One A:

• If you are not extending credit to your customer, your basic bookkeeping entry when receiving the payment would be entered through Sales Receipt as follows:

Debit (Increase) Undeposited Funds (because you don't take the cash to the bank after every sale ... think of it as "holding drawer" for the cash)
Credit (Increase) Sales (if they paid immediately)

Step One B:

• If you extended credit to your customer and are now receiving a payment to apply to their account, your bookkeeping entry when you receive the payment would be entered through Receive Payment as follows:

Debit (Increase) Undeposited Funds (because you don't take the cash to the bank after every sale ... think of it as "holding drawer" for the cash)
Credit (Increase) Accounts Receivable

Step Two:

• When you make the physical bank deposit, your basic bookkeeping entry to capture the bank deposit would be made using the Make Depositfunction:

Debit (Increase) Cash in bank (current asset on balance sheet)
Credit (Decrease) Undeposited Fund (You've removed cash from the "holding drawer" to take to the bank)

• What you received (debit) - cash to deposit to bank account
• Where it came from (credit) - payment on outstanding account receivable with discount taken

Debit (Decrease) Accounts Payable (current liability on balance sheet)

Credit (Increase) Cash in Bank (current asset on balance sheet)

If you are using QuickBooks®, record this transaction through Pay Bills in the Vendor section of the flow chart or the drop down menu.

To read about a bad habit to avoid when recording this basic bookkeeping entry, click here

• 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 ... in QuickBooks this account should be an "other current asset" type NOT an "accounts receivable" type)

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 basic 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)

In QuickBooks write-off the bad debt using a credit memo not a general journal entry. Your "item" will be bad debt which you have defaulted to your allowance account.

Bad debt allowance is NOT used for tax purposes. This means if you are keeping your records on a tax basis not GAAP basis, you do not book an allowance in this manner.

You can find more on this topic including the bookkeeping entries when a bad debt is recovered in the article Canadian Self-Employed Tax Deductions. 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.

• 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.

Here's two ways you can choose for this basic bookkeeping entry.

First Option:

• 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

Second Option:

• 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.

That's it for today's chat. I'll keep adding basic 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.

See you on the next page ...
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