Understanding Purchase Return Journal Entry

A purchase Return Journal Entry is a type of accounting transaction that records the return of goods to the supplier. It is a crucial aspect of the purchasing process and requires accurate recording to ensure the financial statements reflect the true state of affairs.

Definition of Purchase Return Journal Entry

Journal entries for purchase returns are a record of a purchase return transaction. It shows the credit entry to the supplier’s account and the debit entry to the inventory account. This journal entry is essential for maintaining accurate records of purchases and returns.

Importance of Purchase Return Journal Entry

Accurate journal entry for purchases ensures the financial statements reflect the correct inventory levels, accounts payable, and cost of goods sold. It also helps in tracking the purchase returns and keeping a record of the reasons for the return.

What to include in Purchase Return Journal Entry

Purchase return journal entry should include the transaction date, the supplier’s name, the amount of the return, and the reason for the return. It should also have a credit entry to the supplier’s account and a debit entry to the inventory account.

Types of Purchase Return Journal Entry

When recording a purchase return, two types of journal entries can be made: full purchase return and partial purchase return.

Full Purchase Return occurs when the entire purchase is returned to the supplier. In this case, the journal entry will credit the accounts payable account and debit the cash or accounts receivable accounts if the payment was already made.

Partial Purchase Return occurs when only a portion of the purchase is returned. In this case, the journal entry will credit the accounts payable account for the returned amount and debit the inventory account for the number of goods returned.

Steps to Record Purchase Return Journal Entry

1. Review the invoice to determine the items being returned and their original cost.
2. Identify the accounts involved, including the accounts payable account, inventory account, and cost of goods sold account.
3. Create the journal entry by debiting the accounts payable account and crediting the inventory account and cost of goods sold account.
4. Include any applicable taxes or fees in the journal entry.
5. Double-check the accuracy of the journal entry.
6. Post the journal entry to the general ledger to update the company’s financial records.

Importance of Accurate Purchase Return Journal Entry

Avoiding errors in financial statements:

An accurate journal entry for purchases helps avoid errors in financial statements. The financial statements give a clear picture of the company’s financial position, and any errors in the statements can lead to wrong decisions.

Ensuring accurate inventory tracking

An accurate purchase return journal entry helps track inventory levels accurately. This helps avoid overstocking or understocking inventory, which can lead to financial losses.

Maintaining good vendor relationships

Maintaining accurate journal entries for purchase returns helps maintain good vendor relationships. Vendors appreciate businesses that keep accurate returns records, which helps build trust and better relations.

Summarising the significance of purchase return journal entries, the conclusion emphasises the avoidance of errors in financial statements, accurate inventory tracking, and maintaining vendor relationships.

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Bills Payable Meaning 

Bills payable are promissory notes issued by a company to pay for goods or services. The bill is usually for a short period, ranging from 30 days to one year. If the company does not pay the accounts payable by the due date, it can lead to legal action.

Bills payable can be of different types, such as trade bills payable meaning, commercial bills payable, and bank bills payable. The company’s suppliers issue trade bills to purchase goods and services. Commercial bills are issued by banks and are used to finance a company’s operations. In addition, the company issues bank bills payable to borrow money from the bank.

Role of Balance Sheet in Financial Reporting

The balance sheet is used by investors, creditors, and analysts as an essential financial statement that gives a snapshot of a company’s financial position at a specific time.

Liabilities are an essential component of the balance sheet, and bills payable are one of the critical components of liabilities.

How Bills Payable Affect Balance Sheet

They affect the balance sheet by increasing the liability component of the balance sheet. This is because the amount the company owes is reported as a liability on the balance sheet. 

Do you know bills payable come under which type of liability?

Bills payable due within a year are reported as a current liability. Bills payable due after a year are reported as a long-term liability.

Importance of Tracking Bills

It is essential to track accounts payable to manage a company’s cash flow effectively. If a company does not pay its creditor obligations on time, it can lead to legal action, which can be costly. Tracking bills payable helps a company stay on top of its financial obligations and ensures that the company pays its creditors on time.

Strategies for Managing Bills Payable

Managing bills is crucial for a company’s financial health. Here are some strategies to manage creditor obligations effectively:

Negotiate: Negotiating good terms with suppliers is essential to manage outstanding invoices effectively. In addition, negotiating longer payment terms can help improve cash flow.

Prioritise: It is crucial to prioritise and pay the bills on time to avoid legal action.

Monitor: Regularly monitoring outstanding invoices can help identify discrepancies and avoid late payments.

Consider: If a company struggles to pay its outstanding invoices, it is essential to consider alternative financing options, such as short-term loans or lines of credit.

Tips for Effective Management of Bills Payable

Here are some tips for effective management:

1. Create a schedule: Creating a schedule can help keep track of due dates and avoid late payments.
2. Use automation tools: Automation tools can help streamline the process and reduce errors.
3. Monitor cash flow regularly: Monitoring cash flow can help identify issues and avoid late payments.

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No business can afford to conduct all transactions in cash; thus, making credit available to clients is a requirement. But collecting book debts quickly and within the credit period is vital. If this is not done, debt becoming unaffordable will increase. So, what is the effectiveness and quality of a company’s credit collection operations? To address this question, a company’s Debtors turnover ratio is examined.

What Does The Debtor Turnover Ratio Mean?

In business, the debtor turnover ratio is also called Receivables’ Turnover Ratio.

Due to the delay in revenue realisation, receivables are formed when a business offers products on credit. Later on, these receivables are converted to cash. Therefore, the rate at which receivables are recovered directly affects the business’s liquidity condition.

The Debtors’ turnover ratio provides insight into a business’s collection and credit strategies. It measures how effectively a company’s management controls its receivables.

It establishes the rationality of the company’s debtors’ resources and the efficiency with which the company converts debtors to cash. In other terms, it measures how quickly debtors are paid off.

It is an important indicator of a firm’s financial and operational integrity. It can determine whether a company is experiencing difficulties collecting on credit sales.

The Formula for Calculating Debtors’ Turnover Ratio

The turnover ratio of debtors is computed as the ratio of net credit sales to the average trade debtors. This ratio is specified in terms of times.

Debtors Turnover ratio formula = Net credit sales / Avg AR

Credit sales are the total amount of goods or services sold or supplied on credit by a business to its consumers. These figures are exclusive of any returns or trade discounts.

Average accounts receivable is computed by dividing the sum of beginning and ending receivables for a specified period (usually monthly, quarterly, or annually) by two. Debtors & bills receivables are both included in the category of accounts receivable. They are the amounts customers owe for items sold, services provided, or contractual obligations.  

It is critical to remember that when calculating this ratio, allowances for doubtful debts are not excluded from total debtors or accounts receivables to avoid the perception of a larger collection of receivables.

The trade receivables turnover ratio is often used in financial modelling to forecast the balance sheet. The accounts receivable balance is calculated from the average time (days) in which revenue is expected to be received. To calculate the AR balance for each period, revenue is multiplied by turnover days and then divided by the number of days.

The higher the turnover of debtors, the more effectively the firm manages its credit.

 An example of debtors’ turnover ratio

Consider the following scenario a company has total sales of Rs 5,00,000, of which Rs 3,50,000 are credit sales. Account receivables have an opening balance value of Rs 3,00,000 and a closing balance value of Rs 1,00,000 after the financial year. Therefore, the debtor’s turnover ratio will be as follows

Debtors Turnover Ratio = 3,50,000/2,00,000 = 1.75 times

Credit sales total = 3,50,000

Average AR = (3,00,000+1,00,000) /2 =2,00,000 

High and Low Debtor Turnover Ratio

A high ratio could suggest

• Customers are permitted a short collection period.
• The business may run primarily on a cash basis.
• The company’s accounts receivable collection process is efficient.
• A high proportion of individuals pay off their debts promptly
• The corporation is conservative when it comes to credit extension. 

A low ratio could suggest

• Customers are permitted a prolonged collection period.
• The company has a long credit period with its suppliers, which helps it pay its bills on time.
• High-value cash receivables may be owed to the business.

Why Should You Monitor Accounts Receivable Turnover?

As you are probably aware, the accounts receivable turnover ratio indicates how frequently clients pay invoices due during the year. The higher the percentage, effectively your financial department collects money owed to your organisation. It’s a simple computation based on the tracking period’s net credit sales divided by the average AR. The average accounts receivable balance equals the sum of the AR balances at the start and end of the month divided by two. This computation should be simple enough to complete on a small portable calculator.

Average Debtor Collection Period and How to Calculate It?

An account’s average collection period is the number of days it takes on average to get the money back. It means the average number of days required for a business to convert its receivables to cash. This ratio also called days sales outstanding (DSO), is a common name for the receivables turnover ratio. The average collection period is often referred to as the Receivables (Debtor) velocity.

(i) The following formula is used to determine the Average Collection Period

Average Collection Period = Average Accounts Receivable or Average Debtors / Average Daily Credit Sales.

(ii) If the debtor’s turnover ratio is stated in terms of days, then the average collection period may be determined easily using the following formula

Average Collection Period = 365 days / Debtors Turnover Ratio

The lower the frequency, the better the position is going to be. A shortened collection period indicates prompt debtor payment, while a prolonged collection period indicates excessively generous credit terms and ineffective credit collection performance.

Advantages Of Debtor’s Turnover Ratio In Financial Report

It’s beneficial for the following

• Cash flow forecasting
• Recognising inefficient billing practices
• Your credit policy should be reevaluated.
• Maintaining the effectiveness of your credit policies.
• Customer screening guidelines are effective.
• Accuracy of invoicing.
• Efficacy of the dunning process.
• Deductible preventative initiatives

The Importance of the Debtor’s Turnover Ratio

This is a liquidity ratio combined with a high trade receivables turnover ratio, indicating improved liquidity. As a result, it assists creditors in determining whether the company will be able to pay the bills on time.

• Using this ratio, both employees and lenders may get a clear picture of the business’s financial health.
• It also assists sales managers in forecasting future sales.
• It is also beneficial in setting the organisation’s credit policy. The management may choose to grant a short-term credit facility to its clients to increase the organisation’s liquidity.
• Financial modelling also makes use of the trade receivables turnover ratio. It is used to generate budget projections and preliminary balance sheet figures. This ratio can estimate the number of accounts receivable or other debtors. 

Maximise Your Debtor Turnover Ratio

If your account receivable turnover ratio is too low, you likely need to modify your credit and collection rules and practices. Here are the five best ways to maximise your ratio

• Invoice in a timely and appropriate manner.
• Clearly state the terms of payment.
• Accept a variety of payment methods.
• Create follow-up reminders for yourself.
• Consider providing cash and prepayment discounts.

 Conclusion

When calculating a company’s debtors’ turnover ratio, it considers how quickly it collects outstanding cash amounts from its customers. Therefore, a high ratio is beneficial since it suggests frequent and efficient credit collection. Otherwise, a low receivables turnover ratio may indicate an unstable collection mechanism, inadequate credit guidelines, or customers that aren’t creditworthy.

The presence of a high ratio suggests a conservative credit strategy, whilst a low ratio shows the presence of liberal lending terms. A company’s credit policy should be neither overly liberal nor very restrictive. The former will lead to an increase in fund blockages and bad debts, whereas the latter will result in decreased sales, ultimately resulting in a decrease in profits.

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Bookkeeping is critical for maintaining accurate financial records. But, many small firms struggle to execute it effectively. Bookkeeping can assist you in developing a budget, ensuring tax compliance, evaluating your business’s performance, and assisting in making decisions.

Single Entry System – Definition

One of the most basic and easy bookkeeping methods, single-entry bookkeeping records each transaction as a single line item in a journal. For cash-based bookkeeping, a journal keeps track of how much money comes in and goes out.

The single-entry accounting method is primarily used to record financial disbursements and receipts. In the cash book, you will record both incoming and outgoing funds. Typically, assets and liabilities are tracked separately. This system maintains data for taxes paid, accounts payable, cash, receivables, and a few other accounts.

The single-entry bookkeeping system is a cost-effective method of documenting and tracking financial transactions. There is no need to hire specialised accountants or financial experts to keep track of a company’s financial operations. Furthermore, due to the small number of financial transactions, keeping a significant number of books is not necessary.

 Accounting Fundamentals: Single Entry System

• Single-entry bookkeeping may be the best option if you have a small business firm with a limited volume of transactions.
• With single-entry accounting, you can keep track of cash, tax-deductible expenses, and taxable income.
• A single entry system differs from a check register in that each transaction is entered with only one entry.
• Entries are entered in one column as positive or negative values.
• Keep a two-column ledger for revenue and expenses, with single-entry bookkeeping.
• Each transaction is entered on a single line, so it is still called “single-entry.”
• A business owner may open and manage only personal accounts in this accounting system.

 How Does The System Of Single Entry Work?

Single-entry bookkeeping uses a cash book to track revenue and spending. First, begin with your current cash balance for a specific period, then add your income and subtract any expenses you incur. After taking into account all of these transactions, you can compute the cash balance that remains at the end of the specified period. Due to the constant updating of the balance, an organisation is unlikely to go overdrawn on its bank account. A small business person can always view the balance at a glance.

 Types of Single-Entry Accounting Systems

1 – Pure Single Entry

There is no information on sales, purchases, cash and bank balances available in this; primarily, personal accounts are included. Therefore, this method is not quite useful in the real world because it provides no information about cash or daily transactions.

2 – Simple Single Entry

Even though this account is maintained using a double-entry method, only two accounts are considered, namely, the personal accounts and the cash accounts. Therefore, only entries from these accounts are examined, and no other accounts are considered.

3 – Quasi Single Entry

In addition to the personal and cash accounts, several subsidiary accounts are maintained in this method of accounting. Mainly sales, purchase, and bill books. Discounts are also recorded. Additional important information, such as wages, rent, and salaries, is also available. This method is used instead of a double-entry accounting system.

 Examples of Single Entry Bookkeeping

If we sold items to Ram on a credit basis for 10,000/-.

It might be represented as,

The outstanding amount of Ram is Rs. 10,000/-.

(The second account in which we must get funds from the Ram is not specified here.)

This bookkeeping method is only ideal for small businesses such as single stores.

The law/taxation dept does not authorise this procedure.

Double Entry System – Definition

Double-entry accounting is a system of documenting transactions in which each company transaction is recorded, like a debit or credit in two accounts. The debits and credits in a double-entry bookkeeping system must be balanced.

The double entry procedure is important when preparing financial accounts as it offers the arithmetic accuracy required by the tax department.

 Accounting Fundamentals: Double Entry System 

• A transaction is split across two accounts in a double-entry bookkeeping system. One account is debited, and the other is credited.
• A two-fold effect ensures that the system is accurate, comprehensive, and in compliance with GAAP. Each transaction is thoroughly recorded.
• Starting with source documents, this method proceeds to the journal, ledger and trial balance before moving on to financial statements preparation.
• Because this system fully records transactions, there are fewer opportunities for fraud and embezzlement. Errors are easily identifiable.
• With the two-fold character of the accounts, they can be reconciled.
• Tax laws also recommend that transactions be recorded using a Double Entry Accounting system. This procedure is more time-intensive than using a single-entry method.

How Does The System Of Double-Entry Work?

For error-free transactions, the debits and credits must always match. The double-entry accounting system is based on the following formula:

Assets = Liabilities + Owner’s equity

Your equation must be balanced on both sides at all times.

Types of Double Entry Accounting Systems 

The following are the many accounts that are taken into consideration when recording the transactions:

1. Asset Account – It indicates the amount of money related to an individual’s or an entity’s property. It could be a source of money or property.

2. Liability Account – This statement demonstrates what the same person owes the market. Liabilities are financial obligations to repay the amounts.

3. Revenue Account – This account is used to track the cash received by the account entity in revenues or interest.

4. Expense Account – This account reflects the total expenditure on goods and services, brand-lifting costs, advertising and publicity charges, etc.

5. The capital – The equity account records the owner’s initial capital investment and subsequent investments and earnings in the business. A company’s equity account is reduced when the owner withdraws cash for personal use, as is when the company suffers losses.

 Examples of Double Entry Bookkeeping

If we sold items to Ram on a credit basis for 10,000/-.

The Ram account will be debited, and the Sales account will be credited.

As Ram is the receiver of assets, we are the givers of goods.

Due to the dual effect recordings, this system is comprehensive, accurate, reliable, and legally acceptable. In this system, every business organisation follows accounting rules.

Comparing Single and Double Entry Bookkeeping

The following are the primary differences between single entry and double entry systems:

Golden Rules of Accounting

Depending on the type of account, each transaction would have a debit and a credit entry.

1. Real Account

2. Personal Account

3. Nominal Account

Accounting principles have been developed depending on the nature of all accounts. For example, all transactions involving a business must be recorded. The entity must generate journal entries reconciled in ledgers to account for these transactions. Journal entries are made under accounting’s Golden Rules. Each account has its set of Golden Rules, resulting in 3 Golden Rules of Accounting. The Golden rules outline how the business treats all transactions.

• Real Account: Debit for what comes in, Credit for what goes out
• Personal Account: Debit the Receiver, credit the giver
• Nominal Account: Debit all expenditures and credit all income

To apply these principles, one must first determine the type of account. These form the basis of accounting and are thus referred to as the Golden Rules of accounting. Without knowing the golden rules of accounting, one cannot make journal entries and thus cannot accurately account for transactions.

Single Entry System vs Double Entry System Differences

• Single-entry transactions are easy and do not require extensive accounting knowledge, but double-entry transactions require extensive accounting understanding.
• A single entry keeps incomplete records, but a double-entry keeps both sides of records.
• Comparing two accounting periods in a single entry system is quite challenging. In the double-entry method, we may immediately compare two accounting periods.
• A single-entry system is a simplistic approach that requires no special skills or knowledge to implement, but the double-entry system is a complicated method that takes special expertise and skills to complete.
• It is uncomplicated to prepare a trial balance or profit and loss account using the single entry system, which means that the country’s financial position cannot be depicted using the single entry system. On the other hand, using the double-entry system can be beneficial when producing an enterprise’s trial balance and statement of changes in financial situation.
• A single entry system is used to manage both personal and cash accounts. Personal, real, and nominal accounts, on the other hand, are maintained using the Double Entry System.
• Frauds are easily detectable in a double-entry system, whereas they are not in a single entry system.
• While the Single Entry approach is optimal for small businesses, larger organisations prefer the Double Entry System.

Conclusion

For very small business owners, the single entry method is appropriate since the business organisation or owner lacks the financial resources to absorb the cost of bookkeeping. In other words, all business owners must use a double-entry accounting method. Although a person with limited accounting expertise can maintain records using the single entry system, the double-entry system evolved due to the method’s inadequacies. As a result, almost every country has adopted the double-entry technique to keep accounting records.

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There are three main types of financial statements – Cash Flow, Profit and Loss Statement and the Balance Sheet. A balance sheet is a statement that reports the company’s assets, liabilities and equity at a given point of time, usually the end of a financial year. A Comparative Balance Sheet is a statement that considers the balance sheet of two or more time periods. 

While all three financial statements are necessary to make and analyse, in this article, we’re going to discuss a comparative balance sheet, why it is needed, and finish it off with an example. 

What is a Comparative Balance Sheet 

A comparative balance sheet is a financial statement that compares the business’s revenue, cash flow, profits, and other financial metrics from the previous years to the current year. The comparison is limited to previous years and from one time period to another time period or from one company to another company. 

It helps compare from where the business has started to where it is going, the business trend, and what particular actions need to be taken to ensure the business is headed that way. This is essentially what a comparative balance sheet aims to do.

Purpose of Comparative Balance Sheet 

Financial analysts make comparative balance sheets between two or more time periods to understand how the business has grown over time. What changes are working for the business? What ideas are not working for the business, and what actions need to be taken to ensure growth and profitability. 

Sometimes, financial analysts also make comparative balance sheets between two different companies in the same sector to understand how the competitors are doing, what they are doing differently, and how that impacts their overall balance sheet and company performance. 

The purpose of a comparative balance sheet is to make executive decisions about the company’s future based on past and current business performance. Any owner, at whatever scale, should always aim to make a comparative balance sheet to grow and scale the business.

Components of a Comparative Balance Sheet 

A comparative balance sheet includes assets, liabilities and equity of a business, just like a general balance sheet, but compared over two or more time periods or two or more companies.

Difference Between Balance Sheet and Comparative Balance Sheet 

A balance sheet is a financial statement that reports a company’s assets, liabilities, and equity in a financial year. It helps understand the business’s current position, how the business has done in the financial year, and the final position of the assets and liabilities in that financial year. On the other hand, a comparative balance sheet contains all the balance sheet elements but compares the balance sheets for two or more periods.  It also compares the balance sheets of subsidiaries of the same company or companies of the same industry.  

Format of a Comparative Balance Sheet 

The comparative balance sheet has various numbers, ratios and other financial information. Just reading the comparative balance sheet is not enough, one needs to understand and analyse the information to make better decisions. There is usually a set format of the comparative balance sheet that is followed globally. 

An example of a comparative balance sheet looks something like this:

This is what a comparative balance sheet looks like on a very basic level. Of course, this is only for representation purposes, but the idea behind the example is to understand that the above balance sheet is being compared over two years, and it is being noticed how the assets, liabilities and equities have increased or decreased over time in absolute terms as well as in percentage terms.

Advantages and Disadvantages of a Comparative Balance Sheet

Comparative balance sheets are made to understand a business’ situation, make decisions about the future, and understand how the business is doing compared to the sector. 

Making a comparative balance sheet and understanding it can be very beneficial for you and your business. It helps your business grow and ensures you’re always on top of trends.

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Contra Entry definitions

Contra entry is defined as the transactions that involve cash and bank account. Contra entry is also known as contra vouchers. In simple words, we can say that contra entry is any transaction involving a transfer of cash between two cash accounts or between a cash account to a bank account or even between a bank account to another.

Contra Entry examples

Below you can see some of the examples of contra entry.

1. Transferred cash to petty cash – INR 2,500 is a contra entry as it affects two accounts, the cash account, and the petty cash account
2. Cash withdrawn from bank for office use – INR 2,500 is a contra entry as the transaction affects both cash and bank account.
3. Deposited INR 12,000 to the bank account is a contra entry as it affects two accounts, the cash, and the bank account.

Other examples which are not contra entry are as follows:

1. Received cheque from Mr. A 6,000 and paid into the bank – this is not a contra entry as only bank account is affected here, not the cash account
2. Purchased stationery for INR 2500 – this is also not a contra entry as only the cash account is affected 
3. Paid rent by cheque of INR 2000 – not a contra entry since the transaction only affects one account which is the cash account

After comparing the example of contra entries and non-contra entries, you will have a clear-cut idea about how a contra entry is formed and when a contra entry should be recorded in the books.

How do you enter Contra Entry?

If the contra entries are recorded traditionally, then a cash book with two columns namely cash and bank is prepared. Both the aspects of the transaction should be entered in the same book which is known as the Contra Book. 

Now when you enter the contra entries, in the debit side of the contra book, you must enter – To Cash a/c which should be under the particulars column. Then the amount will be noted in the bank column. 

On the credit side of the book, you must enter – By Bank a/c under the particulars column. This amount will be entered in the cash column. 

All the contra entries are denoted by the letter C in the L.F column on both sides of the cash book. These days a majority of the business uses accounting software to make the work simpler and accurate. If accounting software like myBillBook is used, then the transactions are posted automatically into the applicable ledger.

If you want to record a contra entry, then you should record a payment against the sales and the purchase invoices. 

In the event of no money, the exchange happened on the contra entry, then the current account should not reflect the same. 

Therefore, it is a good practice to have an individual bank account used to offset the two invoices. 

Following are the steps to create a contra entry bank account.

• Visit the Banking page and click on the New button
• Then select Bank Account
• Click on Current under the Account type list
• You must then enter the Account name and click on the Save button
• Click on the Contra entries bank account
• You must now check the nominal code of the Ledger Account to verify if it is correct
• Click on the Save button

Now to record a payment against the sales invoice using a contra entry bank account, follow the given guidelines.

• You should go to the Sales section and select Sales Invoices
• Click on the invoice you want
• Then select Record Payment
• Add all the applicable information (the amount received, the amount paid to the bank account, the date on which the amount is received, etc).
• And click on the Save button.

To record a payment against the purchase invoice, use the following steps.

• Access the purchases section and select the Purchase Invoices
• Select the accurate invoice
• Then click on the Record payment button and enter all the information required
• Finally, click on the Save button

How many types of Contra transactions are there?

There are four different types of contra account: contra asset, contra liability, contra equity, and contra revenue. 

1. Contra asset account will include the details of the allowance for a doubtful account and even the accumulated depreciation. These asset accounts are recorded with a credit balance that will decrease the balance of an asset.

2. A Contra liability account will hold the debit balance and one of the examples of contra liabilities is a discount on notes or bonds that are payable. When you compare contra asset and contra liability, contra liability accounts are not very popular as contra asset account. The liability recorded as a debit balance is mainly used to decrease the liability balance.

3. A Contra equity account is the equity account of stockholders which has a negative balance, which means the account has a net debit balance. Contra equity account will reduce the total amount of equity that a business holds. An example of contra equity is the treasury stock which will signify the amount paid to buy back the stock.

4. A Contra revenue account will reduce the gross revenue that results in net revenue. There are sales discounts and sales returns for contra revenue accounts and these contra revenue accounts will have a debit balance.  

Contra Entry format 

Below is the double cash book format in which you can see how the transactions are recorded. 

FAQs- Contra Entry 

1. When do we have contra entry?

We have a contra entry when both cash and bank account are affected at the same time in any one transaction in the business. Such transactions that are related to contra entry are as follows:

• When cash is withdrawn from the bank
• When cash is deposited in the bank account

In the first scenario, where cash is withdrawn from the bank the entry will be:

Cash a/c dr

To bank a/c

Whereas in the second example, when cash is deposited in the bank the entry will be:

Bank a/c dr

To Cash a/c

2. When does contra entry come in a double column cash book?

The contra entry will come in a double-column cash book when the cash is either withdrawn or deposited into the bank.

3. What is contra entry in the banking system?

A contra entry is a record in the banking system when the debit and credit affect the same parent account.

4. What is the purpose of a contra entry?

The main purpose of a contra entry is to specify the transactions that affect both bank and cash balances. This type of entry will not affect the financial position of a business.

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This guide will help you understand what single entry bookkeeping is, who should be using this method, its advantages and disadvantages, and the differences between single entry and double-entry methods.

What is Single Entry Bookkeeping?

Single-entry bookkeeping is a simple method of accounting with only one entry for each transaction. In this form of accounting, a transaction must be recorded against one category only, either an expense account or an income account. In its simplest form, single entry bookkeeping is recorded in a table or a cash book.

This method of bookkeeping is a concise record of receipts and payments. It can be performed easily using a manual cash book or in a spreadsheet. It is usually used for personal finances, societies, and small businesses, as it is an ideal way to get started with accounting. With only the essentials recorded, the single entry system usually does not require accounting software or a specialist accountant. 

Cashbook and its columns

The journal that businesses generally use to record transactions is called a cash book. Single-entry bookkeeping is best done with a cash book, as it contains columns for you to list down all cash transactions. 

At a minimum, these are the elements that a cash book records: 

Date: The day that the transaction occurs. 

Description: The description is for your reference. So, include information that you think will help you reference transactions in the future. However, ensure that you only enter relevant information to avoid cramming the description.

Transaction amount: Place this information either in the income or expense columns. Ensure that you maintain separate columns to record credit and debit. It will help you avoid unnecessary hassles. 

Balance: This column records the updated balance of your business each time a transaction is recorded. You can add the income and deduct the expenses based on the transaction.

Reference: This can vary from business to business. You can choose whatever information you think will help you find a particular transaction. By including this column, you can ensure you do not need to waste time finding essential details in the future.

Advantages of Single Entry Bookkeeping

One of the most significant advantages of the single entry system is that it is very straightforward. You don’t need to incur high costs, and people with limited experience can easily do this. It doesn’t require any modern software or complicated training. Any simple spreadsheet with the needed columns is more than enough. 

If you are just starting with your business and deal with a limited number of transactions, the single entry system offers everything you need. A significant advantage is that generating the profit & loss (P&L) statements becomes way easier.

In the initial phase of a business, it is critical to watch out for profitability. A P&L statement reflects how profitable your company has been in a specific period. It helps understand how their strategy has performed and whether there is a need to cut down on costs. Single-entry bookkeeping is ideal for producing a P&L statement, and hence, perfect for small businesses. 

Disadvantages of the single entry system

Although the single entry system makes it easier to manage accounts, often it doesn’t contain all the required information. As your business grows, this system will not give you access to vital data for strategising for the future. 

In this system, it is challenging to keep a record of the assets and liabilities. Even though these are recorded, there is only one entry for each. As a result, it becomes less likely to detect losses and frauds. Since each entry is not matched, a single entry system increases the chance of accounting errors. Moreover, with only one entry, the administration might not have clear insights into the overall company performance. 

Who should use the single entry method of accounting?

If your business begins to expand, you might not be able to afford expensive software tools or manual accounting services of an agency. Single-entry bookkeeping is ideal for firms with a low number of transactions and modest revenue.  

The best part about this bookkeeping method is that there are no complexities involved. It is the easiest and fastest way to calculate profits – it only includes metrics that are essential for determining a business’ financial health. 

This system of bookkeeping is highly relevant and helpful for newly established organisations. It can also prove to be useful for entrepreneurs who are working on their own. Even if your business has grown and involves a high number of transactions, it only makes sense to stick with this system if there are limited metrics involved. Thus, if you are looking for a system that helps you quickly calculate profits and avoid the complexities of double-entry bookkeeping, this is the way to go. 

Difference Between Single Entry and Double-Entry Bookkeeping

Entries

As already mentioned, single entry bookkeeping contains one entry for each transaction. On the other hand, double entry bookkeeping records two entries- debit and credit, for each transaction. Usually, separate accounts are maintained for credit and debit, while single entry bookkeeping involves only a single account for a transaction.

Recorded elements

The single entry system forms the basis for cash accounting. As the name suggests, this system focuses on recording cash – when it comes in (revenue) and when it goes out (expenses). Here, cash means monetary value in the form of a cheque, physical cash, card, electronic transfer, or any other payment method. 

Double-entry bookkeeping is the basis of accrual accounting. It involves five accounts, including revenue, expenses, liabilities, assets, and equity. 

Way of recording

In the small-entry system, businesses record an expense when paid and revenue when it comes in. On the other hand, in the double-entry system, revenues are recorded as soon as they are earned, irrespective of when they are received. And the expenses are recorded as quickly as they are due, whether they are paid or not. 

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But what exactly does small business bookkeeping entail?

Let’s understand this in detail.

What is Bookkeeping?

In a business firm, bookkeeping refers to the process of keeping a record of every financial transaction that takes place within the business every day. A bookkeeping ledger can be a manual one where a bookkeeper makes regular entries in pen and paper or Microsoft Excel, or it can be a specialised bookkeeping software where a computer program does the task of the bookkeeper. 

Regardless of the mode of record-keeping, bookkeeping is supported by relevant documentation such as invoices, receipts, purchase orders, or other similar financial records to prove that a transaction has taken place. Comprehensive and up-to-date bookkeeping is essential for the business’ internal stakeholders and external parties such as investors and financial institutions. Hence, accuracy is crucial to the process.

Bookkeeping vs Accounting: How are they different?

Speaking of small business bookkeeping, the terms ‘bookkeeping’ and ‘accounting’ are often used interchangeably. While both are incredibly vital for the business, there is a fundamental difference between the two.

Bookkeeping is simply the day-to-day tracking and recording of a business’s financial transactions. On the other hand, business accounting involves interpreting, classification, analysing, and reporting financial data. While small business bookkeeping merely provides information on the daily financial transactions, accounting is a more intensive process, the outcome of which lets management make crucial business decisions.

In other words, bookkeeping focuses on keeping a proper and organised record of financial transactions, whereas accounting analyses a company’s financial situation and communicates it to the relevant stakeholders. Read more about bookkeeping vs accounting.

Types of Bookkeeping

There are two most commonly used methods of bookkeeping – single-entry and double-entry systems.

• Single-entry bookkeeping system: As the name suggests, single-entry bookkeeping involves recording one entry for each financial transaction. It is one of the most basic bookkeeping systems that a business might use for recording daily receipts or generating a daily/weekly report of the cash flow. This system works best for smaller enterprises that deal with a low volume of financial transactions.

• Double-entry bookkeeping: In contrast to the previous system, double-entry bookkeeping requires double entries for each financial activity. For each debit entry, the double-entry bookkeeping system records a corresponding credit entry and provides checks and balances. In contrast to the single-entry system that enters transactions with every bill paid and deposits made, the double-entry system is not cash-based, and transactions are only recorded when revenue is earned or debt is incurred. The double-entry bookkeeping system is ideal for large and complex companies.

Both the above bookkeeping systems have their unique pros and cons. Business owners must choose one that best suits their scale and goals.

Features of Bookkeeping

Small business bookkeeping includes the following main features and objectives:

• Complete and permanent financial recording of the business: Bookkeeping provides the systematic recording of financial transactions as they occur and identifies financial transactions from a large number of daily business proceedings.

• Identifying profit and loss: Small business bookkeeping is essential to know whether your business is running on a net profit or loss. Bookkeeping offers a clear profit and loss statement of the company and facilitates subsequent action.

• Indication of the current financial health of the business: Assessing the financial position of a business doesn’t end at the profit and loss statement – it extends to the balance sheet, which details the balance of expenditure and income of a business. Without accurate bookkeeping, preparing a balance sheet is practically impossible.

How does myBillBook help in small business bookkeeping?

Small business bookkeeping can be a tedious process if done manually. There always remains a possibility that a manual bookkeeper will make errors that could result in disastrous consequences for your business. With myBillBook billing and stock inventory software, bookkeeping gets as easy and hassle-free as it could be!

Here’s how myBillBook makes bookkeeping efficient for small businesses:

• Manage your accounts easily: With myBillBook, you can seamlessly manage your accounts payable and accounts receivable, as well as record all business transactions such as sales, purchases, quotations, and returns.

• Collect payments faster: myBillBook offers a digital collection of payments via UPI and lets you send payment reminders to parties to ease the task of bookkeeping.

• Organise your complete stock inventory: Using myBillBook, you can easily upload the entire stock inventory after choosing from a list of more than one lakh items spanning across pharma, FMCG, and electronics. You can link other accounting apps such as Vyapar, Marg, and Tally to myBillBook and manage your inventory and bookkeeping in one place. 

• Get comprehensive business reports: In addition to the above functionalities, myBillBook offers more than ten different types of business reports to help you analyse and manage your business. Reports include sales summaries, party statements, profit and loss reports, expense transaction reports, GST reports, and many more.

Why should you use myBillBook for small business bookkeeping?

myBillBook offers perks like no other. Here’s why you should choose myBillBook over the rest:

• It is a free bookkeeping software: myBillBook software is free to use, and most of its services like GST billing, invoicing, inventory management, etc., come at absolutely no cost. 

• It is for all business types: You can avail of bookkeeping and other services on myBillBook regardless of your industry and business type (distributor/trader/wholesaler/retailer/stockist). 

• It is 100% safe and secure: While using myBillBook, you need not stress about security. The software is completely safe and secure with sophisticated encryption technology in place.

• It generates comprehensive business reports: myBillBook not only offers easy accounting but also reinforces your business function with valuable reports. Do you need a quick and instant profit and loss report or a sales summary? myBillBook is at your disposal!

• It offers easy data sync and backup: With myBillBook, you will never lose your data because all your information gets automatically backed up and synced across all your devices (computer, smartphone, and tablet). In addition, you can quickly transfer data from your other accounting apps to myBillBook.

• It offers bookkeeping on the go: myBillBook has a robust mobile app, which means that you can access your books anytime and anywhere with only a few clicks.

• It is a smart option that saves time and effort: Maintaining a bookkeeping book manually requires a lot of time, energy, and of course, human resources. So, when technology provides an easy way out, why take the rough terrain? myBillBook is a smart, convenient, and economical way to get your small business bookkeeping done accurately and effortlessly.

The post Guide To Bookkeeping appeared first on MyBillBook.

The double-entry system of bookkeeping is a system in which each transaction is recorded in at least two accounts. This system provides a more accurate record of a company’s financial activities.

Each transaction—both credits and debits—has a corresponding entry. Every transaction has two parts and affects two ledger accounts, which forms the foundation of the double-entry bookkeeping system. 

For instance, if a business borrows money from a bank, there will be two entries—one for an asset and one for a liability. This is because it will increase the assets for the cash balance account and the liabilities for the loan payable account.

In accounting, there is an equation: Liability + equity equals assets. 

For the books to balance out at the end of the day, both sides of every transaction must be accounted for. This means that for every asset increase, there must be an equal increase in liabilities. If the total assets do not equal the total liabilities plus capital, then something has gone wrong and needs to be fixed in the books of accounts.

Principles of Double-Entry System of Bookkeeping

The following guidelines should be followed when using the double-entry bookkeeping system:

• There must be a credit for every debit.
• Credit appears on the right, with a debit to the left.
• The credit provides the benefit, and the debit receives it.

Certain guidelines must be followed when posting double-entry transactions in the bookkeeping process, which are as follows:

• Personal accounts are general ledger accounts for individuals, groups, and businesses.

For Individual Accounts: Debit the recipient, credit the giver

• The Real Accounts are general ledger accounts linked to assets and liabilities distinct from those of specific individuals or groups.

For Real Accounts: If money comes in, it is a debit. If money goes out, then it is a credit.

• All expenses, incomes, gains, and losses are recorded in the Nominal Accounts, general ledger accounts.

For Nominal Account: Debit all expenses and credit all profits.

Journal Entries of Double-Entry System of Bookkeeping

Each transaction is noted as credit and debit in a journal. As a result, each transaction must be recorded in two accounts.

The main rule for the double-entry system is that each transaction must have a debit and credit entry. These two entries will be on opposite sides of the general journal. The debit entry will be on the left, while the credit entry will be on the right. The total of debits and credits must be equal to balance the transactions.

The following table shows an example of a double-entry of transactions in a journal:

Advantages of Double-Entry System of Bookkeeping

The double-entry bookkeeping system prevents errors and provides a clear and accurate record of a company’s financial transactions.

There are several advantages of using the double-entry system of bookkeeping such as:

1. Ensures all financial transactions are recorded

The company should continue to use a double-entry bookkeeping system if its transactions are significant. This helps maintain crucial financial reports like an income statement and balance sheet. Moreover, in contrast to the single-entry system, it provides comprehensive information about all transactions because each has a source and a destination.

2. Prevent financial errors

The formula states, Assets= Liability + Equity

This is important because if the information is wrong, it looks like the records have not been well kept, which could hurt the organisation’s reputation. The double-entry system ensures balance sheets and books of accounts are accurate, and being accurate also helps accountants reduce mistakes.

3. Provides a clear and accurate record and helps in decision making process

The double-entry system benefits companies by giving the organisation control over the business. In addition, the system offers valuable information about the profitability and financial stability of different aspects of the business, which can help inform better financial decision-making.

The detailed records help accountants maintain records that can be used for comparison purposes. This way, businesses can compare the details of the previous year with the current year and identify and address any deviations.

4. Supports statutory bodies and banks that rely on them

The double entry system is more reliable than other methods. It makes it easier for businesses to get credit and attract investors. 

The double-entry system of bookkeeping is like getting a checkup from the experts. It provides a complete and accurate picture of the company’s financial health, which is why the Income Tax Department prefers it.

This system is also accepted by the statutory organisations overseeing businesses, such as the Registrar of Companies, SEBI, RBI, etc.

FAQs on Double Entry Bookkeeping

What does "double-entry bookkeeping" mean?

The double-entry bookkeeping method records business transactions where there is an entry for each transaction in at least two accounts. In this system, the total debits must equal the total credits.

What types of records are maintained for entries?

A cash register records the transactions' income and expenses in single-entry bookkeeping. On the other hand, the double-entry system begins with a journal, then moves on to a ledger, a trial balance, and then financial statements.

What are double-entry accounting's two rules?

Every transaction must be recorded in two or more accounts, and the total amount debited and credited must be equal.

Single Entry Bookkeeping
Guide To Bookkeeping
Balance Sheet Format

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