| name | bookkeeping |
| description | Use when helping with financial record-keeping, expense categorization, tax preparation, or accounting questions — covers double-entry accounting, IRS categories, reconciliation, and financial reports |
| allowed-tools | Read Write Edit Glob |
Bookkeeping
When to Use
When helping with financial record-keeping, expense categorization, tax preparation, accounting questions, journal entries, bank reconciliation, chart of accounts design, or generating financial reports.
Core Concepts
Double-Entry Accounting
The Fundamental Equation
Assets = Liabilities + Equity
Every transaction affects at least 2 accounts (balanced)
Debits must equal credits
Account Types & Normal Balances
- Assets (debit +, credit -): Cash, accounts receivable, inventory, equipment
- Liabilities (credit +, debit -): Accounts payable, loans, credit cards
- Equity (credit +, debit -): Owner's equity, retained earnings
- Revenue (credit +, debit -): Sales, service income, interest income
- Expenses (debit +, credit -): Rent, salaries, utilities, supplies
Example Transaction
Purchase office supplies for $500 cash:
Debit: Office Supplies (Asset) +$500
Credit: Cash (Asset) -$500
Effect: Cash decreases, Supplies increases (total assets unchanged)
Chart of Accounts (COA)
Structure (Account number + name)
1000-1999: Assets
1000: Cash
1100: Accounts Receivable
1200: Inventory
1500: Equipment
1600: Accumulated Depreciation (contra-asset)
2000-2999: Liabilities
2000: Accounts Payable
2100: Credit Card Payable
2500: Loans Payable
3000-3999: Equity
3000: Owner's Equity
3500: Retained Earnings
3900: Owner's Draws (contra-equity)
4000-4999: Revenue
4000: Sales Revenue
4100: Service Revenue
4500: Interest Income
5000-9999: Expenses
5000: Cost of Goods Sold (COGS)
6000: Salaries & Wages
6100: Rent
6200: Utilities
6300: Office Supplies
6400: Marketing & Advertising
6500: Travel & Meals
6600: Insurance
6700: Software & Subscriptions
8000: Depreciation
9000: Income Tax Expense
Journal Entries
Standard Entry Format
Date: 2024-02-14
Description: Purchase office supplies
---
Debit | Office Supplies (6300) | $500
Credit | Cash (1000) | $500
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Common Entry Patterns
Cash Sale
Debit: Cash (1000) $1,000
Credit: Sales Revenue (4000) $1,000
Credit Sale
Debit: Accounts Receivable (1100) $1,000
Credit: Sales Revenue (4000) $1,000
Receive Payment
Debit: Cash (1000) $1,000
Credit: Accounts Receivable (1100) $1,000
Pay Expense (cash)
Debit: Rent Expense (6100) $2,000
Credit: Cash (1000) $2,000
Pay Expense (credit card)
Debit: Marketing Expense (6400) $500
Credit: Credit Card Payable (2100) $500
Take Loan
Debit: Cash (1000) $10,000
Credit: Loans Payable (2500) $10,000
Owner Investment
Debit: Cash (1000) $5,000
Credit: Owner's Equity (3000) $5,000
Owner Draw
Debit: Owner's Draws (3900) $1,000
Credit: Cash (1000) $1,000
Cash vs Accrual Basis
Cash Basis
- Record revenue when cash received
- Record expense when cash paid
- Simple, good for small businesses
- Example: Invoice sent Jan 15, paid Feb 5 -> Record revenue Feb 5
Accrual Basis
- Record revenue when earned (invoice date)
- Record expense when incurred (invoice received)
- GAAP compliant, required for corporations
- Example: Invoice sent Jan 15, paid Feb 5 -> Record revenue Jan 15
IRS Rules
- Cash basis: Allowed for businesses <$27M revenue
- Accrual basis: Required for inventory businesses >$27M
Bank Reconciliation
Why Reconcile?
- Catch errors (duplicate transactions, typos)
- Identify missing transactions (bank fees, deposits in transit)
- Detect fraud (unauthorized charges)
Process
1. Start with ending bank balance
2. Add: Deposits in transit (not yet cleared)
3. Subtract: Outstanding checks (written but not cashed)
4. Adjusted bank balance
5. Start with ending book balance (accounting records)
6. Add: Bank interest, deposits not yet recorded
7. Subtract: Bank fees, NSF checks (bounced)
8. Adjusted book balance
9. Compare: Adjusted bank = Adjusted book (should match)
10. If mismatch: Find discrepancy (missing transaction, error)
IRS Expense Categories
Deductible Business Expenses (IRS Schedule C)
- Advertising: Ads, social media, SEO, business cards
- Car & Truck: Mileage (67c/mile 2024), gas, repairs (if business use)
- Commissions & Fees: Sales commissions, payment processing fees
- Contract Labor: 1099 contractors, freelancers
- Depreciation: Equipment, vehicles, computers (multi-year assets)
- Insurance: Business liability, E&O, health (if self-employed)
- Interest: Business loan interest, credit card interest (business purchases)
- Legal & Professional: Lawyers, accountants, consultants
- Office Expense: Supplies, software, postage
- Rent: Office space, coworking, storage
- Repairs & Maintenance: Equipment repairs, website maintenance
- Supplies: Materials, inventory (not for resale)
- Taxes & Licenses: Business licenses, sales tax, property tax
- Travel: Flights, hotels, car rental (business trips)
- Meals: 50% deductible (100% if with client)
- Utilities: Phone, internet, electricity (if home office)
- Wages: W-2 employee salaries
Non-Deductible
- Personal expenses (groceries, personal car use)
- Owner's draw (not an expense, it's equity withdrawal)
- Loan principal payments (only interest is deductible)
- Capital expenses (equipment >$2,500 -> depreciate, not expense)
Patterns & Procedures
Recording Daily Transactions
1. Collect source documents:
- Receipts (paper or digital)
- Invoices (sent to customers)
- Bills (from vendors)
- Bank statements
2. For each transaction:
- Identify accounts affected (at least 2)
- Determine debit/credit for each account
- Verify debits = credits
- Record in journal entry
3. Categorize by type:
- Revenue: Sales, service income
- COGS: Direct costs (materials, labor)
- Operating expenses: Rent, salaries, utilities
- Other: Interest, taxes, depreciation
4. Enter into accounting system:
- Include date, description, amounts, accounts
- Attach receipt/invoice (digital copy)
Month-End Close Procedure
1. Record all transactions for the month (including last day)
2. Bank reconciliation:
- Compare bank statement to accounting records
- Add missing transactions (fees, interest)
- Mark cleared transactions
3. Reconcile credit cards (same process as bank)
4. Review accounts receivable:
- Follow up on overdue invoices
- Write off uncollectible debts (if any)
5. Review accounts payable:
- Ensure all bills are recorded
- Plan payments for upcoming month
6. Accrue expenses (if accrual basis):
- Unpaid bills received but not yet paid
- Prepaid expenses (insurance, rent paid in advance)
7. Record depreciation:
- Monthly depreciation for equipment, vehicles
8. Generate financial reports:
- Income Statement (P&L)
- Balance Sheet
- Cash Flow Statement
9. Review for errors:
- Unusual account balances
- Negative balances (should be rare)
- Duplicate transactions
10. Close the period (lock it to prevent changes)
Expense Categorization Workflow
Receipt: $150 for Facebook Ads
1. Identify expense type: Marketing & Advertising
2. Check if business-related: Yes (promoting business)
3. Check if deductible: Yes (ordinary and necessary)
4. Choose COA account: 6400 (Marketing & Advertising)
5. Record entry:
Debit: Marketing Expense (6400) $150
Credit: Cash or Credit Card Payable $150
6. Attach receipt to transaction
7. Note: 100% deductible for business advertising
Handling Loans
Loan received: $10,000 at 6% annual interest, 5-year term
Initial entry (loan received):
Debit: Cash (1000) $10,000
Credit: Loans Payable (2500) $10,000
Monthly payment: $193.33 (principal + interest)
- Interest: $10,000 x 6% / 12 = $50
- Principal: $193.33 - $50 = $143.33
Monthly payment entry:
Debit: Interest Expense (6600) $50
Debit: Loans Payable (2500) $143.33
Credit: Cash (1000) $193.33
Note: Only interest is expense, principal reduces liability
Common Pitfalls
Personal vs Business Expenses
- Mistake: Recording personal expenses as business (groceries, personal car)
- IRS Issue: Not deductible, can trigger audit
- Fix: Separate business and personal accounts, only record business expenses
Not Recording All Transactions
- Problem: Forgot to record bank fee, cash purchase
- Result: Books don't match bank statement, can't reconcile
- Fix: Daily review of bank/credit card transactions, enter all
Misclassifying Expenses
- Error: Recording equipment purchase as expense (should be asset + depreciation)
- Impact: Overstates expenses, understates assets
- Fix: Capitalize assets >$2,500, depreciate over useful life
Owner's Draw vs Expense
- Mistake: Recording owner's draw as "salary expense"
- Issue: Owner's draw is not tax-deductible (equity withdrawal)
- Fix: Use Owner's Draws (3900) account, not expense account
Loan Principal as Expense
- Error: Recording full loan payment as interest expense
- Problem: Principal repayment reduces liability, not an expense
- Fix: Split payment (interest = expense, principal = liability reduction)
Not Reconciling Accounts
- Symptom: "Books balanced last I checked" (months ago)
- Result: Errors compound, missing transactions, can't find mistakes
- Fix: Monthly bank reconciliation (non-negotiable)
Quick Reference
Debit/Credit Quick Guide
Assets: Debit to increase, Credit to decrease
Liabilities: Credit to increase, Debit to decrease
Equity: Credit to increase, Debit to decrease
Revenue: Credit to increase, Debit to decrease
Expenses: Debit to increase, Credit to decrease
Memory trick:
DEALERS (Debit increases: Expenses, Assets, Losses; Credit increases: Equity, Revenue, Sales)
Common Account Numbers
1000: Cash
1100: Accounts Receivable
2000: Accounts Payable
2100: Credit Card Payable
3000: Owner's Equity
4000: Sales Revenue
6000: Salaries
6100: Rent
6300: Office Supplies
6400: Marketing
Financial Reports
Income Statement (P&L):
Revenue - Expenses = Net Income
Balance Sheet:
Assets = Liabilities + Equity
Cash Flow Statement:
Operating + Investing + Financing = Net Cash Change
Accounting Software Options
QuickBooks Online: Most popular, comprehensive ($30-90/mo)
Xero: Clean UI, strong for inventory ($13-70/mo)
FreshBooks: Best for freelancers ($17-55/mo)
Wave: Free (ad-supported), good for micro-businesses
Spreadsheet: DIY (free, requires manual work)
IRS Mileage Rate (2024)
Business: 67c/mile (deductible)
Medical: 21c/mile
Charity: 14c/mile
Option 1: Deduct mileage (easy, no receipts needed)
Option 2: Deduct actual expenses (gas, repairs, insurance, depreciation)
Choose one (can't do both)
Checklists
Daily Bookkeeping
Weekly Review
Monthly Close
Quarterly Tasks
Annual Tasks
Recording a Transaction
