Bookkeeping & Accoun ng Basics:

Over 20 Examples of Bookkeeping &

Accoun ng Transac ons!
Calvin K. Lee, MBA, CPA, CA, CPA (Illinois)

©2015, 2021
All Rights Reserved

This book is dedicated to all the accounting

partners and colleagues I’ve had the privilege to
work with.
Praise for “Bookkeeping & Accoun ng Basics”
“This is awesome! I love the short chapters with clear examples.”

“I’m 100% certain to say that this book should be accounting 100 pre-requisite
course for anyone who wants to take introduction to accounting! Very clear,
concise, and concrete. Well done!”
- K.T., CPA, CA

Praise from readers of Calvin’s books:

“Very practical, good reading!”

“I really enjoy your books.”

“Well done, very informative. I like how you used your example.”

“By using his own example, Calvin gives hope for the readers.”

“Great real life experience that you can relate to easily.”

“Very clear, concise, and concrete. Well done.”

“Practical tips and relatable examples. A pleasant read. Congratulations on your

recent publications! Keep writing more.”

“I’ve taken notes on my smart phone and will implement them in my life.”

“Thanks for the little pearls of wisdom and optimism.”

Table of Contents
Introduction

Your irst day on the job as a bookkeeper or accountant

Types of accounts in bookkeeping

Balance sheet and income statement

Debits and credits must equal

Assets

Liabilities

Revenue

Expenses

Taxes

Accounts receivable

Accounts payable

Purchasing inventory

Inventory costing methods

Lower of cost or market (LCM)

Capital assets

Depreciation of capital assets

Sale of an asset
Shareholder loans – shareholder pays out of pocket

Shareholder loans – company pays on behalf of shareholder

Year-end closing

Final thoughts

About the Author

Note to the reader

Introduc on
After reading this book, you will be able to do basic bookkeeping with
con idence.

Accounting is the language of business. Whether the company is a global Fortune

500 company or a local mom and pop shop, both of these companies need a system
to keep track of income, expenses, assets purchased like computers or furniture,
liabilities obtained like mortgages, and equity components such as number of shares
issued or how much the owner has invested in the company. Of course, the bigger
the company and the more transactions it has, the more complex the accounting.

Small & medium sized businesses and home businesses do not need sophisticated
accounting software. They just need a simple system to keep track of the company’s
transactions. This book is written for beginners to accounting and bookkeeping.

I am a designated CPA accountant in both Canada and the U.S., and have
worked since 2007 as an accountant and auditor in public accounting irms
and companies. The majority of my clients were small to medium sized businesses.
Some of my clients’ bookkeepers struggle with the accounting software and the
basic accounting concepts.

I have also taught accounting courses at York University’s reputable Schulich School
of Business in Toronto while I was obtaining an MBA degree myself there. I taught in
the Bachelor of Business Administration (BBA) program and Master of Accounting
(MAcc) program.

I enjoyed teaching accounting concepts to irst year students, and I understand that
many of them struggle to learn the accounting language. Textbooks are sometimes
long and dif icult to follow. My greatest satisfaction in teaching is to explain a
concept that is challenging a student, and watch a proverbial light bulb light up as
they begin to understand the concept.

Since you’ve picked up this book, I believe you want to learn the basic concepts of
accounting and bookkeeping for small & medium sized enterprises and home
businesses. I will use the simplest language to explain basic concepts so that you
can perform accounting and bookkeeping duties for your business or company.
This book is designed to be as practical as possible, so I’m going to focus on
application rather than explaining detailed theory and concepts.

Think of this book as a quick reference guide rather than a detailed textbook.
Therefore, it does not cover all the topics in a irst year accounting course. This book
covers the most common transactions an entry accountant or bookkeeper will do on
a daily basis.
Your first day on the job as a bookkeeper or accountant
Congratulations! You got the job!

Imagine your irst day on the job as a bookkeeper or accountant. You are handed a
stack of invoices from your company to its customers, a cheque book with cheque
stubs of cheques written by the shareholders, and a stack of expense receipts like
hydro & electric bills, travel, meals & entertainment, and of ice supplies. You are
expected to enter all the transactions into the company’s Quickbooks or Sage
accounting software.

What do you do?

I was in this situation many times whenever I did the books for a company. The irst
thing you need to know are what kinds of accounts there are in a company. After
you understand the basic types of accounts, you know where to post your
accounting transactions.

Bookkeepers and accountants are expected to be ef icient. You may be

swamped and stressed with work. Management relies on bookkeepers and
accountants to provide them with the inancial data needed to make business
decisions. Bookkeepers and accountants need to know how to work smart to keep
up with the demands of their work.

Sometimes our work as a bookkeeper or accountant becomes mundane and

repetitive. It’s important to focus on what you want in life and to re lect on whether
you are living the life you want. All it takes is to change your way of thinking and
then take small steps towards living a better life. As a bookkeeper or accountant,
you are given the mandate to record past transactions, which can then be used to
project future trends of the business. Your work is signi icant!

Let’s get started.

Types of accounts in accoun ng
The main types of accounts are:
 Assets
 Liabilities
 Owner’s Equity
 Revenue
 Expenses

Examples of asset are: cash, accounts receivable, prepaid expenses, inventory,

capital assets like land, buildings, computers, and cars.

Examples of liabilities are: accounts payable, loans payable, and mortgages payable.

Examples of owner’s equity are: common shares, preferred shares, and retained
earnings.

Examples of revenue are the price that you sell a product or service.

Examples of expenses are a telephone bill payment or a rent payment.

Balance sheet and income statement
One of the goals of bookkeeping is to produce inancial statements. The statements
that most people look at are the balance sheet and income statement. These
statements show stakeholders how the company is performing.

Assets and liabilities go on the balance sheet. It is sometimes called the Statement of
Financial Position. It is called a balance sheet because this formula must always be
true:

Assets = Liabilities + Owner’s Equity

If at anytime your balance sheet doesn’t balance, for example, you have $500 worth
of assets but your liabilities + owner’s equity equals $490, you’ve made a mistake
somewhere in your bookkeeping. Fortunately, today’s accounting software won’t let
you make any mistakes that upset the basic accounting formula.

The balance sheet is a snapshot in time. For example, the balance sheet may be as of
December 31.

The income statement contains transactions for a period of time. For example, the
income statement can be for the period from January 1 to December 31. This will
record the accumulated revenues and expenses for that entire period.

Ok, so how do we record transactions? We’ll get to that after I explain debits and
credits.
Debits and credits must equal
Debits and credits are the most fundamental system of accounting. Accounting is
based on debits and credits.

Another basic accounting formula must also be true:

Debits (Dr.) = Credits (Cr.)

Another words, whatever number you post on the debit side must equal to what you
post on the credit side.

Example: You purchase a computer for $300 and you pay with cash.

The journal entry will be:

Dr. Capital assets 300

Cr. Cash 300
To record purchase of computer paid with cash

Notice that the debit side (300) equals the credit side (300).

Example: You perform a service and receive $50 payment from your client.

The journal entry will be:

Dr. Cash 50
Cr. Revenue 50
To record revenue received in cash

Notice again that the debit side (50) equals the credit side (50).
Assets
Assets are usually in a debit position. When you gain an asset, like when a customer
pays you cash for a product or service, you would debit cash for the increase in cash.
On the other hand, if you use an asset, for example you use cash to pay for rent, you
decrease the asset cash and so you credit the cash account.

Remember:
Gain an asset = debit
Use an asset = credit

Let’s revisit the example in the debits and credits section and make sure you
understand this point.

Example: You purchase a computer for $300 and you pay with cash.

The journal entry will be:

Dr. Capital assets 300

Cr. Cash 300
To record purchase of computer paid with cash

Notice you increased the capital assets account by debiting it, and you decrease the
cash asset account by crediting it.
Liabili es
Liabilities are usually in a credit position. When you gain a liability, for example, you
take on a mortgage, and then you would credit the liability account. When you
decrease a liability, for example, you make a payment on your mortgage, you would
debit the liability account.

Remember:
Gain a liability = credit
Decrease a liability = debit

Example. You purchase a building and take on a $100,000 mortgage.

Dr. Building 100,000

Cr. Mortgage liability 100,000
To record a purchase of building using a mortgage

Notice you are increasing the mortgage liability, so you credit the liability account.

Example. You make a $10,000 payment on your mortgage.

Dr. Mortgage liability 10,000

Cr. Cash 10,000
To record a mortgage payment using cash

Notice here you are decreasing the mortgage so you debit the liability account. Cash
is an asset so when it is decreased, you credit the cash asset account.
Revenue
Revenue is one of the most important accounts on the books of any company.
Without revenue, a company will not last very long.

Remember:
Record revenue as a credit

Example. If a customer buys one of your products, you would do this journal
entry to record cash and revenue of $25:

Dr. Cash 25
Cr. Revenue 25
To record revenue on sale of product

There is also a journal entry needed to record the selling of inventory. This will be
discussed in the inventory section.
Expenses
Expenses include advertising, bank charges, depreciation of capital assets, meals &
entertainment, of ice expenses, professional fees, rent, supplies, telephone, wages,
etc.

Remember:
Record expenses as a debit

Example. For example, you pay for a business meal of $30.

Dr. Meals & entertainment 30

Cr. Cash 30
To record meal expense paid with cash

You record meals & entertainment as a debit because it is an expense, and you credit
cash to decrease the asset account.
Taxes
If your business is registered with a sales tax account, it is able to claim back some of
the sales taxes it paid on its purchases. The other feature of having a sales tax
account is the business has to collect applicable sales tax on its sale of products or
services.

Example. You sell a product worth $100, and it has a sales tax of 5%.

Dr. Cash 105

Cr. Revenue 100
Cr. Sales tax payable 5
To record sale of product

Notice that the $5 sales tax goes into a liability account. It is a liability because you
collected the sales tax on behalf of the government, and you need to pay it out on
your next sales tax return remittance. The $5 collected doesn’t belong to you.

Example. You purchase a desk for $80. It has a sales tax of 5%.

Dr. Capital asset – desk 80

Dr. Sales tax receivable 4
Cr. Cash 84
To record purchase of desk

Here, the sales tax of $4 that was paid can be claimed from the government on your
next sales tax return.

Let’s imagine the above two example transactions are the only transactions your
company had during the sales tax period. On your sales tax return, you would net
the two amounts to ind the amount you owe to the government.

Example.

Sales tax payable 5

Sales tax receivable (4)
Net sales tax payable 1

You would need to pay $1 to the government, because you owed $5 for collecting
sales tax on behalf of the government, and could get back $4 as a credit for the
purchase you made.

Example.
After you ile your sales tax return and pay the government, you would do this
journal entry:

Dr. Sales tax payable 5

Cr. Sales tax receivable 4
Cr. Cash 1

This will clear out the sales tax payable and sales tax receivable accounts.
Accounts receivable
It is very common in business that a company sells a product or performs a service
and gets paid later. Accounting rules require that as soon as the product is sold or
the service is performed with no outstanding obligations remaining, revenue should
be recognized. But since cash has not been received, the debit goes into accounts
receivable.

Example. You perform a service for your client for $200. The client said they
would pay you within 30 days.

Dr. Accounts receivable 200

Cr. Revenue 200
To record revenue on performance of service

When the client pays you, you will then reverse accounts receivable and record the
cash received.

Dr. Cash 200

Cr. Accounts receivable 200
To record cash received on outstanding accounts receivable
Accounts payable
Accounts payable is similar to accounts receivable. You have an obligation to pay for
an expense in the future. For example, say your year-end is December 31. Your
electric bill for the month of December is due on January 8 of the next year. You
have to accrue the expense for the current year because the expense pertains to the
current year. When you actually pay the amount in cash, you would then reverse out
the accounts payable. The expense will be recorded in the current year.

Example. The electric bill for December is $50. The payment isn’t due until
January 8 of the next year.

Dr. Utilities expense 50

Cr. Accounts payable 50
To accrue utilities bill for December

Notice the expense will be recorded in the current year because it is for the month of
December.

When you actually pay the electric bill the following year, this journal entry will be
recorded.

Dr. Accounts payable 50

Cr. Cash 50
To record payment on accounts payable for electric bill
Purchasing inventory
If you sell products, you have to record inventory transactions. If you only sell
services, you can skip this section.

To record a purchase of inventory, you may have to account for sales tax that you
can claim and receive back from the government.

Example. You purchase $50 of inventory and you paid $5 sales tax that you can
claim.

Dr. Inventory 50
Dr. Sales tax recoverable 5
Cr. Cash or Accounts payable 55
To record purchase of inventory

Notice that the debits (50+5 = 55) equals credits (55).

When you sell inventory, you have to take it out of your inventory. The cost of goods
sold account gets debited.

Example. You sell inventory worth $500.

Dr. Cost of goods sold 500

Cr. Inventory 500
To record remove sold inventory from inventory account

Here cost of goods sold is an expense so it is a debit. Inventory is an asset that has
decreased so it is a credit.
Inventory cos ng methods
If you sell inventory, you need to decide how to account for the cost when you sell
inventory.

Speci ic identi ication method:

This is when each inventory is tracked with its own cost. This method usually is
applicable to businesses with few inventory or speci ic models of inventories such
as cars.

First-in, irst-out (FIFO) method:

This is when the irst inventory comes in, it is sold irst in the order purchased.
Because inventory purchase prices change, this method is done this way: say you
buy inventory on November 1 at $10, then you purchase more inventory on
November 15 at $12, when you sell inventory, you will sell all of the $10 inventory
before selling the $12 inventory.

Last-in, irst-out (LIFO) method:

This method is the reverse of the FIFO method. The last inventory that is purchased
is considered sold irst. Using the same example, the company would deem the $12
inventory being sold irst before the $10 inventory. Because inventory purchase
price typically increases over time, LIFO method usually produces a lower gross
margin than the FIFO method.

Weighted average cost:

This method uses the average cost for the year.
Lower of cost or market (LCM)
At the end of the year, a company needs to compare its inventory cost on the books
with the market value. If the market value is lower than the inventory cost on the
books, the inventory needs to be written down to the market value. On the other
hand, if the market value is higher than the inventory cost on the books, then no
adjustment is required.
Capital assets
Every business needs to buy capital assets, also known as ixed assets or property,
plant, and equipment.

Capital assets include:

 Land
 Buildings
 Of ice equipment (desks, chairs, etc.)
 Computers
 Computer software
 Vehicles
 Leasehold improvements

Generally, capital assets are required for the business to earn income. They are an
asset rather than an expense because they enable the business to earn income over
multiple years rather than a one-time expense.

Each capital asset should have its own account class. A different account should be
used for each type of capital asset, so when it’s time to do the corporate tax return,
the information is more easily and readily found because each class of capital asset
has a prescribed depreciation rate for taxes by the government.

Most capital assets, with the exception of land, depreciate over time meaning its
useful life decreases over the years.
Deprecia on of capital assets
Depreciation can be calculated at month-end or year-end.

Example. Your business purchases a computer with a cost of $600 that has a
useful life of 3 years.

Dr. Computer 600

Cr. Cash 600
To record purchase of computer

If your business uses the straight-line method - which means each year the
depreciation is the same - each year there will be depreciation of $600/3 years =
$200/year.

Dr. Depreciation expense 200

Cr. Accumulated amortization - computer 200
To record depreciation for the year

Notice that the credit is to an account called “accumulated amortization –

computer”, which is an asset account that goes along with the computer asset
account. At the end of the irst year, the computer has book value of 400 on the
balance sheet, which is 600 minus 200.

If your business uses the declining balance method, a percentage of depreciation is

applied every year.

Example. Your business has equipment worth $1,000, and it depreciates at

20% a year.

Year % depreciation Book value Depreciation

1 20% 1,000 200
2 20% 800 160
3 20% 640 128
4 20% 512 102
5 20% 410 82

Note that using the double declining method the depreciation is highest in the 1 st
year ($200), and decreases over time ($160, $128, etc).
Sale of an asset
When you sell an asset, you will remove the asset from the balance sheet.

Example. Using the above example, you sell the equipment after the end of the
second year. You receive cash of $650 from the buyer.

The cost of the equipment is $1,000, and the accumulated amortization is 200 + 160
= $360.

You will record this journal entry:

Dr. Cash 650
Dr. Accumulated amortization – equipment 360
Cr. Equipment 1,000
Cr. Gain on sale of equipment 10
To record sale of equipment

The net book value of the equipment is $640, but you received $650 from the buyer.
You received $10 more than the equipment’s book value, so you record a gain on the
income statement. If you received less than the book value, you would record a loss
on the income statement.
Shareholder loans – shareholder pays out of pocket
Sometimes the owner or shareholder of a small business pays for an expense out of
pocket on behalf of the company.

Example. The owner pays for a business meal out of his own pocket.

Dr. Meals expense 20

Cr. Shareholder loan 20
To record a meal expense paid by the owner out of pocket

The owner did not use the company funds to pay for the meal, so the credit is not to
cash. The credit is to shareholder loan which is a liability account because the
company now owes the owner $20.

Example. Later, when the company reimburses the owner for the meal, the
following happens.

Dr. Shareholder loan 20

Cr. Cash 20
To record the company reimbursing the owner for expense paid out of pocket
Shareholder loans – company pays on behalf of shareholder
Another common situation is when the company pays a personal expense for a
shareholder.

Example. The company pays for a personal vacation for a shareholder.

Dr. Shareholder loan 1,000

Cr. Cash 1,000
To record company paying for a personal vacation for shareholder

Here, the shareholder loan is in a debit position like an asset because it will receive
in the future the money owed to the company by the shareholder. The shareholder
will have to pay back the company later.

Example. The owner pays back the company for the personal vacation.

Dr. Cash 1,000

Cr. Shareholder loan 1,000
To record shareholder reimbursing company for personal vacation
Year-end closing
Most accountants and bookkeepers are busy at month-end or year-end because they
need to make adjusting journal entries such as depreciation, and close the books.
When you close the books, the amounts accumulated in the income statement are
closed out into the retained earnings of the balance sheet. The income statement is
reset to zero to start the next year.

Example. Your company’s year-end is December 31 and you need to close the
books. The company had annual revenue of $100,000 and expenses of
$80,000.

To close the books, the following journal entry is done.

Dr. Revenue 100,000

Cr. Expenses 80,000
Cr. Retained earnings 20,000
To close out revenues and expenses into retained earnings at year-end

Retained earnings are usually a credit amount if the company has been pro itable.
Retained earnings represent the pro its or loss that has accumulated in the business
to date.
Final thoughts
This was just a snapshot into the exciting world of bookkeeping. Bookkeeping is one
of the fastest growing industries out there and Forbes, Entrepreneur and INC named
it as one of the top small businesses to start.

As an instructor, nothing lights me up more than seeing students that I have taught
in the past succeed, who started with absolutely no experience ind meaningful
work as an accountant and bookkeeper after taking the course. I still keep in touch
with some of them. I am truly happy to hear stories of their success and that I was
able to accompany them on their journey to success.

Bookkeeping is de initely in my opinion one of the most valuable skills out there and
you can utilize it to ind meaningful employment as a bookkeeper or accountant or
to start your own pro itable online business, or BOTH! You can also change career
paths whenever you want from being a bookkeeping employee to starting your own
business and enjoy the excitement and freedom that comes with it. It is also high
paying and pro itable. The sky is the limit.

One of my passions is teaching, and I couldn’t have asked for more fun teaching at
Schulich School of Business, Canada’s top MBA program. However, I knew I wanted
to have more impact and more reach. I knew with the power of the Internet, I could
reach many more students and have much more impact.

When I looked at current offerings on the Internet, I was frustrated at how

expensive online courses were. Some were charging for $2,000 or MORE, creating a
BARRIER to entry for students such as yourself that wanted to learn bookkeeping.

I was also disappointed at how these courses focused only on the online marketing
aspect and not enough on the technical foundations of bookkeeping. You need both
to be successful in being a bookkeeper or building a pro itable bookkeeping
business.

Frustrated with the current status, I decided to launch online courses with all the
material I taught at the school PLUS much more. These courses are designed to take
you from zero bookkeeping experience to take control of your inances in your
business or as a bookkeeper in a company or have your own bookkeeping business.

I personally get to know every student in my courses whether online or of line and I
am here to support you.

I hope you will continue learning with me.

About the Author
Calvin K. Lee, MBA, CPA, CA, CPA (Illinois) is an accountant, author, consultant, and
teacher. His biggest passion is inspiring and helping others achieve their goals. He
has launched 7 online courses on bookkeeping, accounting, investing, and time
management, and more than 65,000+ students have enrolled in his courses from
178 countries.

He is a Certi ied Public Accountant (CPA) in the U.S.A. and a Chartered Professional
Accountant, Chartered Accountant (CPA, CA) in Canada. He also holds a Double MBA
degree from two of the world’s top business schools.

In addition to his successful career in accounting, he has also taught Master of

Accounting classes at York University, taught accounting modules at the CPA
Professional Education Program, and enjoys being a mentor to younger accountants.
He has served as President of the MBA Ambassadors during his MBA studies and as
Chair of the Young Professionals Forum at the CPA Association.

Contact the author

Facebook page: https://www.facebook.com/hellocalvinlee

LinkedIn: https://linkedin.com/in/calvinkleecpacacpa

Twitter: @calvinklee2010
Note to the reader
This book is written for general guidance, and is not a substitute for accounting,
legal, tax, or other professional advice with a quali ied advisor. Laws are always
changing. While every effort is made to make this book current, there may be errors
or omissions. This book is made available with no representations or warranties of
any kind for the accuracy or completeness of this book. The author and/or publisher
do not assume and hereby disclaim any liability or responsibility for any action or
decision leading to claims, losses or damages by any person(s) relying on the
contents of this book. Consult a professional advisor as needed as the examples may
or may not be applicable to your situation. The accounting standards discussed here
follows standards pertaining to small & medium sized enterprises. While these
bookkeeping & accounting concepts can be similar in other parts of the world, there
may be some differences.