Module 3.

Bookkeeping
Module 3. Bookkeeping

DOUBLE ENTRY BOOKKEEPING:

Every economic event requires two entries

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Module 3. Bookkeeping

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Module 3. Bookkeeping

cash
increases,
a payable is
cash created

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Module 3. Bookkeeping

owes money

cash cash
decreses, increases,
a receivable a payable is
is created created

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Module 3. Bookkeeping

owes money

cash cash
decreses, increases,
a receivable a payable is
is created created

Cash Receivables Cash Payables

100 100 100 100

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Module 3. Bookkeeping

Technical solutions for bookkeeping

spreadsheet bookkeeping
paper
software

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Module 3. Bookkeeping

Example of the basic principles of bookkeeping: residential housing company, semi-detached

house and entries related to land purchase

Cash Equity
1)
100 000 100 000

2) Cash Long-term debt

100 000 100 000
100 000

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Moduuli3.3.Bookkeeping
Module Kirjanpito

You can set up as many accounts as you want in

accounting
• Each account tracks increases in some expenses and
income during a fiscal year
• For example, a residential housing company may set up
different accounts for electricity and water, or a shared
account to include both
• The number and specific use of the various accounts
depends on how precise the information culled from the
accounts for various purposes should be

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Moduuli3.3.Bookkeeping
Module Kirjanpito

An account itself has two sides: debit and credit

• Debit refers to ’receiving’
• Credit refers to ’giving’

Cash Equity
Debit Credit Debit Credit
100 000 100 000

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Module 3. Bookkeeping

subcontracts

salaries
BOOKKEEPING home
appliances
kirjanpito-
ohjelmisto
furnishings

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Moduuli3.3.Bookkeeping
Module Kirjanpito

The detail of bookeeping information is

determined by the number of accounts used and
how well we manage to record expenses to
correct accounts

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Moduuli3.3.Bookkeeping
Module Kirjanpito

Example:
When you build a house, you incur several different types of
expenses:
• Recorded in different accounts of the residential housing firm as they incur
• Need to decide how detailed the information should be, and set up an
adequate number of different accounts – Chart of Accounts
In the financial statements:
• Expenses added together and recorded in the balance sheet as the value
of the building
• Value of the building is the sum of all the expenses incurred during the
building process

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Module 3. Bookkeeping

When the house is complete, you still need to keep track on revenues and expenses of the
housing company – entries, when the invoices arrive:

1) Electricity Accounts payable

1836 1836

Waste disposal

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Module 3. Bookkeeping

When the house is complete, you still need to keep track of the revenues and expenses of the
housing company – entries, when the invoices arrive:

1) Electricity Accounts payable

1836 1836
318

Waste disposal
318

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Module 3. Bookkeeping

Payments are made, and both sides of trade payables equal each other, i.e. the balance is zero:

2) Cash Accounts payables

1836 18361836
318 318318

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Module 3. Bookkeeping

In the end, the balances are left in the expense accounts and the cash account, thus showing how
much money was spent on electricity and waste disposal, as well as how much the cash account
has been reduced as a result:

Electricity Cash

Waste disposal Accounts payables

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Moduuli3.3.Bookkeeping
Module Kirjanpito

• Voucher on each transaction: payment amount, date,

affected accounts, and consecutive numbering

• At year end, the account balances are added

together, and recorded either in the income statement
or the balance sheet

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Moduuli3.3.Bookkeeping
Module Kirjanpito

E.g. an expensive snowthrower, recognized in the

balance sheet, depreciated
• Purchase price (here 2,000 €) recorded as an expense for
those periods when we have it at our disposal
• Estimated useful life (conservatism principle, 5 years)
• In practice, the depreciation charge is a specific% of the
declining balance, i.e. of the remaining carrying value of the
acquired machine
• Notes pages reveal the used depreciation method

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Moduuli3.3.Bookkeeping
Module Kirjanpito

Depriciation Remaining balance

at balance sheet
Purchase 2000 €
1. year 400 € 1600 €
2. year 400 € 1200 €
3. year and so on and so on

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Moduuli3.3.Bookkeeping
Module Kirjanpito

E.g. an expensive snowthrower, recognized in the

balance sheet, depreciated
• Purchase price (here 2,000 €) recorded as an expense for
those periods when we have it at our disposal
• Estimated useful life (conservatism principle, 5 years)
• In practice, the depreciation charge is a specific% of the
declining balance, i.e. of the remaining carrying value of the
acquired machine
• Notes pages reveal the used depreciation method

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Module 3. Bookkeeping
Equipment Electricity
Financial statements:
2000 1836
2000 1836

Income statement Balance sheet

400 1600 + equity
1836 846 + liabilities
+ all the
expenses from
construction
3000 phase

Cash
Income from maintenance
3000
3000
1836
3000
318
846 saldo

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Moduuli3.3.Bookkeeping
Module Kirjanpito

• Income statement is drawn up based on the balances in the

income statement account, and the balance sheet based on
the balances on the balance sheet account.
• Income statement account calculates the difference
between the period income and expenses
• Balance sheet shows the value of the assets
– How much money has been used
– Sources of the funds

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Summary

• The method described in this module is called double entry bookkeeping as each transaction is
recorded twice
• One recording to the debit side of an account, the other recording into credit side of some other
account
• Debit and credit recordings need to be of equal amounts
• In preparing the financial statements, the balance of each account is transferred to either P&L
or balance sheet account
• A firm can establish as many accounts it sees is needed
• The detail used in recording determines also the level of detail available for analysis and
decision making

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