So you received cash! …Do you know how to book it?

I think we can all agree that the most exhilarating part of owning a business is when you make a sale.

Realizing that you have cash coming in can be the best feeling in the world.

But when you sit down at the end of the week to manage your books, are you confident you’re booking that cash correctly?

Let me guess, you’re not confident in your bookkeeping abilities.

And we’re not surprised by that.

Let’s face it. We’re not all born to be kids who can easily divide numbers in their head or kids who get straight A’s in pre-algebra.

But that doesn’t mean we need to write off numbers, right? (No pun-intended there)

 

Most people look at bookkeeping like a storm, never really knowing what’s happening or what’s coming next.

The bright side is that even if numbers weren’t always your forte, you can learn bookkeeping.

When cash comes in, you can be taught exactly what type of entry needs to be made in your accounting software.

And the best part is, it’s really not as hard as you think.

 

While it’s true that different situations and forms of payment make bookkeeping entries differ from one another, one of the key points we tell small businesses is that cash transactions mainly differ based on the type of business you have.

In our time with small businesses, we pretty much see 3 main types of businesses:

 

1. Point of Sale Business

2. Service Business

3. Online Ordering or Call-to-Order Business

 

The first step is to sort out what type of business you have, and then learn the HOW TO behind your business’ bookkeeping.

 

1. Point-of-Sale Business

Ok, so what is Point-of-Sale? I know, you’re probably thinking, “I don’t know all these formal terms so what does that really mean in layman’s terms?” Well, a Point-of-Sale business is your everyday coffee shop, clothing boutique, or bakery. Basically, the most telling sign of a point-of-sale business is if it has counter service and a cash register to pay for the item as it is given to the customer.

If you have determined you are a point-of-sale business, let’s dive head first into a few scenarios when you receive money.

Scenario #1: A customer hands you green cash

I think we can all agree this is hands down the best scenario. And not just from a business owner’s point of view, but from a bookkeeping side as well. Who doesn’t love a dollar bill?

Anyways, a customer gives you a dollar bill, you put it in your register, and move on.

But on the back end, when booking the entry, what transaction do you make?

This is a traditional matching of revenue and cash. You immediately increased your business’ revenue, while at the same time increased cold hard cash. In your accounting software, you Debit (increase), your Cash Account, and Credit (increase), your Revenue account.

(If you’re totally confused about debits, credits, and accounts, please first read our article on debits and credits here to give yourself a little background)

Scenario #2: A customer whips out plastic

Let’s be real, most people pay with credit cards these days. And that’s great too, but creates a different scenario for you as a business owner.

Think this way: how does this type of transaction impact my cash? The answer to that is, it actually doesn’t at this point. You exchanged a product, but really got no cash in return, so you cannot book anything to your cash account yet. Making the sale increases revenue, but now you’re waiting to receive that cash. In accounting language, this is called a Receivable, or in simple terms, money owed to you.

Let’s hop back into your accounting software for a minute. When making this transaction, you’ll want to Debit (increase) your Accounts Receivable account, and Credit (increase) your Revenue account.

You probably noticed that the above transaction didn’t include your cash account at all. That’s because there’s a part 2 (I know, more fun, right?)

When you actually get paid the cash from the credit card company (this typically shows up as a wire transfer in your bank account), you will make another transaction. Remember: wire transfers are considered a cash equivalent. It may not be a green dollar bill, but it is a true equivalent to a physical dollar.

Now that you’ve actually received cash, you’ll want to increase your cash account, and decrease your receivable account, because now there is less money owed to you. Go ahead and Debit (increase) your Cash Account, and Credit (decrease) your Accounts Receivable account.

Note: you don’t touch your revenue account because, 1: you already booked that piece, and 2: your revenue won’t decrease again unless the customer returns the item.

 

2. Service Business

So, what constitutes a service business? These are businesses that provide a service rather than sell products, such as your landscaper, plumber, doctor, or lawyer.  If you provide a service (not sell physical goods) of any sort to a customer, who then pays your company to render a service for them, you are a service-based business.

Receiving cash in a service business is definitely different from a Point-of-Sale business. Think of it this way: If you are a landscaper, when you show up to a customer’s house to mow their lawn, you as the business owner don’t pull a bulky cash register out of the trunk first (even though that would be kind of funny, right?).

Instead, there are typically two scenarios. In the first scenario, you render your service, you send a bill for the service, and then the customer pays you for that service at a later time.  Or, the second scenario is the fee for services are paid in advance of the services being rendered (a much better option for cash flow). Let’s discuss the specifics of booking cash in both scenarios.

Scenario #1: You get paid after you provide your service

As soon as the service is rendered, although you did not receive physical cash, the revenue was earned, and owed to you, which in turn gives you a receivable (money earned but still owed to you) on your books.

Let’s hop back into your accounting software for a minute. When making this transaction, you’ll want to Debit (increase) your Accounts Receivable account, and Credit (increase) your Revenue account.

When you actually get paid and receive the physical cash, you’ll want to increase your cash account, and decrease your receivable account, because now there is less money owed to you. Go ahead and Debit (increase) your Cash Account, and Credit (decrease) your Accounts Receivable account.

Scenario #2: You get paid before you provide your service

In this scenario, you are receiving cash before you render services.  In this case you have “unearned revenue”. It is “unearned” or “not yet earned” because you haven’t actually rendered your service yet to earn the money owed to you.

When making this transaction, you’ll want to Debit (increase) your Cash account, because your cash increased, and Credit (increase) your Unearned Revenue account.  

Then, when you actually render the service, the transaction does not impact cash. Remember, you already got your cash, so you don’t want to hit your cash account again. You simply Debit (decrease) your Unearned Revenue to wipe out the owed balance from before and now Credit (increase) Revenue because now, you actually earned the money.

 

3. Online Ordering or Call-to-Order Business

With the internet being the most popular place to purchase items, I think it’s safe to say that everyone knows what an online ordering / call-to-order business is. This is any type of business where a customer places an order for goods to be shipped to them. If this is you, how do you book your cash when it comes in?  

Scenario #1: The customer places the order, and you ship the goods immediately

If the customer orders finished goods that ship immediately, you’ll want to Debit (increase) your Accounts Receivable account, because money is owed to you from the credit card that the customer just paid with, and Credit (increase) your Revenue account because you officially made a sale and can recognize it as revenue.

On the other hand, if the business is one in which custom orders are being placed where time passes between order placement and order fulfillment, the recognition of cash is slightly different.

when you actually receive the cash from the credit card company (typically shows as an electronic transfer of funds into your bank account) you simply Credit (decrease) Accounts Receivable because you are no longer owed that money, and Debit (increase) Cash, because now you actually received the cash (woo!)

Scenario #2: The customer places the order, but you do not ship the goods immediately

In this situation, you are receiving the credit card payment prior to the merchandise actually being available.  So, in this example, when the order is placed you can Debit (increase) Accounts Receivable (because a receivable tells you that you are owed the money, and you are waiting for the cash from the credit card company) and you Credit (increase) Unearned Revenue (because you haven’t actually rendered your service yet to earn the money owed to you.)

When you actually receive the cash from the credit card company (typically shows as an electronic transfer of funds into your bank account) you simply Credit (decrease) Accounts Receivable because you are no longer owed that money, and Debit (increase) Cash, because now you actually received the moo-la (woo-hoo!).

When the product is produced and ready to ship, you have now earned your revenue. You simply Debit (decrease) Unearned Revenue because you produced the product and earned the sale now, and Credit (increase) Revenue.

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