Let’s look at an example of the bookkeeping process. Imagine you own an online store that sells custom coffee mugs. Your customer buys three mugs and pays you at the time of the transaction. How would this transaction be recorded in your books? That depends on what method of bookkeeping you are using. For this example, we will use the double-entry method of bookkeeping. There are a number of accounts affected by this one transaction, including the Cash account, Sales, Inventory, Cost of Goods Sold, and the Sales Tax Liability account. It may seem overwhelming at first, but everything must be tracked to maintain good records.
First, we would debit the Cash account since our available cash increased and credit the Sales account, which may seem confusing, but it is recording that the equity increased. Remember, the accounting equation must always be balanced: Assets = Liabilities + Equity.
Next, we have to adjust the inventory and Cost of Goods Sold (COGS) accounts. We will debit the COGS account since it is an expense account and credit the inventory account since the inventory has decreased.
Last, we have to keep track of the sales tax. We will credit the Sales Tax Liability account. You may notice that there is only one record for this, no matching debit yet. This account will be balanced and zeroed out (debited) when you pay the sales tax to the government.
Once the bookkeeping period has ended, you would take the total of each account and enter it in the General Ledger to confirm everything is balanced. Once everything is balanced, you can create the financial statements for that period.