FreshBooks is known for its user-friendly accounting software, but it also supports double-entry accounting, an essential feature for maintaining accurate and balanced financial records. In double-entry accounting, each transaction affects at least two accounts, and also ensures the accounting equation (assets = liabilities + equity) remains balanced.
Double-Entry Accounting Basics in FreshBooks
In FreshBooks, double-entry accounting allows users to record transactions in two accounts, with one account being debited and the other being credited for each transaction. and also system automatically ensures that for every debit, there is an equal and opposite credit.
Here’s how double-entry accounting works in FreshBooks for some common transactions:
1. Recording Sales Invoices
When you create a sales invoice for a customer, FreshBooks automatically creates the necessary double-entry accounting.
Example:
You issue an invoice for $2,000 to a customer for services rendered.
- Debit: Accounts Receivable (Asset) $2,000
- Credit: Revenue (Income) $2,000
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09/06/2024 | Accounts Receivable A/c Debit | 2,000 | |
| 09/06/2024 | To Revenue A/c | 2,000 |
Explanation: FreshBooks increases your Accounts Receivable, showing that you are owed $2,000. It also records $2,000 in Revenue, reflecting the income earned.
2. Recording Customer Payments
When a customer pays the invoice, FreshBooks records both the reduction in Accounts Receivable and the increase in Cash/Bank balances.
Example:
Customer pays $2,000 to settle the invoice.
- Debit: Cash/Bank (Asset) $2,000
- Credit: Accounts Receivable (Asset) $2,000
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09/06/2024 | Cash/Bank A/c Debit | 2,000 | |
| 09/06/2024 | To Accounts Receivable A/c | 2,000 |
Explanation: Cash increases by $2,000, and the receivable from the customer is eliminated since the payment was received.
3. Recording Expenses
When you record an expense, FreshBooks ensures both your Expense and Cash/Bank (or Accounts Payable) accounts are properly updated.
Example:
You pay $500 for office supplies.
- Debit: Office Supplies Expense (Expense) $500
- Credit: Cash/Bank (Asset) $500
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09/06/2024 | Office Supplies Expense A/c Debit | 500 | |
| 09/06/2024 | To Cash/Bank A/c | 500 |
Explanation: The Expense account will debited to recognize the cost of office supplies, and the Cash account will credited to reflect the decrease in cash.
4. Recording Accounts Payable (Purchases on Credit)
When you buy goods or services on credit, FreshBooks tracks the liability until payment is made.
Example:
You purchase equipment worth $1,000 on credit.
- Debit: Equipment (Asset) $1,000
- Credit: Accounts Payable (Liability) $1,000
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09/06/2024 | Equipment A/c Debit | 1,000 | |
| 09/06/2024 | To Accounts Payable A/c | 1,000 |
Explanation: Equipment (an asset) will debited because it increases, and Accounts Payable (a liability) will credited because you now owe $1,000.
Later, when you pay the supplier:
- Debit: Accounts Payable (Liability) $1,000
- Credit: Cash/Bank (Asset) $1,000
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09/06/2024 | Accounts Payable A/c Debit | 1,000 | |
| 09/06/2024 | To Cash/Bank A/c | 1,000 |
Explanation: The Accounts Payable balance will reduced when you pay the supplier, and the Cash/Bank account decreases accordingly.
5. Recording a Loan Payment
When making payments towards a loan, you split the transaction between Loan Payable (liability) and Interest Expense.
Example:
You make a $1,200 payment, where $1,000 goes toward the principal and $200 is interest.
- Debit: Loan Payable (Liability) $1,000
- Debit: Interest Expense (Expense) $200
- Credit: Cash/Bank (Asset) $1,200
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09/06/2024 | Loan Payable A/c Debit | 1,000 | |
| 09/06/2024 | Interest Expense A/c Debit | 200 | |
| 09/06/2024 | To Cash/Bank A/c | 1,200 |
Explanation: The loan balance will reduced by $1,000, the Interest Expense is recorded as $200, and the Cash account will reduced by the full $1,200 payment.
6. Depreciation Entries
FreshBooks doesn’t automatically calculate depreciation, but you can manually enter depreciation journal entries if needed.
Example:
You calculate $500 of depreciation for office equipment.
- Debit: Depreciation Expense (Expense) $500
- Credit: Accumulated Depreciation (Contra-Asset) $500
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 09/06/2024 | Depreciation Expense A/c Debit | 500 | |
| 09/06/2024 | To Accumulated Depreciation-Asset A/c | 500 |
Explanation: Depreciation reduces the value of your office equipment over time, recorded as an expense. The Accumulated Depreciation account (a contra-asset) keeps track of the total depreciation on the asset.
Benefits of Double-Entry Accounting in FreshBooks
- Accuracy: FreshBooks ensures your books are always balanced, which helps avoid errors in financial statements.
- Compliance: Double-entry accounting is required for compliance with accounting standards and regulations.
- Complete Financial Picture: It allows for a detailed view of your assets, liabilities, and equity.
- Automatic Reporting: FreshBooks generates accurate financial reports like balance sheets, profit and loss statements, and cash flow statements.
With FreshBooks, you don’t need to manually create double-entry accounting records; it automates the process and keeps your books accurate.