How to record transactions for money flowing into an acounting system?

Question

I've been reading about accounting patterns described by Martin Fowler in his book "Analysis Patterns - Reusable Object Models". I understood the basic concepts: account, entry, transaction, etc; but I am not quite clear when it comes to the money flow when external funds flow into the system. To make sure that no money is created or destroyed, I use transactions (2 legged) so that each entry in the transaction is the opposite of the other. Say I am a contractor, when a customer pays me $1000, how should I record this transaction? What I can think of now is that I set up income accounts for customers: one customer will have one income account; I will have my balance account. When a customer pays me $1000, the transaction will have two entries: one with -$1000 on the customer income account, the other with +$1000 on my balance account. This way, it mimics the cash flow from the customer to me (the contractor). The customer income account will be decreased as the customer makes more payments, e.g. -$1000, -$2000, -$3000, etc. Does this make sense? Is there any better way to model this cash flow? Thanks in advance for your help/advice.

Answer 1

I'm not sure if this truly answers your question though, with respect of accounting bookkeeping, the transactions would look like this:

When you perform services for a customer, the entry is a debit to accounts receivables (money owed to you) and a credit to services revenue for the customer.

When the customer pays you, it would then become a credit to accounts receivables (reflecting a diminished amount of money now owed) and a debit to cash.

When the customer pays you in advance to your completing the work for them, it would be a debit to cash and a credit to Unearned Revenue (a current liability account)

Once you have performed the services to record that revenue, it would then become a credit to Services Revenue and a debit to Unearned Revenue.

With every example above, please ensure that you record the debit first and credit second for an appropriate journal entry.