Even if you use an automated accounting software double-entry bookkeeping is behind each and every transaction you enter.
In the old days, double-entry bookkeeping was all done manually using a spreadsheet and, before that, paper and pen!
Nowadays, thankfully, bookkeeping is much easier with most of the complicated recording handled for you through a computer system.
But whether you are a small business owner managing their own accounts or a trainee accountant, understanding double-entry bookkeeping is crucial to learning basic accounting and correcting errors that’ll save you accountancy fees.
What is Double-Entry Bookkeeping?
Every time a financial transaction is entered in the company books there is an action and a reaction.
If a customer pays £100. The cash balance goes up by £100 and £100 is added to sales.
When a supplier is paid £250. Cash in the bank goes down by £250 and expenses increase by £250.
For every financial transaction that happens in the accounts of a business, there are two opposite entries (a double-entry) of the same amount.
These two opposing transactions are known in accounting as debits and credits.
Debits and Credits
Debits and Credits in accounting increase and decrease the balances of individual nominal accounts. The effect depends on whether they affect the balance sheet or profit and loss account.
Here is a summary of the effects that debits and credits have:
Remember debits always equal credits.
Double-Entry Bookkeeping Example
Your customer pays an outstanding invoice of £150. The double-entry would be:
|Bank account (balance sheet)||£150|
|Trade debtors (balance sheet)||£150|
The bank balance has increased and trade debtors have decreased.
You pay a rent deposit for new premises of £5,000. The double-entry would be:
|Rent deposit (balance sheet)||£5,000|
|Bank account (balance sheet)||£5,000|
The bank balance has decreased and a rent deposit has been added to the balance sheet.
You pay marketing costs of £1,000. The double-entry would be:
|Marketing (profit & loss account)||£1,000|
|Bank account (balance sheet)||£1,000|
The bank balance has decreased and expenses in the profit and loss account have increased.