What is the best way to make sure your financial records are spot on? Double entry bookkeeping accounting is the answer. It’s an important part of accounting. And it helps businesses maintain accurate and reliable financial records – essential for decision-making and compliance.
Are you 100% sure where your finances stand? A significant 25% of businesses say they’ve overpaid on tax. And 17% have missed a tax deadline. Here’s how to gain back control of your finances. Let’s start by understanding the principles of double entry bookkeeping.
In this blog we’ll explain what the meaning of double entry bookkeeping is and how it differs from other methods like single-entry bookkeeping. We’ll also offer some double entry bookkeeping examples along the way to help.
What is Double Entry Bookkeeping?
First things first. Let’s explain what double entry means. It’s kind of what it says on the tin. The double entry bookkeeping definition is this: it’s an accounting method that records every transaction in two accounts: debit and credit.
It’s based on the double entry principle. This ensures that the accounting equation (Assets = Liabilities + Equity) always remains balanced. So for every bookkeeping entry, there is a corresponding and opposite entry.
The double entry method gives a clear overview of a company’s financial status. It also helps prevent any errors and omissions that could lead to inaccurate financial reports.
For example, if a business makes a sale, it would record the revenue (credit) and the corresponding increase in assets (debit). This keeps the double entry bookkeeping book balanced.
What are the Principles of Double Entry Bookkeeping Accounting?
Double entry bookkeeping is led by two main principles:
- Every transaction has at least two effects: When one account is debited, another must be credited.
- The accounting equation must balance: The equation of Assets = Liabilities + Equity must always remain balanced.
These principles ensure the books are accurate and balanced, making it much easier to pinpoint any discrepancies (as well as prevent fraud).
How is Double Entry Bookkeeping Different from Single Entry Bookkeeping?
While both methods track financial transactions, they have some key differences. This is how we define double entry system and single entry system.
Single entry bookkeeping records each transaction just once – income or expense. This system is typically used by smaller businesses that deal with fewer transactions. While it’s simple and easy to maintain, it can be prone to errors. It also doesn’t provide a full financial picture at a glance.
Double entry bookkeeping, on the other hand, records each transaction twice (debit and credit). This ensures the accounting equation stays balanced.
This method is a bit more complex than single entry bookkeeping. It is also far more accurate and helps pick out errors. It’s mostly used by medium and large businesses and is an important part of preparing financial statements, like the balance sheet and income statement.
For a more in-depth explanation, watch this video which explores the difference between double entry and single entry bookkeeping further.
So, What is the Role of the Ledger in Double Entry Accounting?
In accountancy double entry, the ledger summarises all transactions that have been recorded in the journals. The ledger is where all double entry books are kept and where all debits and credits are allocated to their respective accounts.
It’s really just a collection of accounts used to track business transactions. Each one is broken down into categories like assets, liabilities, income and expenses.
Each account in the ledger has a debit and credit column where financial transactions are recorded based on the double entry system. By balancing the debit and credit amounts, making sure they’re always equal.
In short, the ledger helps accountants and business owners track finances. It provides a detailed breakdown of all accounts, which helps in the preparation of financial statements, such as the balance sheet and profit and loss statement.
Double Entry Bookkeeping Examples
It all makes sense so far in theory. But let’s look at a couple of double entry accounting examples to better understand how the system works when money is added or owed:
Example 1: Purchase of goods on credit
A company buys £1,000 worth of goods on credit. Your bookkeeping entry will look like this:
- Debit: Inventory account £1,000 (Asset increases)
- Credit: Accounts payable £1,000 (Liability increases)
Example 2: Receipt of cash from a customer
A company receives £500 in cash from a customer. Your bookkeeping entry will be:
- Debit: Cash £500 (Asset increases)
- Credit: Revenue £500 (Income increases)
Take a look at this video which explains double entry bookkeeping examples in further detail.
Sales Double Entry and VAT
When it comes to double entry sales, things get a bit more complicated. In the double entry VAT system, a business must account for VAT on the sale and purchase of goods or services. A double entry system example would be, if a company makes a sale of £1,000 plus VAT at 20%, the bookkeeping entry would be:
- Debit: Accounts receivable £1,200 (Total sale amount including VAT)
- Credit: Sales revenue £1,000 (Net sales amount)
- Credit: VAT payable £200 (VAT collected from customer)
How to Implement Double Entry Bookkeeping in Your Business
If you’re looking to use double entry bookkeeping in your business, you’ll need to set up a proper system. Here’s how to get started:
- Choose the Right Accounting Software: Accounting software automates the process of double-entry accounting, making it easier to keep accurate records.
- Set Up a Chart of Accounts: Organise your accounts into categories, including assets, liabilities, equity, income and expenses. Each category will have individual accounts to record specific transactions.
- Train Your Staff: Ensure that your accounting team understands the principles of double entry bookkeeping.
FAQs
What is the definition of double entry bookkeeping system?
The double entry accounting system definition is a method where every transaction affects two accounts, one debit and one credit. This ensures that the accounting equation (Assets = Liabilities + Equity) remains balanced.
What are debits and credits in double entry bookkeeping?
Debits are an increase in assets or expenses, or a decrease in liabilities or equity. Credits are a decrease in assets or expenses, or an increase in liabilities or equity. In the double entry system, one account is debited and one account is credited.
How does double entry work for sales transactions?
Double entry for sales involves recording the income from a sale as a credit in the revenue account. The debit is made to the accounts receivable or cash account. Both the increase in sales revenue and the increase in assets (cash or accounts receivable) are accurately recorded in the books.
What is the history of double entry bookkeeping?
Double entry bookkeeping goes back as far as the 13th century. Florentine merchant Amatino Manucci used the double entry system during his time employed by the firm Giovannino Farolfi & Company. It was not until 1494 that Italian mathematician and friar Luca Pacioli officially documented the double entry system meaning in his book, ‘Summa de Arithmetica’.
Conclusion
Double entry bookkeeping is a popular accounting method for many reasons. It offers accurate financial recording, helps protect against fraud and improves decision-making.
Accounting software that supports double entry bookkeeping automates the process, helping your business stay compliant and reduce errors.
Once you fully understand double entry and how it differs from other methods like single-entry bookkeeping, you’re ready to stay on top of your finances.
