One of the terms used often in small business accounting is double entry bookkeeping, but what does it mean?
Double-entry bookkeeping is the process that most businesses use to produce their accounts. If a transaction takes place, then two entries need to be made; a debit and a credit. A simple example is that is a sales invoice is issued; there will be an entry in the sales (profit and Loss Account), and customer account increased (Debtors).
By completing double entry bookkeeping the business can track stock, debtors, creditors, bank, assets, and liabilities much easier than using a single entry system. This is essential for Limited Companies for submitting year-end accounts to Companies House.
Double Entry Accounting Trial Balance
A Trial balance will show all the figures in the accounts. It includes all the debits and credits from the Profit and loss and balance sheet reports. A trial balance helps to check for any mistakes n the accounts. The trial balance should be equal on both sides; if it does not, then a mistake has been made. If there are mistakes made, then it is possible to make a journal entry to correct them.
You can also check the figures by looking at the individual accounts like the bank, making sure the value in your accounts is the same as the figure on your bank statement on the same date. There may be a few adjustments to be made for cheques not cleared or deposits not showing on the bank statement.
One of the advantages is that it helps to minimise errors in the accounting system compared to a single entry. A single entry system will show the income, expenditure and the bank balance, It’s the most straightforward and cheapest form of accounting. Small businesses and non-profit organisations mainly use it.
Double Entry Accounting Example
Below are two double entry bookkeeping examples:
A business buys stock for £500 using his bank account; two things need to happen – the bank balance needs to be reduced by £500, and the stock or inventory needs to be increased by £500.
A business invoices a customer (the debtor) for services of £200 for payment at a later date. Increase the customer account by £200 (Debit), and increase sales by £200, the sales figure will make up part of the retained earnings on the balance sheet which will be posted as a credit.
Double entry can be complicated to grasp if you are planning to do your accounts; it may be worth investing time in an accounting course or read some of the books available. We have compiled a list of our top five accounting and bookkeeping books.
If you are stuck, you may need to get someone in to do the bookkeeping for you. It is not worth getting it wrong it may cost more time and money to get an accountant to put it right for you. If you have an accountant, it is worth contacting them for any recommendations that they may have to get you started.
Double Entry Bookkeeping System
There are many different software packages which will complete bookkeeping for you. For most businesses, there are several choices these include using Excel, QuickBooks, Sage or online accounting services. The advantage of software for your accounts is that the figures are calculated for you. As you complete your transaction, the numbers automatically post to the accounts. An example of this is if you raise an invoice on a customer. By completing an invoice from the software will automatically complete the posting for you and increase your sales and also increase your customer’s balance.
Further reading is available on the Accounting Coach website.
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