Your Helpful Guide to Double-entry Bookkeepingcreative77
HMRC are maintaining their commitment to Making Tax Digital (MTD); requiring everybody to maintain and digitally submit their accounting records. As such we thought it the perfect time to take a trip down memory lane; sharing a helpful summary of double-entry bookkeeping. This is the main principle of the digital accountancy systems and one really worth learning.
Said to have been invented by an Italian merchant in the mid 15th century, double-entry bookkeeping is an accountancy method whereby each entry into an account must be matched with a corresponding and opposite entry in another account. It is based upon the accounting equation, where assets must be equal to the addition of liabilities and owner’s equity.
It’s quite common for new business owners and freelancers to use the single-entry bookkeeping method. However, the double-entry method has a variety of advantages and is considered particularly suitable for the growing business. Evidence of this method may be key if you are to secure a bank loan or outside investment.
Keep on reading as we cover the uses and benefits of double-entry bookkeeping.
Creating the ledger
The double-entry method typically begins with the creation of a t-shaped account (ledger), with the section on the left being allocated to debits and the section on the right being allocated to credits. The title of the account should be added above the t. Suitable names would include the “computer account”, or “fixtures and fittings account”.
It is possible to draw up multiple ledger accounts by hand. However, the HMRC will require you to use accountancy software for MTD over the coming years; with associated benefits including the saving of time and assurance of accuracy. At Appleleaf Chartered Certified Accountants we can provide impartial advice and guidance in the selection of such software.
Accounting for credit and debits
You must ensure that every transaction is recorded on the debit and credit side of the ledger so that your accounts remain in balance. This will mean that each debit entry increases the balance of the asset and expense accounts; while each credit entry increases the balance of liabilities, revenue, and equity accounts. Care must be taken over the assignment of transactions to the debit and credit sides of the ledger.
The double-entry rules are as follows:
|Accounts||To record||Entry in the account|
The receiver must be debited and the giver credited for every transaction. This will mean adding the account receiving the benefit to the debit side and the account transferring the benefit to the credit side. It is essential to record every transaction, with the double-entry sheet accounting for every asset, liability, and capital item. The use of this method will allow you to have an in-depth and comprehensive view of the money coming in and paid out of your business.
As an example, let’s say that you’ve just bought a set of 5 office chairs at a total cost of £1,500. You would then set up the double-entry ledger highlighting the exchange of one asset (cash) for another asset (chairs).
The transaction would be displayed as follows:
You should continue this process, ensuring that all of your business receipts and expenses are accounted for. A trial balance may then be used to establish whether the debits and credits balance. The transactions should be reviewed and any necessary corrections made for the accuracy of the trial balance. A statement should then be produced for a clear overview of your business’s financial performance.
Get In Touch
You should now have an improved understanding of the double-entry bookkeeping method. However, you may still be daunted by the amount of time needed for the maintenance of accurate accounts. Thankfully you can rely on the bookkeeping services offered by Appleleaf Chartered Certified Accountants. Using the latest cloud-based technology, we are able to keep your books in order so that you have more time to focus on what you do best.
Fill out our simple contact form or phone 01472 287387 for more information about our bookkeeping services.