Double entry bookkeeping, the subject of this blog, is used by the majority of businesses for accurate accounting and as an aid to forecasting and financial planning.
It’s a systematic and scientific system with clear-cut rules that ensure mathematical accuracy in business accounting.
Anyone studying for an accountancy apprenticeship or other accounting qualifications will need to familiarise themselves with this process (see our blog on Accountancy couses and apprenticeships and AAT Accountancy Courses).
How does it work?
In double entry bookkeeping, all transactions are entered twice. The receiver is debited and the giver is credited.
A positive entry, or debit, is noted on the left side of the account and a negative entry, or credit, is noted on the right side of the account.
Why use double entry bookkeeping?
There are several reasons, including:
- It helps companies to balance the books correctly and reduces the likelihood of errors
- It’s easier to see the financial situation of the company, useful for forecasting and planning ahead (see our blog on What is PESTLE Analysis?)
- It helps businesses to compare various results from one year to the next
- It reduces the likelihood of fraud
What about single entry bookkeeping?
Some smaller companies may prefer to stick to a simpler method of single entry bookkeeping, especially when they are first starting out. In this system, your entries are logged under either revenue (income) or expenses (outgoings).
Double entry bookkeeping can take longer and cost more than single entry bookkeeping. Also, the person carrying it out needs to fully understand how it works to ensure it is done correctly, although today there are a number of financial software options on the market that can help. The other alternative is to employ a professional bookkeeper for the company.
What types of accounts are involved?
Double entry bookkeeping is used across the whole of a company’s accounts. This includes:
Assets – eg business premises, stock and machinery
Liabilities – eg monies owed to the bank or suppliers
Capital – eg monies and other resources invested in the company by its owners
A common formula used in accounting is: assets = liabilities + equity.
The history of double entry bookkeeping
This system of bookkeeping is anything but new – in fact it has probably been around for at least 500 years. A monk called Luca Pacioli is thought to have brought it to Europe in the early 1500s; he was also Leonardo da Vinci’s maths teacher.
While a sole trader or small limited company run by one person might prefer to use single entry bookkeeping, most businesses will use the double entry system. You may also find it useful to read our blogs on What Is Basic Costing? and When is FIFO used in accountancy?