Double Entry Bookkeeping 101
Double-entry bookkeeping is the most widely used bookkeeping system which records the dual effect of every financial transaction a business makes. Double-entry bookkeeping is one of the oldest bookkeeping systems available, and despite the introduction of computerised bookkeeping and accounting software, understanding double-entry is still a requirement for bookkeepers and accounting clerks worldwide.
The Golden Rules of Accounting
Double-entry bookkeeping systems record financial transactions in relation to whether the transactions are Income, Expenses, Assets or Liabilities. Double-entry bookkeeping is used only in the “Books of Accounts” that make up a business’ nominal ledger. All entries in Books of Accounts have a dual effect, increasing one account and decreasing one or more other accounts by an equal amount.
Books of Prime Entry
Books of prime entry are the sub-ledgers or daybooks where the majority of financial transactions are first recorded, but they are not part of the Double-entry system. The financial information entered into individual daybooks is totalled together and used in the nominal ledger. Provided that the information in the daybooks has been recorded properly the nominal ledger ensures the integrity of the accounting information resulting from the daybooks. Common books of prime entry are:
- Purchase Invoice Daybook – records individual supplier invoices and credit notes
- Bank Payments Daybook – records supplier payments
- Sales Invoice Daybook – records individual customer invoices and credit notes
- Bank Receipts Daybook – records customer receipts
An example of Double-entry
The simplest way to understand Double-entry is to see the way that a simple supplier invoice affects the nominal ledger:
£50.00 invoice from J Bloggs Stationery Co (0% VAT)
The first effect that this supplier invoice has is that it increases the value of the Purchases Nominal Ledger account, the transaction is entered onto this account as a debit balance:
Dr Purchases £50.00
But we also owe money to the supplier, so we need to record the same amount into the Creditors (or Supplier) Nominal Ledger as a credit balance:
Cr Creditors £50.00
So we have now recorded the dual effect of the invoice, and put together it looks like this:
Dr Purchases £50.00
Cr Suppliers £50.00
Common abbreviations found in double-entry bookkeeping include:
Dr/dr – Debit
Cr/cr – Credit
P/L – Purchase Ledger
S/L – Sales Ledger
N/L – Nominal Ledger
A/C – Account
c/f – Carried Forward
b/f – Brought Forward
c/d – Carried Down
b/d – Brought Down
VAT – Value Added Tax
P&L – Profit & Loss
B/S – Balance Sheet
TB – Trial Balance
PPE – Property Plant & Equipment
