Double entry bookkeeping stretches back centuries perhaps
even as early as the 12th century and is now accepted
worldwide as the accounting standard to be employed by all
companies in recording the financial accounting records.
The first written explanation of the accounting system was
reportedly by a Venetian mathematician Luca Pacioli towards
the end of the 15th century.
The accounting industry has grown somewhat since then and
today contains many technical words known but largely
ignored by non accountants. The understanding and desire to
understand accounting terms is further confused by the
banking industry while adopting double entry bookkeeping as
standard use what appears to be diametrically opposed terms
in the presentation of information to their customers.
In accounting terms an asset such as money in the bank is a
debit balance while bank customers are told if they have
money in the bank it is a credit balance. This arises
because what the bank is really saying is when a customer
has money in the bank that the balance represents a
creditor to the bank as it owes the customer money and is a
creditor in the banks books. Hence the bank describes the
balance as a credit balance.
The simplest way to understand double entry bookkeeping is
the understanding that every financial transaction has a
double effect. One effect is to change the profit and loss
of the business with sales income increasing the financial
profit and purchases reducing the financial profit. While
the double entry is that every profit and loss transactions
also has a balance sheet effect in either increasing assets
or increasing liabilities.
In more complex accounting areas such as journal entries or
bank transactions both sides of a transaction may have no
impact on the profit and loss account as both sides of the
double entry effect the value of balances in the balance
sheet. For example when a creditor is paid the bank balance
reduces and the amount owed by the business reduces by the
same amount.
The greatest value of double entry bookkeeping to a
business is its ability to show in numerical terms the
profitability of the business to generate improved
financial performance and management while also producing a
statement of assets and liabilities. These factors are
important to accountants too although the greatest benefit
to an accountant is that because every transaction has an
equal and opposite entry a mathematical check can be
produced to ensure all financial transactions have been
recorded accurately.
This mathematical balance is when all the financial
accounts into which the financial transactions have been
entered are listed and added up and if all transactions
have been entered correctly the total is zero. This is
called the trial balance.
The function of accounts clerks and bookkeeper is to record
the prime documents such as sales invoices and purchase
invoices into the financial ledgers. Cash and bank records
must also be entered. And for every entry made there must
also be the opposite entry into the business financial
ledgers such as sales ledger, purchase ledger and bank.
Accounting software is basically a database of these
financial transactions that automates the double entry
enabling a single transaction to be entered once by the
user but create the second entry in the company financial
accounts. Using accounting software which all but the
smallest companies adopt as a standard business tool
ensures greater accuracy and usually produces a self
balancing trial balance since the accounting software
always produces a second equal entry to the one being input
to the financial system.
The task of an accountant is first of all to ensure the
prime documents are entered accurately and then interpret
the results produced by the trial balance into financial
statements and reports in a format that aids the financial
management of the business and ensure those financial
figures also represent a true and fair view of the
financial position.
Limited companies must produce a balance sheet under
various financial acts and submit the balance sheet to both
Companies House and the tax authority each year. Different
rules apply to a limited company as opposed to self
employed business because the accounts including the
balance sheet are public records available to the members
of that company and not necessarily the property of a
single individual or partnership.
Self employed business in the UK are not compulsory
required to produce a balance sheet and consequently may
choose to operate a single entry bookkeeping system rather
than double entry. By adopting a single entry system the
self employed business has less financial control over the
assets and liabilities although this is often not a problem
as the self employed in smaller businesses often know
exactly what the individual assets and liabilities of the
business are.
In smaller businesses that may not have adopted accounting
software it is a common practise for the bookkeeper to
maintain day books.
A sales day book would be a simple list of sales invoices
issued and by recording against those financial
transactions the sales receipts as they are received the
sales day book effectively becomes a sales ledger in that
it shows the debtor balance owing to the company.
A purchase day book would be a list of purchase invoices
received and by recording on the purchase day book the
amounts paid to each creditor that day book effectively
becomes the purchase ledger.
----------------------------------------------------
Terry Cartwright, qualified accountant and CEO at DIY
Accounting in the UK designs accounting software for
limited companies at
http://www.diyaccounting.co.uk/companyaccounts.htm on excel
spreadsheets using a double entry bookkeeping system
http://www.diyaccounting.co.uk/bookkeeping.htm
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