One of the most difficult areas of accountancy to understand at first is the concept of double entry bookkeeping, which can seem like learning a foreign language.
If you haven’t studied accounting before, you will probably be wondering what double-entry bookkeeping is (which is also covered in detail in AAT Level 2 Bookkeeping).
Understanding accounting transactions
Double entry bookkeeping is a system which has been used for nearly 500 years, where every transaction is recorded in at least two ledgers.
Every financial transaction that takes place needs recording into the accounting records, and requires at least two entries, hence using the term ‘double entry’.
Double entry bookkeeping example
Let’s look at an example to better understand double entry bookkeeping:
A business pays rent of £1000 for the month by cash. This will need to be recorded in the accounts, and the two entries that are made must balance.
The two sides of this transaction are the rent and the cash. Transactions need to be categorised as either assets, liabilities, income or expenditure.
In this example, the rent is the expenditure, as it is a general running cost of the business. The cash is an asset, as it is something that the business owns.
The next step is to decide whether the accounts are increasing or decreasing. This will enable you to work out whether the accounts need to be debited or credited.
In this example, the amount that has been spent on rent has increased. The amount of cash that we have has decreased. You can then use an acronym such as PEARLS to work out which side is a debit and which side is a credit:
|Assets||Source of funds (capital)|
For our example, the rent account is an expense, and has increased, so will therefore be debited.
The cash account, on the other hand, is an asset, but has been decreased. When an asset is increased it is debited; therefore, when it is decreased it is credited.
Double entry bookkeeping with accounting software
One of the great advantages of modern day bookkeeping and accounting is the use of accounting software. Many systems use the double entry technique and you only have to enter the data once and the system will create the debit and credit entries. Systems like Sage, Xero, and QuickBooks make use of the double entry method.
Not every software will use the double entry methods, so it is important to check with this with your software provider.
Whether you need to become familiar with double entry bookkeeping for your current job, or future career, studying a bookkeeping course such as AAT level 2 Bookkeeping will give you a thorough grounding in the essentials of bookkeeping.