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 have not studied accountancy previously, you will probably be wondering what double entry bookkeeping is, so let’s start at the beginning.
Every financial transaction that takes place needs recording into the accounting records, and requires at least two entries, hence “double entry”. These entries will comprise of a debit entry in one account, and a credit entry in another. Let’s work through an example:
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.
Whether you need to become familiar with double entry bookkeeping for your current job, future career, or another reason, it’s a good idea to study a short course such as AAT level 2 Bookkeeping, where you’ll cover the basics and more.