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How to Double Entry Bookkeeping

Double entry accounting which also known as double entry is Bookkeeping is an accounting method in which all the business transactions are recorded at least two times. The accounting equation basically follows the same concept. This means at anything that is recorded in debt should be recorded in credit as well. This is also called duality concept. In other words, the balance of debit and credit transactions should be equal. All the modern accounting systems are built on double entry bookkeeping.  This is used as the best bookkeeping services in the UK.

When it comes to double entry bookkeeping system, the key formula or equation for the balance sheet (assets= liabilities + equity) plays a vital role.

All the debit entries are the ones that account for the following effects:

• Decrease in income
• Decrease in equity
• Decrease in liability
• Increase in expense
• Increase in assets

All the credit entries are the ones that account for the following effects:;

• Increase in income
• Increase in equity
• Increase in liability
• Decrease in expense
• Decrease in assets

Any increase in the expense account (Dr) will be offset by a decrease in assets (Cr) or an increase in the equity or liability (Cr) and vice-versa. Hence, it will make the accounting equation stay in equilibrium. For example:

Transaction no. 1:   Purchase of machine

Debit                            Machine                                   Increase in asset

Credit                          Cash                                          Decrease in asset

 

Transaction no. 2: Interest received on bank deposit account

Debit                   Cash                              Increase in asset

 Credit                Finance income             Decrease in income

A good understanding and handling of double entry bookkeeping help you understand the journals. Journals are used to make manual adjustments without having an effect on the account balances of the bank.

The double entry bookkeeping process

The following processes lead to the final bookkeeping entry books:

1. Documents are produced by using the business transactions
2. The information recorded in the documents is then written in the journals.
3. The data in the journals is then recorded in the ledger books.
4. Each ledger includes different accounts which are listed in the charts of accounts.
5. These accounts are then managed and totaled according to the accounting equation.
6. The accounts are balanced properly by using the debit and credit entries. This is basically the core function of double-entry bookkeeping.

Advantages of double-entry bookkeeping

1. This method ensures that each and every transaction is been recorded. So, there is a record of complete accounts.
2. Because both the debit and credit entries are equal in amount, so it is easy to find any possible error to verify the arithmetical accuracy of the books of accounts by determining that the two sides are equal or not. This is a done through a process known as trial balance.
3. This system helps to prepare the profit and loss account easily by gathering all the accounts of income, expenses, revenues, and losses through which the result of the business can be ascertained.
4. To assess the financial position of the business, a balance sheet can be prepared conveniently by taking together all the accounts of assets and liabilities.
5. Any error or mistakes can be detected by this system.
6. All the necessary details about a business transaction can be obtained quickly.
7. All the sales, purchases, stock, revenue, expenses, profit or loss, of different years can be compared and the financial fluctuations of the business can be measured. It can help to identify the causes of the failure of the business and then different strategies can be implemented to ensure the success of the business.

Disadvantages of double entry bookkeeping system

Double-entry bookkeeping system also has some disadvantages which are as follows:

1. Due to keeping the record on two sides, the number and size of books of account are increased and it is more complicated.
2. Expert knowledge and guidance are required to keep up with such a system.
3. It is a complex system, so there are chances of errors in it.
4. This type of system requires time, labor and money. So, it might not be possible for small firms to keep accounts under this system.

According to the discussion of the double entry bookkeeping system above, it is clear that it has more advantages than disadvantages. This is why it is considered as the best bookkeeping services in the UK by Weaccountax and in the modern world.