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