What is double-entry bookkeeping?

Double-entry bookkeeping allows a business to track all its transactions and understand how it is performing in terms of profitability, cash balances and business growth. It is an important function on which VAT returns, annual accounts and tax returns are all based.

What are the principles of double-entry bookkeeping?

The principles of double-entry bookkeeping are very simple - every transaction will have two equal and opposite elements. For example, when your business makes a sale, your bank/cash balance increases and your stock levels goes down.

The entries resulting from double-entry bookkeeping are often referred to as 'debits' and 'credits'. These represent the two sides of every accounting transaction. Now that bookkeeping is less manual, it isn't always obvious that you're posting in this way as the bookkeeping software is doing it for you. The first sign that it has gone wrong is when your trial balance doesn't 'balance' - i.e. the two columns don't agree.

A business’ accounting records will be an accumulation of these double entries that are summarised in a general ledger and trial balance. These will show a list of all account balances at the report date broken down by account, and the general ledger will include each transaction too.

A chart of accounts is a list of all the accounts set up in your bookkeeping. The main types of account you will have are:

1. Assets
2. Liabilities
3. Capital Introduced
4. Owners’ equity/shareholding
5. Income
6. Expenses
7. Drawings

The main accounts will often have sub-accounts to include additional details such as cash and accounts receivable included under assets.

Here is a simplified look at how debits and credits work under the double-entry bookkeeping system.

Debits

• Increase an asset account
• Decrease a liability account or equity
• Increase an expense account
• Decrease revenue
• Recorded on the left

Credits

• Increase a liability or equity account
• Decrease an asset account
• Decrease an expense account
• Increase revenue
• Recorded on the right

What is double-entry bookkeeping used for?

Double-entry bookkeeping, or double-entry accounting, allows a business to record all its financial transactions in a structured way. It can then provide the owners, or their accountants, with the information they need to prepare their VAT returns, business accounts, tax returns and cashflow statements.

It also enables business owners to track their finances on a regular basis, helping them to understand how the business is performing and supporting key financial decisions.

Using double-entry bookkeeping to record transactions provides you and your accountant with a detailed, comprehensive view of your financial affairs.

Who should use double-entry bookkeeping?

Very simply, all businesses will need to use double-entry bookkeeping. It is the only way to ensure that financial information is complete and correct and will support all the ongoing reporting functions that business may have.

Some business owners will deal with the entirety of their double-entry bookkeeping, however in most cases bookkeepers or accountants are involved to help set up and run suitable systems to deal with bookkeeping needs.

As we mentioned, advances in software mean that you won't have to think about bookkeeping in such detail if you don't want to. Generally, you will post transactions as invoices or bills and the software will sort the double-entry for you.

Examples of double-entry bookkeeping

Some examples of how double-entry bookkeeping works are:

Example 1: Buying with cash

You have started a new takeaway business and want to buy a new phone for when you are out on deliveries.

Under double-entry accounting, you would make two entries: you pay with cash and get a mobile phone. You must therefore adjust both the cash and mobile phone accounts in your double entry ledger:

Account	Debit	Credit
Cash	-	£1,000
Mobile phone	£1,000	-

With double-entry bookkeeping, each debit must always have an equal corresponding credit to keep this equation in balance: Assets = Liabilities + Equity

This is known as the accounting equation, and is at the heart of double-entry accounting. If at any point this equation is out of balance, it will mean the bookkeeping process has gone wrong at some time.

Example 2 – Buying on credit

You have bought £5,000 of food for your catering business on credit.

In this case, the asset that has increased is your stock. Because you bought this stock on credit, your accounts payable (creditors) account also increases by £5,000 to show the money you owe.

Account	Debit	Credit
Inventory	£5,000	-
Accounts payable	-	£5,000

Bookkeeping Software

Business owners are increasingly working remotely, at least in some way, shape or form. It’s more important than ever to have flexible access to your finances which drives the need for cloud-based bookkeeping software which now dominate the small and medium sized business market.

These bookkeeping systems automate double-entry bookkeeping and are key tools for business owners, accountants and bookkeepers.

Digital compliance will soon be a necessity given the introduction of Making Tax Digital (MTD). This move to digitalisation will enforce digital records for all records once they become eligible for Making Tax Digital. Our guide on Making Tax Digital: Where are we now? will inform you of what you need to know and when.

We make bookkeeping simple

When you start a business, you may want to do everything yourself, or you may need to to start with. However, using a local bookkeeper can save you time and money. It's important that you spend your time where it matters, and when it comes to selling your business, products and services you'll do this best. Time away from this could mean you lose out on lucrative contracts.

Financial savings come from:

• reduced risk of human error
• years of experience working with many other clients
• no missed payments to HMRC
• no missed tax deadlines.
• benefits of tax planning and business reporting

Choosing a local bookkeeper is one of the best decisions you can make for your business.

How TaxAssist Accountants can help

At TaxAssist Accountants, we are experienced bookkeepers and software experts, including QuickBooks and Xero, and Dext. We can guide you through getting the best out of your software and making the most of having real time data at your fingertips. If you are interested in hearing more about how we can make bookkeeping easier, please call 01494 778900 or use our simple online enquiry form.

Last updated: 13th February 2025