Category Archives for Double-entry Bookkeeping

Double-entry Accounting Explained In Simple Terms

Double-entry accounting is really very simple provided you follow these rules.

  1. Everything starts with a Source Document. That is usually an invoice for something you have sold or a receipt for something you have bought.
  2. Each Source Document is copied into your double-entry system by creating Transactions.
  3. A Source Document always contains at least one complete transaction, and depending on your accounting system sometimes more.
  4. A double-entry transaction consists of a minimum of two Entries.
  5. That is, each transaction you create must have at least two entries.
  6. Each entry contains either a Debit or a Credit.
  7. Debits and Credits are amounts of money.

For a Transaction to be true to the double-entry principle, two further rules must be obeyed:

  1. The entries involved must contain at least one Debit and at least one Credit.
  2. The value of all the Debits must equal the value of all the Credits for a transaction to be considered complete.

Furthermore, each entry must consist of a minimum of four pieces of information as follows:

1. Date (the date on which the transaction occurred)
2. Reference (so it can be identified with a source document)
3. Amount (known as a Debit or a Credit in any currency)
4. Account (whose balance will be increased or decreased by the amount depending on whether it is a Debit or a Credit)

Every transaction tracks an amount of money from one account to one or more other accounts.

As long as the Debit amounts equal the Credit amounts, then we know that all the money has been accounted for.

The idea that we are doubling the amount of data by making two entries is a myth.

The two (or more) entries merely record the flow of money from one account to another. That is its sole purpose.

It is called Double-entry because two entries are the minimum required to record the two accounts involved in every transaction.

For example, buying a computer for your business involves your Bank and your Equipment accounts.

Once the transaction has been entered, a look at your books will show how much you have left in your bank and how much you have spent on equipment.

If you don’t know these things, it is unlikely your business will stay profitable as you will have no idea what is going on.

This is why double-entry accounting is used universally around the world and has been in existence for many thousands of years.

NOTE: If you want to learn more about double-entry, take an online exam and get a certificate to prove you know what you’re talking about, consider joining the Accounting for Everyone Certified Online Bookkeeping Course. It is the longest running online course and has had well over 12,000 successful students.

All the above and more is explained step by step with tasks and answers in the Accounting for Everyone online certified bookkeeping course. Click below to find out more.

Join The Accounting for Everyone Online Course

Learn Double-Entry Bookkeeping

Here’s a great resource from Loris Tissino. He has developed a site to step you through double-entry including transactions and posting. I think you will find this another very useful tool.

Loris has written a piece for Accounting for Everyone describing it. Here we go:

If you are a student and want to practice bookkeeping and accounting, what can you do? If you look for explanations on the web, you’ll find lots of tutorials that teach you the basic concepts, like what an account is, how double entry works, how to prepare a trial balance or a financial statement, and so on. That’s fine, but what do you have to do to practice?

Probably you need to actually write down your journal entries, preparing a paper with some T-accounts, and manually copy the amounts from the journal to the T-accounts. To prepare the statements, you have to make dozens of (boring) sums, putting it all together in a nice paper.

If you are a bit more evoluted, you can open up a spreadsheet, and do your journal entries there. Some sorting, some filtering, some subtotals computing, and you are almost done. Better than using pen and paper, but a bit complicated, though (and things tend to get messy if you don’t pay attention to some details).

Of course, you could use some software to accomplish your task. You can find programs that are actually used by companies to do the job. The problem with this approach is that these kind of programs are not much flexible (they don’t have to). You cannot easily adapt the chart of accounts to your needs, you have to fill tons of information that are very important for the business’ life but irrelevant for what concerns your exercise, and sometimes you cannot even edit what you have previously done.

If you are a student and faced this kind of problems, you’ll be glad to know about a new web site aimed to allow you practice bookkeeping keeping everything easy. It’s LearnDoubleEntry.org. The usage is completely free, and the source code is available as free software. The good news is that you don’t have to install anything on your computer, since it is web-based. Just login, create a firm, and start bookkeeping. As you proceed, you can check the Ledger, the Trial Balance and the Financial Statement. If you make errors, you can easily correct them. You can have your transactions analysed, and you are warned if some of the results don’t look normal (like having cash with a negative balance). You can use a standard chart of accounts or prepare a new one. You can share your firm with another student, so that you can work together. And you can send a link to your teacher, if you want him/her to check it.

how to learn double entry bookkeeping imageFor those with a passion for languages and internationalization, there is also the possibility to prepare a multilanguage chart of accounts. The application is under development, but already usable enough. Of course, it is open to improvements (you can help by sending comments and reporting bugs).