Bookkeepers And Accountants Choose Double Entry Bookkeeping For Accuracy
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Double entry bookkeeping stretches back centuries perhaps even as early as
the 12th century and is now accepted worldwide as the accounting standard to be
employed by all companies in recording the financial accounting records. The
first written explanation of the accounting system was reportedly by a Venetian
mathematician Luca Pacioli towards the end of the 15th century.
The accounting industry has grown somewhat since then and today contains many
technical words known but largely ignored by non accountants. The understanding
and desire to understand accounting terms is further confused by the banking
industry while adopting double entry bookkeeping as standard use what appears to
be diametrically opposed terms in the presentation of information to their
In accounting terms an asset such as money in the bank is a debit balance
while bank customers are told if they have money in the bank it is a credit
balance. This arises because what the bank is really saying is when a customer
has money in the bank that the balance represents a creditor to the bank as it
owes the customer money and is a creditor in the banks books. Hence the bank
describes the balance as a credit balance.
The simplest way to understand double entry bookkeeping is the understanding
that every financial transaction has a double effect. One effect is to change
the profit and loss of the business with sales income increasing the financial
profit and purchases reducing the financial profit. While the double entry is
that every profit and loss transactions also has a balance sheet effect in
either increasing assets or increasing liabilities.
In more complex accounting areas such as journal entries or bank transactions
both sides of a transaction may have no impact on the profit and loss account as
both sides of the double entry effect the value of balances in the balance
sheet. For example when a creditor is paid the bank balance reduces and the
amount owed by the business reduces by the same amount.
The greatest value of double entry bookkeeping to a business is its ability
to show in numerical terms the profitability of the business to generate
improved financial performance and management while also producing a statement
of assets and liabilities. These factors are important to accountants too
although the greatest benefit to an accountant is that because every transaction
has an equal and opposite entry a mathematical check can be produced to ensure
all financial transactions have been recorded accurately.
This mathematical balance is when all the financial accounts into which the
financial transactions have been entered are listed and added up and if all
transactions have been entered correctly the total is zero. This is called the
The function of accounts clerks and bookkeeper is to record the prime
documents such as sales invoices and purchase invoices into the financial
ledgers. Cash and bank records must also be entered. And for every entry made
there must also be the opposite entry into the business financial ledgers such
as sales ledger, purchase ledger and bank.
Accounting software is basically a database of these financial transactions
that automates the double entry enabling a single transaction to be entered once
by the user but create the second entry in the company financial accounts. Using
accounting software which all but the smallest companies adopt as a standard
business tool ensures greater accuracy and usually produces a self balancing
trial balance since the accounting software always produces a second equal entry
to the one being input to the financial system.
The task of an accountant is first of all to ensure the prime documents are
entered accurately and then interpret the results produced by the trial balance
into financial statements and reports in a format that aids the financial
management of the business and ensure those financial figures also represent a
true and fair view of the financial position.
Limited companies must produce a balance sheet under various financial acts
and submit the balance sheet to both Companies House and the tax authority each
year. Different rules apply to a limited company as opposed to self employed
business because the accounts including the balance sheet are public records
available to the members of that company and not necessarily the property of a
single individual or partnership.
Self employed business in the UK are not compulsory required to produce a
balance sheet and consequently may choose to operate a single entry bookkeeping
system rather than double entry. By adopting a single entry system the self
employed business has less financial control over the assets and liabilities
although this is often not a problem as the self employed in smaller businesses
often know exactly what the individual assets and liabilities of the business
In smaller businesses that may not have adopted accounting software it is a
common practise for the bookkeeper to maintain day books.
A sales day book would be a simple list of sales invoices issued and by
recording against those financial transactions the sales receipts as they are
received the sales day book effectively becomes a sales ledger in that it shows
the debtor balance owing to the company.
A purchase day book would be a list of purchase invoices received and by
recording on the purchase day book the amounts paid to each creditor that day
book effectively becomes the purchase ledger.
About the Author
Terry Cartwright, qualified accountant and CEO at DIY Accounting in the UK
designs accounting software for limited companies at
http://www.diyaccounting.co.uk/companyaccounts.htm on excel spreadsheets
using a double entry bookkeeping system
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Article Published/Sorted/Amended on Scopulus 2008-01-14 00:33:12 in Business Articles