Double Entry Bookkeeping: Simplified With UK Practices and Examples

Double Entry Bookkeeping
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Double-entry bookkeeping is a form of an accounting system that essentially records all financial transactions of a business in a logical manner. A credit to one account is matched with a debit of the same amount to another for every transaction. Therefore, every transaction is recorded in two accounts, resulting in double-entry accounting. Before the development of a double-entry bookkeeping system, all financial records were kept in physical account books.

However, like computer technology, software, databases, and remote data storage facilities have evolved, financial records are now being preserved in time-saving and convenient digital media formats.

Further in this post, we would be explaining the UK system of double-entry bookkeeping using examples and exercises to ensure your thorough understanding.

Double Entry Bookkeeping UK System Explained

Double-entry bookkeeping is the ideal system for large firms in the UK. It is called double-entry because each input to one account necessitates a corresponding and opposite entry to another. For example, recording earnings of £200 would necessitate a £200 entry to an account called cash and a £200 credit entry to an account called revenue.

Double-entry bookkeeping is a set of accounting exercises that are also known as a double-entry accounting system. It’s the foundation of accounting regulations all around the world. Furthermore, double-entry is an accounting principle that assures the accounting equation is always equal. This means that Assets must always equal Capital plus Liabilities.

A company’s assets are its resources. In essence, assets are the things that the corporation possesses. Assets include items such as office furniture, computers, cash, accounts receivable, and so on. Liabilities, on the other hand, are sums of money payable by the company, for example, loans, money owed for items given, or for expenses. Lastly, Capital is what the owner(s) of the firm invests in the form of cash or other assets such as motor cars, premises, and so on. Capital, in its most basic form, refers to the finances brought in by a company’s owner(s) to start up the business.

Additionally, every asset, liability, and capital has its account in the double-entry system. The term “double-entry” refers to the fact that every accounting transaction has two entries and affects two different accounts to preserve the balance. This means that there will be a credit and debit entry for each transaction. 

Double-entry Bookkeeping Equation Examples

The total assets of the firm are always equal to the total equities and liabilities…

                Assets = Capital + Liabilities

In case of liquidation, the owner does not have any claim on the assets until all the claims of creditors have been satisfied… From this point of view, the accounting equation is expressed as:     

            A – L = Capital

Some Double-entry Bookkeeping Equation Exercises

As already stated, asset, liability, and capital are the three types of accounts that make up the accounting equation list, but do you know how debits and credits affect each? The following double-entry bookkeeping exercises will put your knowledge of the accounting equation to the test.

  • Using the double-entry equation, find the firm’s assets when liabilities are £9,000 and capital is £12,000. 

Assets= 9000+12000=  £21,000.

  • Using the double-entry equation, find the firm’s liabilities when assets is £15000 and capital is  £7000

Liabilities=15000-7000=  £8000

  • Using the double-entry, find the firm’s capital when assets is  £50000 and liabilities are  £15000

Capital=50000-15000= £35000

UK Double Entry Bookkeeping and VAT

VAT registration is mandatory in the UK for all firms with an annual turnover of £85,000 or more; however, VAT registration is optional for smaller businesses. Most other European countries have lower VAT registration requirements, with some making it mandatory for all enterprises, including single traders, regardless of sales.

Consequently, you’ll need to account for it in your double-entry bookkeeping if your UK business registers for VAT, displaying the component of every payment made and received, as well as your VAT payments to HMRC. Except for specific types of items that are zero or 5%, VAT rates on goods and services purchased and sold in the UK are now 20%.

Debit and Credit Part Of Double-entry Bookkeeping Examples

With one notable exception, double-entry is simple and intuitive. A financial “debt” is a withdrawal from our daily labor and communication, whereas a “credit” is an addition. The term “debit” simply refers to an entry made in the left column of a two-column entry system, whereas “credit” refers to an input made on the right side. It will all make sense if you can get that into your head.

Conversely, a rise in the account balance is shown by a debit entry for assets and expenses. Increases are reported in the credit column for liabilities, equity, and revenue. However, you can make a cheat sheet if this element of the system is overwhelming.

When your company buys a tractor, for example – as an accounting issue, and not a strategic one, you’ll be raising one form of an asset while lowering another. Specifically, you’ll be raising the asset type “Machinery” while lowering the asset type “Cash.”

In the above example, you’ll make a debit entry to the Machinery account (assets that grow is debit) and a credit entry to the Cash account (assets that decrease is credit).

When you return to the accounting equation, you’ll notice that your numbers didn’t change because you’ve just grown and lowered assets. As a result, the growth and reduction occur simultaneously on the same side of the equation.

Examples

To further drive home our point, here are some clear examples of double-entry bookkeeping.

Purchasing a piece of equipment using cash. When assets are high, they enter in the debit column, and when they are low, they belong in the negative column. As a result, you’ll have the following balance.

AccountDebitCredit
Machinery (Asset)$5,000
Cash (Asset)$5,000

Here’s an example of how you might pay an employee — the specifics will depend on your chart of accounts. With a debit entry, you’re raising your expenses and lowering your cash, while with a credit entry, you’re decreasing your cash.

AccountDebitCredit
Wages (Expense)$2,200
Payroll Taxes (Expense)$300
Cash (Asset)$2,500

Dropping the value of your Inventory account by entering a credit and matching it with a debit in Cost of Goods or a separate inventory write-off account is a straightforward way to write down the value of inventory.

AccountDebitCredit
Cost of Goods Sold (Expense)$4,500
Inventory (Asset)$4,500

When replaying a loan to the bank, you’ll reduce the amount of cash you have on hand while also lowering the loan’s responsibility.

AccountDebitCredit
Loans Payable (Liability)$2,500
Cash (Asset)$2,500

Finally, you would create cash and expand equity by selling stock to investors.

AccountDebitCredit
Cash (Asset)$50,000
Common Stock (Equity)$50,000

Benefits Of Double Entry Bookkeeping System

#1. Accuracy check:

Double-entry bookkeeping exercises verify the book of accounts’ arithmetic accuracy since, for every debit, there is a matching and equal credit. Additionally, the accuracy of the bookkeeping job can be evaluated using this approach by preparing a Trial Balance.

#2. A complete record of transactions: 

While employing this bookkeeping system of double-entry, both sides of a transaction are documented. It is a complete record since it shows correct revenue or loss, as well as assets, and liabilities.

#3. Data for decision making: 

With double-entry bookkeeping examples, management can gather information to make decisions whilst also analyzing previous decisions.

#4. Fraud is minimized:

Because it creates an unequal distribution in the system, this approach also prevents and minimizes fraud. This also aids in the early detection of fraud.

#5. Profit or loss determination: 

The profit or loss incurred during a period can be determined by completing the Profit and Loss statement.

#6. Full details for control reasons:

The system allows account records in as many details as necessary while providing key information for control purposes.

Read Also: Benefits of Accounting Process Automation for Business

How is double-entry bookkeeping superior to single-entry bookkeeping?

There are various advantages to using a double-entry system over a single-entry system:

#1. Method of recording:

Single-entry bookkeeping provides a one-sided image of cash register transactions. Changes resulting from a single transaction are reflected in at least two accounts in double entry. Investors, banks, and buyers like the double-entry approach because it provides a more full financial picture of a company.

#2. Error detection:

Debits and credits must always be the same in double entry. If this is not the case, there is a problem. This makes it simple to detect problems and guarantees that they do not spread to other journals and financial statements. There is no technique for error correction or detection in a single entry.

#3. Company size:

A single-entry system is only suitable for small firms, whereas a double-entry system is suitable for all kinds of organizations, including large ones.

#4. Financial statement preparation:

The information recorded in a single-entry system is insufficient for financial reporting or creating profit and loss statements. Larger firms rely on these reports to track their performance, therefore double-entry accounting provides them with more information.

Double-entry Bookkeeping Summarized

The financial activities and assets of a business are spread among several accounts in this system, each of which can be represented by a name or a numeric number. A credit to one account rhymes with a debit of the same amount to another for each transaction recorded. As a result, every transaction is recorded in two accounts, a process is known as double-entry.

Furthermore, the benefits of this system are primarily twofold. Firstly, dividing the company’s operations into multiple accounts, it provides a foundation for cumulative management information and controls. Secondly, by balancing credit and debit across two accounts for each transaction, controls may be performed to discover problems.

Training in a double-entry bookkeeping system is necessary to comprehend which accounts to debit and which to credit for each sort of transaction. This is a job that many business owners do not find simple or cost-effective to conduct themselves, but those who favor double-entry bookkeeping frequently opt to outsource the work to experts.

FAQs On Double-Entry Bookkeeping

What Is The Basic Rule Of Double-Entry Bookkeeping?

Each company transaction affects at least two accounts in the double-entry accounting system. Inherently, one of these accounts must be debit and the other credit with the same amount. Thus, the sum of all debit entries is always equal to the sum of all credit entries.

What Is a Debit in Double-Entry Bookkeeping?

The double entry mechanism requires debits and credits. So a debit in accounting refers to an entry on the left side of an account ledger, while a credit refers to an entry on the right side. Debits reduce revenue and increase account balances, whereas credits decrease revenue and increase account balances.

What Is The Double-Entry Rule For a Liability?

The double-entry rule is thus: if a transaction enhances the value of a capital, liability, or income account, the increase must be on the credit or right side of the account.

What Is The Point of Double-Entry Bookkeeping?

The goal of double-entry bookkeeping is therefore to use the trial balance to construct a set of financial statements (profit and loss statement and balance sheet). The profit and loss statement also indicates revenue, costs, and profit/loss for a specific time period.

How Do You Use Double-Entry Ledger?

Every transaction should have two or more entries in double-entry accounting. However, keep in mind that debits and credits cancel each other out, and the total of debits and credits should equal the total of credits.

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