Understanding bookkeeping double entry examples

understanding-bookkeeping

When you hear the term ‘double entry bookkeeping’ do you understand what it means or is it just some wizardry that your accountant does with your business finances when you dump a carrier bag of invoices and receipts on their desk?

Even if you have no intention of doing your own bookkeeping, it’s a good idea to have a rudimentary understanding of how it works so that you can make better business decisions when you look at your accounts. So, this blog will explore some common double entry bookkeeping examples to give you a flavour of what it all means.

What is double entry bookkeeping?

As the name suggests, this is a method of bookkeeping that requires every transaction to have two entries in the books of account, a debit entry and a credit entry. This means that everything should balance – if it does not, then you know you’ve got an error in your accounts.

In simple terms,

Debits –

Increase expense or asset accounts

Decrease revenue

Decrease liability or equity accounts

Credits –

Decrease expense or asset accounts

Increase revenue

Increase liability or equity accounts.

And it’s also important to remember that Assets = Liabilities + Equity.

Bookkeeping double entry – examples for a small business using cash accounting

All businesses, whatever they supply, be it bath bombs or business consulting, must account for sales. If you are a small business (under £150,000 turnover), you can choose when you want to record your transactions. If you record your sales when you provide your goods or services, this is known as accrual accounting. If you don’t record the sale until you receive the cash in your bank, this is called cash accounting.

When you account on a cash basis, you’ll record the transaction when the invoice is paid:

When the cash is received:

CR	Sales
DR	Cash at Bank

When you purchase something, you’ll see similar entries.

When you pay a supplier invoice:

DR	Purchases
CR	Cash at Bank

Bookkeeping double entry – examples for a business using accrual accounting

If you are a larger limited company business, then you might be using accruals accounting which means that you would recognise the transaction when the goods are shipped or received by the customer. So, you’ll also make the following entries:

When goods received by your customer:

DR	Trade Debtors
CR	Sales

When the cash is received:

CR	Trade Debtors
DR	Cash at Bank

And when you order goods from a supplier, you would make these entries.

When you receive a supplier invoice:

DR	Purchases
CR	Trade Creditors

When you settle the invoice:

DR	Trade Creditors
CR	Cash at bank

Double entry bookkeeping for assets

Let’s say you buy a piece of machinery costing £5,000. You are trading one type of asset (cash) for another (equipment) so all that’s needed here is to recognise a reduction in the cash balance eg CR Cash £5,000 and DR Fixed assets (machinery) £5,000.

Double entry bookkeeping for liabilities

The bookkeeping for taking a loan out is similar. You’re adding to your cash while also increasing what you owe (liabilities) so the entries are DR Cash, CR Creditors. As you pay back the loan, the repayment entries are reversed – CR cash, DR Creditors.

Of course, there are many other different entries that you might need to make, such as accounting for VAT, PAYE and so on. It can feel challenging if accounting and finance are not your strength areas in your business. If you don’t have enough transactions to make it worth hiring an in-house bookkeeper, some accountants will offer bookkeeping as part of their service package.

Making bookkeeping simple

If the idea of handling your own bookkeeping keeps you awake at night, we’re on hand to sort it all out for you. Our highly qualified bookkeepers and accountants help many small business owners to enjoy running their own company without worrying constantly about the finances. We support businesses across Kent and London. Call the team on 01322 250001 for a no-obligation chat about how we can support your business too.