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Double-entry bookkeeping is when we record a debit and credit – for all company transactions.
It’s where every post to an account requires an opposite post to a different account. The “double-entry” has two equal sides – a “debit” and a “credit”.
For instance, recording a sale of £1 requires two entries: a “cash” debit of £1 to an account, and a “revenue” credit of £1.
What’s the point?
Double-entry accounting reduces errors and boosts the chance of your books balancing. Companies massively benefit from using double-entry bookkeeping because, not only reducing errors, it helps financial reporting and prevents fraud.
Bookkeeping courses teach you how to accurately record transactions into a manual double-entry system. Once you master this skill you can produce accurate financial accounts for your management. If you start at Level 2, you’ll be eased nicely into the topic, Level 3 gives you a more advanced understanding.
When delving into the subject you’ll be made aware of concepts such as: account types, debits and credits, using day books, ledgers, account reconciliation, bank reconciliation, suspense accounts, using journals to correct errors and trial balances.
All the above is important when progressing on to the later levels such as Level 3 and 4 of AAT, and for working in accounts.
The benefits of Double-entry accounting
One reason that double-entry bookkeeping is so accurate is because it implements the “matching principle”. The matching principle makes sure that expenses related to revenue. Recording both means you’re accurately calculating profit and loss.
Human error can distort a company’s financial position. But Double-entry bookkeeping reduces the chance of that as it provides checks and balances.
Errors are easily caught with double-entry bookkeeping because the debit and credit amounts are equal. Although errors are greatly reduced, it does not entirely prevent error.
Leaves an Audit Trail
Double-entry bookkeeping reduces fraud by leaving an audit trail. An audit trail allows you to trace transactions that were posted to the general ledger. For example, if your cash balance seems too high on your balance sheet, you can trace back the transactions made to the cash account and see if they’re accurate.
Financial Statement Preparation
Financial statements are easy to prepare in companies that use double-entry bookkeeping because info is gathered directly from the double-entry bookkeeping transactions. It’s important for companies to produce accurate financial statements quickly and efficiently.
Management depend on financial statements to see how the companies performing financially and to create budgets. External users, like investors, depend on financial statements to view a company’s creditworthiness.
Origins of double-entry bookkeeping
So where did it come from? History suggests that double-entry bookkeeping was first used by merchants in the Middle Ages. This was a vast improvement from the abacus and early single-entry systems used from the age of Antiquity.
As double-entry bookkeeping became more widely used, it extended to include detailed descriptions of products, income, expenses, loans, bad debt, and more.