Why bookkeepers and bookkeepers use double entry bookkeeping

Double entry bookkeeping dates back centuries, perhaps even as early as the 12th century, and is now accepted worldwide as the accounting standard to be used by all companies when registering 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 sector has grown somewhat since then and today contains many technical words that are known but largely ignored by non-accounting professionals. The understanding and desire to understand accounting terms is further confused by the banking industry, while adopting double entry bookkeeping by default, what appear to be diametrically opposed terms in the presentation of information to their customers.

In accounting, 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 occurs because what the bank really says 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 bank’s books. Therefore, the bank describes the balance as a credit balance.

The simplest way to understand double entry bookkeeping is the understanding that any financial transaction has a double effect. One effect is to change the business profit and loss with sales revenue increasing the financial profit and purchase reducing the financial profit. While the double entry is that each profit and loss transaction also has a balancing 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 not have an impact on the income statement as both sides of the double entry affect the value of balances in the balance sheet. For example, when a creditor is paid, the bank balance and the amount owed by the company are reduced by the same amount.

The greatest value of double entry accounting for a business is its ability to numerically show the company’s profitability to generate improved financial performance and management while providing an inventory of assets and liabilities. These factors are also important for accountants, although the main benefit of an accountant is that because each transaction has an equal and opposite record, a mathematical check can be produced to ensure that all financial transactions are recorded accurately. This mathematical balance is when all the financial accounts into which the financial transactions are entered are listed and added, and if all transactions are entered correctly, the sum is zero. This is called the trial balance.

The function of accountants and accountants is to record the most important documents, such as sales invoices and purchase invoices in the financial ledgers. Cash and bank records must also be entered. And for every entry made, there must also be the opposite access to business finance ledgers such as sales ledger, purchase ledger and bank.

Accounting software is basically a database of these financial transactions that automates the double entry so that a single transaction can be entered once by the user but create the second entry in the company’s financial accounts. Using accounting software, which everyone except the smallest companies use as a standard business tool, ensures greater accuracy and usually produces a self-balancing trial balance, as the accounting software always produces a different equal input to that which becomes the input to the financial system.

The job of an accountant is first and foremost to ensure that the primary documents are accurately entered and then interpret the results produced by the trial balance into accounts and reports in a format that helps the financial management of the business and ensure that the financial figures also represents a true and fair view of the financial situation.

Public corporations must prepare a balance sheet under various financial actions and submit the balance to both the corporation’s house and the tax authority each year. Different rules apply to a limited company as opposed to self-employed, because 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 in England is not mandatory to prepare a balance sheet and can therefore choose to operate a single bookkeeping system rather than double entry. By introducing a single entry system, the self-employed has less financial control over the assets and liabilities, although this is often not a problem, as the self-employed in smaller companies often know exactly what the individual assets and liabilities of the company are. In smaller companies that may not have used accounting software, it is a common practice for the bookkeeper to maintain diaries.

A sales diary would be a simple list of sales invoices issued and by recording the sales receipts against the financial transactions as they are received, the sales diary actually becomes a sales account, showing the debtor’s balance due to the business.

A purchase diary would be a list of purchase invoices received and by recording on the purchase diary the amounts paid to each creditor, that diary will actually become the purchase diary.