Double entry bookkeeping is the basic fundamental aspect used in bookkeeping. All computer based bookkeeping software uses the basic principle of double entry bookkeeping and it’s a skill you need to know if you want to use these software programs correctly.
A lot of people think they can just enter transactions without understanding the double entry bookkeeping that is taking place, but if you need to enter journals to make adjustments which at times is necessary, without learning the basic principles you will simply get your self confused and your accounts in a mess.
It’s easier than you think to understand double entry bookkeeping. It’s a basic underlying principle that for every debit there is an equal sized credit (or combination of credits) and for every credit there is an equal sized debit (or combination of debits).
Think of it like balancing a scale. You need an equal weight on each side of the scale to balance. In double entry bookkeeping you need an equal sized transaction on each side to balance your accounts.
So for example I buy some stock for £200 and pay by cash. My stock purchase is a debit for £200 and so my petty cash account must have a credit of £200 posted.
The main thing I find that confuses people when they are starting in bookkeeping is, if you pay money into your bank account it is deemed as a credit yet when preparing accounts it would be a debit on the accounts, why?
Well the answer is that it’s a credit from the bank’s point of view. If I pay money into a bank account I become a creditor of the bank and as such my money is a liability to them (i.e. they owe me that money) and liabilities are a credit so from the banks point of view I am a liability and they credit that account. When we prepare business accounts that same money is an asset of our business and assets are a Debit, therefore we debit the business accounts in order to accurately show our asset.
I tend to find the acronym DEAD CLIC is the easiest way to remember whether I need a Credit or Debit.
DEAD is Debit, Expenses, Assets, Drawings.
CLIC IS Credit, Liabilities, Income, Capital.
So we Debit our expenses, assets and drawings and Credit our Liabilities, Income and Drawings.
This was one of the first things I learnt when I attended a bookkeeping course and I still use it today as there are times you just have to think back to basics no matter how often you use the skills.