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Double Entry Bookkeeping

7 Step Guide to Processing Business Accounts

Double entry bookkeeping is where the value from every business transaction is entered twice into the system.

Learn the principles behind this system and your confidence will grow in leaps and bounds whether keeping the books manually or using software!

Understanding double entry bookkeeping will also help you get a better grasp of how Balance Sheets work.

The basic steps of double entry bookkeeping:

  1. Business transactions produce documents.

  2. The information from the documents is recorded into journals.

  3. The data is taken from the journals and entered into ledger books.

  4. Each ledger book contains various accounts, listed in the chart of accounts.

  5. These accounts are totaled and balanced in line with the accounting equation.

  6. The accounts are balanced by using debits and credits, which is the core foundation of double-entry bookkeeping.

  7. A trial balance can be produced to ensure that the books actually balance and that the debits and credits have been posted correctly.

More details of each of these steps can be found below.

1. When a business carries out an activity a document is produced

One document example would be a sales invoice.

A business activity is the selling, buying, borrowing or loan of items, cash, goods or services.

For example: a sales invoice would be raised when the business sells a product.

The activity (in this case, a sale) is defined as a business transaction.

The document is called an accounting source document.

2. The transaction starts its journey in the Journal books

The details of a business transaction as found on the source document include:-

  • the date
  • the name of person or company
  • a description of the transaction
  • the amount

These details are recorded into books of original entry commonly called day books or bookkeeping journals.

The journals describe in summary what the transaction was and what ledger accounts are affected.

A transaction that has no value attached would not be recorded in the accounts.

View examples of bookkeeping and accounting journals

Make your own journal examples with journal entry template in excel

3. next, the ledger accounts are updated

The amount or value of the transaction will be entered into the bookkeeping ledger accounts.

One ledger represents one account.

If there are a lot of transactions in that one account, one ledger might spread on to several pages.

Each ledger is laid out in a T format.

Depending on the type of account, the amount will be entered into either the left-hand side of the T, or the right-hand side of the T.

In double entry bookkeeping, there are always two accounts affected by one transaction amount to keep the books in balance.

Which leads us on to the debits and credits.

4. the amount is entered twice using a debit and a credit

The amount is entered to the ledger accounts using the debits and credits method.

It is entered once as a debit in one ledger account, and once as a credit in another ledger account. 

A bookkeeper needs to learn how to process debits and credits to ensure the ledgers are accurate. There is a cheat sheet available to print.

It is not that difficult because there are only five main account categories within the ledgers, so only five to learn.

For example, one main ledger category is expenses.

They are always debited when money is spent on an expense.

The opposite credit entry will be made in the bank account which can be found in the assets ledger category.

It is important for bookkeepers to know which accounts to debit and which to credit.

5. where to find the list of ledger accounts

The names of the general ledger accounts are maintained in a list called the Chart of Accounts.

All accounts come under headings which either go on the Balance Sheet or the Income Statement as follows:

Balance Sheet Accounts

  1. Assets
  2. Liabilities
  3. Equity

Income Statement Accounts

  1. Income
  2. Expenses (often split to Cost of Goods Sold and Expenses)

6. There is a mathematical formula to support double entry

It is called the accounting equation and it maintains the structure of the ledgers.

Learning this simple equation by heart can help a bookkeeper to remember the rules of debits and credits.

It is from the bookkeeping ledgers that the totals are totaled. 

The trial balance is then produced.

7. A trial balance shows if the ledgers balance

The Trial Balance is used to ensure that all the debit ledger accounts add up to the same value as all the credit ledger accounts.

You can read more about the Trial Balance here.

If corrections must be made, this is the time to it and then a corrected trial balance produced.

After that, important management reports such as the income statement and balance sheet can be made.

A complete example

You can find a complete bookkeeping example here which shows the movement of two transactions (an income and an expense) going through the journals, ledgers and reports.

Double Entry Bookkeeping

There is another method of bookkeeping: single entry bookkeeping

This is basically just a cashbook.

Single entry is a good place to start for micro and small businesses.

It does not require using journals and ledgers or entering the amount of a transaction twice. It only has to be entered once.

Bookkeeping programs use the double-entry method

The way in which these programs are set up means you don’t really notice the double entry bookkeeping rules in action although they are very much in operation in the background.

The interface makes it easy to input basic data which is then immediately and automatically journaled, placed into the correct ledger accounts, totaled and balanced.

You will be none the wiser on the whole method. So if you want to learn it, you need to do some manual practicing.

Take the quiz!

The business transaction for the quiz

On January 10th Peter buys $20 of stationery from Stationery Store. He pays with his business bank card and Stationery Store gives him a receipt.

Take the Quiz!

The business transaction for the quiz

On January 10th Peter buys $20 of stationery from Stationery Store. He pays with his business bank card and Stationery Store gives him a receipt.

Click on the button below to take the quiz.

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Double Entry Bookkeeping

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