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. So 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.
The transaction starts its journey in the 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 will happen to its value in the ledger accounts.
Journals indicate which ledger accounts to debit and credit.
The value will be entered twice into the accounts.
Once as a debit in one account, and once as a credit in another account.
A bookkeeper needs to learn how to process debits and credits to ensure the ledgers are accurate.
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.
General Ledger Accounts
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
Income Statement Accounts
There is a mathematical formula to support this
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 tallied, balanced and used to produce various business reports.
A Trial Balance is used to ensure all the ledgers do balance.
What is a Trial 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.
There is another method called single entry bookkeeping
This is basically just a cashbook.
Single entry is a good place to start for micro and small businesses.
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
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.