Double entry bookkeeping stretches back centuries perhaps even as early as the 12th century and is now accepted worldwide as the accounting standard to be employed by all companies in recording the 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 industry has grown somewhat since then and today contains many technical words known but largely ignored by non accountants. The understanding and desire to understand accounting terms is further confused by the banking industry while adopting double entry bookkeeping as standard use what appears to be diametrically opposed terms in the presentation of information to their customers.

In accounting terms 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 arises because what the bank is really saying 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 banks books. Hence the bank describes the balance as a credit balance.

The simplest way to understand double entry bookkeeping is the understanding that every financial transaction has a double effect. One effect is to change the profit and loss of the business with sales income increasing the financial profit and purchases reducing the financial profit. While the double entry is that every profit and loss transactions also has a balance sheet 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 have no impact on the profit and loss account as both sides of the double entry effect the value of balances in the balance sheet. For example when a creditor is paid the bank balance reduces and the amount owed by the business reduces by the same amount.

The greatest value of double entry bookkeeping to a business is its ability to show in numerical terms the profitability of the business to generate improved financial performance and management while also producing a statement of assets and liabilities. These factors are important to accountants too although the greatest benefit to an accountant is that because every transaction has an equal and opposite entry a mathematical check can be produced to ensure all financial transactions have been recorded accurately.

This mathematical balance is when all the financial accounts into which the financial transactions have been entered are listed and added up and if all transactions have been entered correctly the total is zero. This is called the trial balance.

The function of accounts clerks and bookkeeper is to record the prime documents such as sales invoices and purchase invoices into the financial ledgers. Cash and bank records must also be entered. And for every entry made there must also be the opposite entry into the business financial ledgers such as sales ledger, purchase ledger and bank.

Accounting software is basically a database of these financial transactions that automates the double entry enabling a single transaction to be entered once by the user but create the second entry in the company financial accounts. Using accounting software which all but the smallest companies adopt as a standard business tool ensures greater accuracy and usually produces a self balancing trial balance since the accounting software always produces a second equal entry to the one being input to the financial system.

The task of an accountant is first of all to ensure the prime documents are entered accurately and then interpret the results produced by the trial balance into financial statements and reports in a format that aids the financial management of the business and ensure those financial figures also represent a true and fair view of the financial position.

Limited companies must produce a balance sheet under various financial acts and submit the balance sheet to both Companies House and the tax authority each year. Different rules apply to a limited company as opposed to self employed business because the 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 business in the UK are not compulsory required to produce a balance sheet and consequently may choose to operate a single entry bookkeeping system rather than double entry. By adopting a single entry system the self employed business has less financial control over the assets and liabilities although this is often not a problem as the self employed in smaller businesses often know exactly what the individual assets and liabilities of the business are.

In smaller businesses that may not have adopted accounting software it is a common practise for the bookkeeper to maintain day books.

A sales day book would be a simple list of sales invoices issued and by recording against those financial transactions the sales receipts as they are received the sales day book effectively becomes a sales ledger in that it shows the debtor balance owing to the company.

A purchase day book would be a list of purchase invoices received and by recording on the purchase day book the amounts paid to each creditor that day book effectively becomes the purchase ledger.

About The Author

Terry Cartwright, qualified accountant and CEO at DIY Accounting in the UK designs accounting software for limited companies at http://www.diyaccounting.co.uk/companyaccounts.htm on excel spreadsheets using a double entry bookkeeping system http://www.diyaccounting.co.uk/bookkeeping.htm

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Once you have decided that you are going to set up a small UK-based business, one of the most important things you should do as soon as possible is to find yourself a good accountant. His (or her) help and guidance will be invaluable in the setting up stage of your business. Here are the 4 key things that you should keep in mind while looking for the right small business accountant for you.

1) Be absolutely clear about what you want your accountant to do.

Accounting is a very large field and good accountants tend to specialise in specific areas. You should therefore be very specific in determining what you want your accountant to do for you.

It is most likely that all you will require basic accounting services to help in filing tax and company returns. In this case you should look for one person or a small practice. Not only will this be the most cost-effective solution but you are also likely to receive highly personalised attention.

However, if you are looking for more specialist support such as advice on the best way to start-up or grow your small business, look for a small business accountant that has relevant experience and specialisation in these areas.

2) Recognize your own responsibilities.

Your accountant can provide advice and guidance but ultimately the law will hold you responsible for all matters connected with your business. This includes any filing with tax or company law authorities. You must be aware that, under the law, ignorance is no defence. Also, you cannot evade your responsibilities on the grounds that you received bad advice from your accountant.

3) Your accountant will charge you for his time.

Accountants, like lawyers, usually bill by time spent on your account so don’t expect any free lunches. Remember that any contact with your accountant may cost you money so acquaint yourself thoroughly with what you’re going to be charged for and how much you can expect to pay. A lot of your basic questions can be answered with a little research on the Internet and the less time your accountant spends on you, the cheaper it is going to be.

You will find that some of the better small business accountants offer a free first consultation. Use this time well to ensure that there is a good match between your needs and your accountant’s services. Some accountants offer fixed fees. You will know where you are at the outset, with this kind of arrangement as long as you know what work the fee covers.

4) Look for value not cost saving.

You can get basic services from a bookkeeper especially if your accounting requirements are limited to keeping your books of accounts. But for all complicated matters such as corporate or personal taxation, you would be taking a risk if you do not use the services of a proper small business accountant. Remember what happens if you pay peanuts: you get monkeys.

David Grant – London Accountant

London Accountants David Grant are London based business start up and small company accounting specialists. We offer:
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For more information about us and how we could help you, visit North-London-Accountants.co.uk. For your first free consultation, call London Accountants David Grant now on 020 3348 8005.

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