Bookkeeping can seem a little bit overwhelming at first. There are tons of different concepts you need to understand and if you are starting out with your business, this might all be a lot of new information to take in.
Double entry bookkeeping is one of the central concepts of bookkeeping. To understand what it all means, here is a simple guide that explains the basics of this concept.
The Definition of Double Entry Bookkeeping
According to Investopedia, double entry bookkeeping is based on:
“the fact that every financial transaction has equal and opposite effects in at least two different accounts.”
This means that every entry has a negative and positive effect in bookkeeping. These are the debits and credits of bookkeeping. So, every transaction you make will have two different effects on bookkeeping records.
Every transaction will be acknowledged both as a debit entry and a credit entry. So the debited account transaction will happen because the account receives value and the credited account transaction will occur because it has given value.
A Simple Way To Know Debits and Credits
If you aren’t sure what transactions would count as credits and what count as debits, here is a simple way to remember it. In accounting, you have two sides in the bookkeeping. As you know from the above, double bookkeeping requires every transaction to be found on both of these sides of the account.
In a simple example, expenses are always on the debit side. So if your business buys a new table it will always be a debited event. Revenues, on the other hand, are always credits. So when your business receives money it goes to the credit side.
When it comes to double entry bookkeeping, you naturally need to have the transaction acknowledged on both sides. So, there will be an increase in the debits when you buy the table and a decrease in credits because you lose net revenue.
The Golden Rule of Double Entry Bookkeeping
Furthermore, there is a great golden rule to double entry bookkeeping that further clarifies the process. It is called DEAD CLIC and it comes from the following wordplay:
Debits increase Expenditure, Assets, Dividends while Credits increase Liabilities, Income, Capital.
Here is an example of what this means when it comes to double entry bookkeeping. Let’s say your business invoices a client for £450. This transaction is increasing an asset, so it goes to the debit account and it is also increasing income so it goes on the credit accounts.
All these different accounting examples might seem a bit overwhelming at the start, but don’t worry. You don’t need to do it all on your own if you hire a professional bookkeeper to help you out. Small business bookkeeping isn’t too expensive and there are plenty of different service providers to guarantee you a tailored service, and you can view our own bookkeeping services here, which start from £25.
You should also look at the rest of our bookkeeping resources. The key is to learn the basics so that you can make the most out of your business financing.