What is Double Entry Bookkeeping?
Newly associated with the accounting world in the UK and looking for the fundamentals guide like what is double entry bookkeeping? You are not alone in this, as we have got you covered with our guide. This comprehensive guide is designed to cover the basics of double-entry bookkeeping, how to do it, who should use double-entry bookkeeping, and what are the potential benefits in this regard. You can be a small business owner to carry out everyday business activities or owner of a large limited company; it is essential to get your books right to pursue the dream of achieving business targets in the competitive market of the UK. Let us kick-start the discussion to gather more information on this.
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What is Double Entry Bookkeeping?
What is double entry bookkeeping? The primary purpose of designing double-entry bookkeeping in the UK is to get truism of business. Understand that you do not get anything for no reason in the business, if something is coming to your business, it is for the reason that you gave something first. For example, you get an investor for your business, you take a business loan, you sell products or services, and you gain cash for these actions. However, it is important to get the acknowledgement of both side’s transactions of money and make it part of your accounting records. If you keep both sides, you will have to enter extra eateries, which is known as double-entry bookkeeping.
If you look into the history of double-entry booking and its origin, it was first used in the Middle Ages by the merchants of that era. This became the advanced version of that era and began to get more famous than the abacus and early single-entry systems. This is because of the factor that it contains detailed descriptions of products, income, expenses, loans, bad debt, and more.
How to Do Double Entry Bookkeeping?
Double-entry bookkeeping is a method of recording financial transactions that involves making two entries for each transaction. This includes a debit entry and a credit entry. This approach helps ensure that your financial records are accurate, complete, and compliant with UK accounting standards. Before you start recording transactions, you’ll need to set up your accounting system. This includes:
- Making of a chart of accounts: You can set up a chart of accounts that includes all the accounts you’ll need to record transactions. This includes assets, liabilities, equity, revenues, and expenses.
- Get software for accounting: Decide a good and suitable software that suits your business needs. For example QuickBooks, Xero, or Sage.
- Decide your accounting period: Choose your accounting period. This is typically a month, quarter, or year.
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What are the Benefits of Double Entry Bookkeeping?
Once you know what is double entry bookkeeping, there is a range of double-entry bookkeeping benefits for businesses in the UK. Here is an outline for the benefits listed and explained in the following.
1- Financial Statement Preparation
It becomes a lot easier to prepare financial statements in case companies are using double-entry booking. This is because of the factor that the required information can be taken from the record of transactions. It works for the companies to achieve the quick and accurate making of the financial statements. The management of a company is dependent on the inflight of its financial health. External users, like investors, depend on financial statements to view a company’s creditworthiness.
2- Leaves an Audit Trail
When it comes to the benefit of Double-entry bookkeeping, it prevents the companies from fraud because of the existing factor audit trail. Through this audit trail, you can trace the transactions that are part of the general ledger of the company. For instance, if your cash balance looks too high as a part of your balance sheet, you can immediately trace back the transactions made to the cash account. This will help to see if they’re accurate.
3- Prevent Errors
The financial position of a company can be damaged by the chance of human errors while making the record of accounting in the UK. However, with the use of Double-entry bookkeeping, the chances of mistakes and human errors are reduced because of multiple trials of check and balance. In the process of ensuring the debit and credit amounts are equal, the mistakes are usually rectified easily. Remember that the chances of errors are reduced in this regard but cannot be fully prevented by the use of Double entry bookkeeping.
4- Accuracy
The matching principle is the basic implementation of Double-entry bookkeeping in the UK works great. This ensures accuracy in accounting. It is a compulsion that the expenses related to revenue. Recording on both sides will give you accuracy while calculating the loss and profit details of the accounting and business.
The Bottom Line
In conclusion, to enjoy the range of benefits when it comes to accounting in the UK, you first need to learn what is double entry bookkeeping and how it works for the benefits. Double-entry bookkeeping is designed in a way that can reduce the chances of errors because of human mistakes. The basic accounting principle of matching works great in this regard. However, the professional asks us to remember that the chances of mistakes can be reduced in this process but are not still fully prevented. In the case of being a beginner, you can get in touch with our accounting professional to gather more information and decide the best accounting choice for your business.
Disclaimer: All the information provided in this article on what is double-entry bookkeeping, including all the texts and graphics, is general in nature. It does not intend to disregard any of the professional advice.