Double Entry Book-keeping

The principle of the double entry system of book-keeping is that every financial transaction that a business undertakes has a dual effect in its accounts. For example, if a business purchases some machinery for £15,000, there will be a reduction of £15,000 in the record of its cash and an increase of £15,000 in the record of the assets of the business.

For a particular transaction, once you have identified the types of account affected and whether there is an increase or reduction, the next step is to record the transaction in two places in the books of the business. One entry will be recorded as a ‘debit’ entry and the other as a ‘credit’ entry, this means that each individual debit will have a matching credit and vice versa. Therefore, over a particular accounting period, when all the debits/credits for all transactions are added together, the sum of the business’s debits should be equal to the sum of all its credits. This will be shown when you look at the Trial Balance for a particular accounting period.