Accounts

Double Entry Book-keeping

TheLawStudent

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.

The ALCIE Classification

TheLawStudent

The ALCIE Classification is a a way of categorising trial balance entries into the ledger to which they relate. The system splits the entries into one of 5 different categories as follows:

ALCIE accounts: Summary

Assets: An asset is something you OWN. A business will have a separate account for each category of asset, (e.g. motor vehicles, cash at bank).
Liabilities: A liability is something you OWE. A business will have an account for each different type of liability, (e.g. loans, trade debts).
Capital: Capital is usually identifiable as an injection of value from the owner or an investor rather than money accruing from customers or otherwise generated by the business. An alternative way of thinking of capital is to see it as representing the owner of the business.
Income earned in the business – this usually comes from regular sources. Each main income source of the business will have a separate account (e.g. a public house might record income from food sales and from drink sales in separate accounts).
Expenses of running the business. Each different type of expense is recorded in a separate account (e.g. heating and lighting, rent etc.).