What Is Double Entry Book-Keeping?
Peter Marshall Bsc (Econ) BA MBIM is a Fellow of the Society of Business Teachers, and an experienced educator in business subjects. He is also a prolific author and his books have been translated and sold worldwide. He lives in London, UK.
Debit and credit
All transactions have two sides, a debit and a credit. When a firm sells a TV and sends a bill for payment, for example, on the one hand it has made a sale (which is a credit entry). On the other hand it has gained a liability from the customer (debit entry). That customer is liable to the firm for the money.
The need for two records
Both these transactions need recording separately, because we need:
- a total of sales figures for tax computation and management purposes (to make sure the business is working to plan)
- a cumulative total of money owed by each customer.
A check of accuracy
There is another important advantage of double entry book-keeping. If both sides of each transaction have been recorded then, at any time, if the sums have been done correctly the debit entries will equal the credit entries. It provides a check of accuracy. An example is as follows:
Example
Suppose A. T. Office Supplies made the following transactions:
Purchased 6 tables for £60.00 from seller A
Purchased 10 chairs for £40.00 from seller B
Sold 1 table for £15.00 to customer A
Sold 1 chair for £24.00 to customer B
Received cheque for £15.00 from customer A
Paid cheque for £60.00 to seller A
The entries would be:
DEBIT |
£ |
CREDIT |
£ |
Purchases |
60.00 |
Seller A |
60.00 |
Purchases |
40.00 |
Seller B |
40.00 |
Customer A |
15.00 |
Sales |
39.00 |
Customer B |
24.00 |
|
|
Bank |
15.00 |
Customer A |
15.00 |
Seller A |
60.00 |
Bank |
60.00 |
|
214.00 |
|
214.00 |
