What is double entry Bookkeeping System?
A double entry bookkeeping system records every financial transaction in two separate accounts. Against each transaction, a credit entry is maintained in a separate journal while a debit entry is maintained in a separate journal. Let’s assume the example of a company “A” selling items to a Company “B”. The company “B” pays the Company “A” via a bank cheque. The bookkeeper at company “A” will record two separate entries in two accounts. A debit entry will be made in the account “Bank” while a credit entry will be recorded in account “Sales”. The bookkeeper at the company “B” will also record two transactions: a credit entry in the account “Bank” and a debit entry in the account “Purchases”.
Although single entry bookkeeping systems are also in use but their primary usage is limited to managing personal finances. Some of the small scale bookkeeping software use single entry system as well. Double entry bookkeeping remains the most widely applicable form of recording and validating financial transactions.
In a double entry bookkeeping system, each account is maintained in a T-shaped ledger. At the end of every month, quarter and/or year the total of debit entries is compared with the total of the credit entries. If both totals are equal, the accounts are considered accurate. The process of recording entries in this system is called posting. Different ledgers are maintained against each account. These T-shaped ledgers are basically sub ledgers acting as a source to the general ledger.
The simplest way of checking the accuracy of the double entry system is through an “Unadjusted Trial Balance”. The unadjusted trial balance is a sheet with three columns. One column contains all the entries. Each credit entry is then recorded in the second column and each debit entry is entered in the third column. If the sum of second column entries equals the sum of third column entries, the accounts are considered accurate.
If the sums of second and third column in an “Unadjusted Trial Balance” do not match, the bookkeeper then makes necessary adjustments to several accounts. Most common types of accounts modified during the adjustment include “Sales”, “Purchases”, “Expense” and “Inventory”. Once necessary adjustments are made to accounts and the balance of the second and third column in an unadjusted trial balance matches, the final sheet is then called “Adjusted Trial Balance”.
Some of the common abbreviations used in double entry bookkeeping are:
A/R Accounts Receivable
A/P Accounts Payable
G/L General Ledger; (or N/L -Nominal Ledger)
P&L Profit & Loss; (or I/S -Income Statement)
PP&E Property, Plant and Equipment
TB Trial Balance
VAT Value Added Tax
B/S Balance Sheet
Dr Debit record
Cr Credit record
c/d Carried down
b/d Brought down
c/f Carried forward
b/f Brought forward