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A Rough Guide To Bookkeeping

The topics in this Business and Accounting Basics Section are designed to help you understand some of the fundamental business processes and accounting principles that form the foundation of our accounting software.

This understanding will help you get the best from our software and should also help you improve the control and management of your business.

Our software provides an integrated accounting database that operates in real time. It incorporates sophisticated controls to ensure that each transaction is processed correctly and completely, so that the database remains in balance and up to date with the most recently-posted transactions.

The text in this topic has been included as a reference to the main principles behind the design of the software.

We recommend that you read this before using your software for the first time.

Double Entry Bookkeeping

Our software uses the Double Entry Bookkeeping system, a standard system used by businesses and other organisations to record financial transactions.

First codified in a 15th Century Mathematics Textbook, its premise is that a business’s financial condition and results of operations are best represented by several variables, called Accounts, each of which reflects a particular aspect of the business as a monetary value.  The Chart of Accounts for a business is the complete list of these accounts. Every transaction is recorded by a number of (at least two) entries.  Each entry records a monetary value to one of the Accounts and is identified either as a Debit or Credit entry.  For every transaction, the total value of all the debit entries must equal the total value of all the credit entries. The premise for this is that any monetary transaction must logically affect two aspects of a business (e.g. a sale affects income and debtors/cash, a purchase affects expenditure and creditors/cash).  See Debits and Credits explained below.

The double entry system forms the basis of the Bookkeeping and Accounting Process used by your product.

Debits and Credits

The Double Entry system is governed by the Accounting Equation.  This states that, at any time, the following must hold true:

Assets + Expenses = Liabilities + Income

Put more simply, at any time, within the system’s data tables:

Total Debits = Total Credits and the system is in Balance.

For a system to remain in balance, a change in one account must be matched with a change in another account.  These changes are known as Debits and Credits and therefore each business transaction will comprise both a debit and a matching credit.

Debits and credits are not to be thought of as positive or negative values.  The balance on an account is either a debit or a credit (not a positive or a negative) value and is the net total of all the debit and credit entries recorded to that account.

For example, if the sum of all the debits exceeds the sum of all the credits, then the account has a debit balance equal to the amount by which debits exceed credits.  Alternatively, if the sum of all the credits exceeds the sum of all the debits, then the account has a credit balance equal to the amount by which credits exceed debits.  The software recognises this when updating and reporting data.

On an account entry there are two columns to record and show the debit and credit monetary value for that entry.

Debits are recorded in the left column and credits in the right column.

Debit Balances

Debit balances are normally found on:

  • Asset Accounts – For example, the cost of computer equipment.
  • Trade Debtor Accounts – For example, a sales invoice posted to a sales ledger account.
  • Cash Accounts –  For example  a receipt from a cash sale.
  • Other amounts due from third parties but not yet received. One example might be an advance on an employee’s salary.
  • Expense Accounts – examples are fuel costs, stationery costs or rent payable.

Credit Balances

Credit balances are normally found on:

  • Liability Accounts – For example bank loans.
  • Bank Overdrafts and other amounts owed to third parties but not yet paid such as the costs of goods received but not yet Invoiced by a supplier. 
  • Trade Creditor Accounts – For example, a purchase invoice posted to a purchase ledger account;
  • V.A.T. and P.A.Y.E Accounts.
  • Income Accounts – examples are sales, interest receivable, rental income.

Further Clarification

To explain a little further about the dual relationship, think about your bank statement. For most  their only experience with Debits and Credits to date has been with their bank statement which displays the amount of money they have in the bank as a Credit (or as a Debit if the bank account is overdrawn). Banks prepare your statements from their perspective rather than yours.  For example, if you have money in the account, then this is money that the bank owes you.  You are a Creditor to the bank and your account is a credit balance in the bank’s accounts.  Similarly an overdraft is a debit balance in the bank’s accounts because you owe money to the bank.

Remember this when you think of Debits and Credits and you should be OK.

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