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13th November 2017

A simple example of double entry bookkeeping

How would you go about setting up a business? The first thing you would probably do, (after working out a good Business Plan) would be to go and see your bank manager and open a business bank account. If you deposited £5,000 in the bank, the double entry would be:

  • Dr (Debit) Bank                         £5,000 (Money in a bank account would be an asset, which is a debit)
  • Cr (Credit) Capital                     £5,000 ( The money is owed to the business owner as capital)

 

The next step might be to buy an asset, for example, a van, to make deliveries. This time, you have to borrow the money and get out a business loan. You would record this as:

  • Dr (Debit) Fixed Asset              £10,000 (A van is an asset of the business, which is a debit)
  • Cr (Credit) Business Loan         -£10,000 (A loan is a liability, which is a credit)

 

You may want to buy some stock to sell. You pay by cheque from the business bank £2,000. This would be shown as:

  • Dr (Debit) Purchases                £2,000 (Purchases are a debit, they are items to be re-sold to make a profit)
  • Cr (Credit) Bank                       £2,000 (Having money in the bank is an asset (Debit) but here you are reducing your asset, so it is a credit.)

 

You can see by the above example, that every transaction in business has two effects. Double entry captures both and ensures that nothing is missed. Sage, of course, is a double entry accounting system and so will do this automatically but it’s good to understand how it works. If you make a mistake, you will know exactly which two accounts to check to put matters right.

 

By: Jackie Hooper

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