Double-entry bookkeeping for UK businesses

The principle

The Institute of Certified Bookkeepers describes double entry as based on the principle that each transaction involves the giving and receiving of benefit, and gives the accounting equation as assets less liabilities equals ownership interest (ICB: basic terminology and accounting concepts).

Every transaction changes at least two accounts. A sale on credit increases what customers owe and increases sales. Paying a supplier reduces the bank balance and reduces what is owed to suppliers. Recording both sides keeps the equation true after every entry, and lets the bookkeeper prove the arithmetic with a trial balance.

Under the Companies Act 2006 every company must keep accounting records that show and explain its transactions and disclose its financial position with reasonable accuracy at any time (Companies Act 2006 s386). Double entry is the method that meets that duty for anything beyond the smallest business.

Which side increases each kind of account

	Increase	Decrease
Assets, such as bank, debtors, equipment	Debit	Credit
Expenses, such as rent, wages, purchases	Debit	Credit
Liabilities, such as creditors, loans, VAT owed	Credit	Debit
Income, such as sales, interest received	Credit	Debit
Capital and reserves	Credit	Debit

Debit and credit are positions, left and right, with no sense of good or bad. A debit balance on the bank account means money in the bank. A credit balance on the bank account means an overdraft. Total debits always equal total credits across the whole ledger, because each entry posts the same amount to each side.

Common transactions as journal entries

Transaction	Debit	Credit
Owner pays 5,000 into the business bank account	Bank 5,000	Capital 5,000
Sale invoiced at 1,200 including 200 VAT	Trade debtors 1,200	Sales 1,000 and VAT 200
Customer pays the 1,200 invoice	Bank 1,200	Trade debtors 1,200
Purchase of stock on credit, 600 including 100 VAT	Purchases 500 and VAT 100	Trade creditors 600
Supplier paid 600	Trade creditors 600	Bank 600
Laptop bought for 900 by card, no VAT	Computer equipment 900	Bank 900
Bank charges of 15	Bank charges 15	Bank 15

The worked example

The figures are illustrative pounds for a VAT-registered business. After those seven entries the bank shows 4,685 (5,000 in, plus 1,200, less 600, 900 and 15). Trade debtors and trade creditors are both nil. The VAT account holds a credit of 200 and a debit of 100, a net 100 owed to HMRC. Sales of 1,000 less purchases of 500 and bank charges of 15 leave a profit of 485, and capital of 5,000 plus that profit equals the net assets of 5,485 (bank 4,685, computer 900, less VAT owed 100).

The laptop is a fixed asset, so it is debited to an asset account and its cost is spread over its life by depreciation. Bills paid in advance or received late are adjusted at the period end with accruals and prepayments.

The books that hold the entries

Day books or journals record transactions in date order before they reach the ledger: the sales day book, purchase day book, cash book and the general journal for adjustments.
The nominal ledger, also called the general ledger, holds one account for each line in the chart of accounts (ICB).
The sales ledger and purchase ledger hold an account for each customer and supplier. Their totals agree to the trade debtors and trade creditors control accounts in the nominal ledger.
The cash book records receipts and payments through each bank and cash account, and is checked against the bank statement by bank reconciliation.

Questions

Does a business using the cash basis still need double entry?

Sole traders and partnerships using the cash basis can keep a list of money in and money out, and GOV.UK lists the records they need (GOV.UK: what records to keep). A double-entry ledger still produces a balance sheet and makes errors easier to find. A limited company has to calculate its profits under generally accepted accounting practice (Corporation Tax Act 2009 s46), which needs accruals and a full ledger.

What does a credit balance on a customer account mean?

The customer has paid more than it was invoiced, or has been given a credit note it has not used. The business owes the customer money until the balance is refunded or set against a later invoice.

Where do VAT entries go?

VAT on sales is credited to the VAT account and VAT on purchases is debited to it. The balance is the amount due to or from HMRC for the period. VAT-registered businesses keep this VAT account as part of their digital records (HMRC VAT Notice 700/21).

In Accountin

In Accountin each bank line is coded to an account and VAT code and posted to both sides of the ledger, and adjustments go through journals where debits must equal credits.