Introduction to Basic Bookkeeping
When you set out to start a business as an entrepreneur you need to be in control of your finances and be able to track the performance of your business. The only way to achieve this is to have a good understanding of basic bookkeeping and the accounting information it provides.
Basic bookkeeping is the process of recording all your business transactions to produce a set of accounting records. Bookkeeping is the start of an accounting process which allows you to produce useful accounting information about your sales, expenses, assets, liabilities and equity.
The bookkeeping process begins with the use of debits and credits to record accounting transactions. At the end of an accounting period these transactions form the basis of producing a trial balance and subsequently the income statement, balance sheet, and cash flow statement.
What is Double Entry Bookkeeping?
Double entry bookkeeping is a system of basic bookkeeping in which ledger accounts are maintained for assets, liabilities, capital, revenue, and expenses.
The main principle of double entry bookkeeping is that for every financial transaction an entry is made to two or more accounts. Entries on the debit side of the ledger record what comes into the business and entries on the credit side of the ledger record what goes out of the business. For every transaction the total debit entries must equal the total credit entries.
Our examples of double entry bookkeeping section shows typical accounting transactions.
Double Entry Bookkeeping Explained
- Owner – The person who controls the business.
- Business – A separate entity from the Owner, the bookkeeping shows the records of the business.
- Transaction – Exchange of goods or services.
- Entry – The recording of a Transaction in an Account in the Accounting Records using Debits and Credits.
- Debit – The left side of a transaction which records something coming into the business.
- Credit – The right side of a transaction which records something going out of the business
- Account – Individual accounts (for example an account for electricity) make up accounting records. Each account reflects a type of transaction. Our Debits and Credits Chart acts as a reference for these account types.
- Accounting Records – The records of all the transactions of the business. Sometimes called “the Books”.
- Financial Statements – Accounting records allow the production of financial statements sometimes referred to as accounts. The financial statements include the balance sheet, income statement, and cash flow statement.
- Accounting Period – Financial statements are for a fixed period such as a month or a year. That period is the accounting period.
- T Account – T accounts are a useful bookkeeping tool used to visualize double entry bookkeeping journal entries before they are posted. Debit entries are shown on the left of the T account and credit entries are shown on the right.
What you need to know
- The Business is separate from you the Owner, and bookkeeping and basic accounting records the transactions of the business.
- Each transaction has two sides, one is a debit and the other is a credit for the same amount. The accounting records should always balance.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.