Even the most advanced accounting software is built on a principle that has stood the test of time: double entry bookkeeping. First described more than 500 years ago, it remains the foundation of every set of accounts today. For business owners, understanding the basics can make reports and figures much easier to follow.
What is double entry?
Double entry means that every financial transaction affects at least two accounts. One side records where the money is coming from, the other shows where it is going. This ensures that the books always balance. In practice, for every debit there is an equal and opposite credit.
The accounting equation
At the heart of double entry is the accounting equation:
Assets = Liabilities Equity
Assets are what the business owns, liabilities are what it owes, and equity represents the owners’ interest. Every transaction will change at least two of these areas, but the overall equation must always stay in balance.
Debits and credits explained
The terms “debit” and “credit” can be confusing because they mean different things depending on the account type. The basic rules are:
- Assets increase with debits and decrease with credits
- Liabilities increase with credits and decrease with debits
- Equity increases with credits and decreases with debits
- Income is recorded as a credit
- Expenses are recorded as a debit
By following these rules, the accounts reflect the true financial position of the business.
An example in practice
Suppose a business buys a new computer for £1,000, paid from the bank account. The double entry would be:
- Debit: Computer equipment (asset increases) £1,000
- Credit: Bank account (asset decreases) £1,000
The books balance, and the transaction is fully recorded.
Why it matters
Double entry is more than a technical exercise. It gives business owners confidence that every transaction is captured, helps spot errors quickly, and forms the basis of reliable financial statements. Without it, reports such as the profit and loss account or balance sheet would not be possible.
Final thoughts
Modern software hides much of the detail, but the double entry rules are still working behind the scenes. For business owners, knowing the basics can make it easier to interpret accounts and to have more informed conversations with their accountant.