Learn - A Better Bookkeeping Service Part - 2

Thus the concept of a 'trial balance' is born: If one lists and adds up all the debit(+) balances from the pages in the ledgers, the total should be the same as the sum of the list of all the credit(-) balances from those books.  This check is the primary purpose of a trial balance. In a single column, of course, the debits and credits will therefore sum to zero, and this is sometimes how a trial balance is presented, rather than the more traditional 2-column 'debit/credit' approach. So, the art of double-entry bookkeeping is to keep the debits and credits in balance; if you make a debit entry you must make an opposing credit entry of the same value. 

The (positive) debits in this system of accounting are the assets and the expenses, the (negative) credits are the liabilities and the income. At first, these pairings seem strange, but they work to keep the books in balance.  This is because the income less expenses makes up the 'Profit and Loss Account' section of the trial balance, and the assets less liabilities make up the 'Balance Sheet' section of the trial balance. For example, if you sell some goods to a customer for £100, that you purchased from a supplier for £80, the double-entry is as follows:   

 Debit : Purchases (in the nominal ledger) £80    

Credit : Supplier account (in the purchase ledger) £(80)    

Debit : Customer account (in the sales ledger) 100    

Credit : Income account (in the nominal ledger) £(100). The trial balance then extracted from this trader's ledger books is as follows:     Income - Sales £(100)    Expenses - Purchases of goods £80    Assets - Debtors in sales ledger : £100    Liabilities - Creditors in purchase ledger : £(80)Once the customer has paid for the goods, and the supplier has in turn been paid, the entries required are:    

Debit  : Bank account

£100    Credit : Customer account (in the sales ledger) £(100)    

Debit : Supplier account (in the purchase ledger) £80    

Credit : Bank account £(80)The trial balance then extracted from this trader's ledger books is as follows:    

Income - Sales £(100)    Expenses - Purchases of goods £80    

Assets - Bank account (in the nominal ledger) : £20    

Assets - Debtors in sales ledger : £nil    Liabilities - Creditors in purchase ledger : £nilAs can be seen, each entry 'balances' in its own right (and is called a 'journal entry' to the ledgers), and therefore a 'trial balance', of equal total of debits and total of credits, is always maintained (summing to zero).In this example, the profit of the business is £(20), measured as a (negative) net credit amount and this is represented by net assets of £20 held in the business.

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Learn - A Better Bookkeeping Service Part - 1

Introduction to double-entry bookkeeping

The first thing to appreciate is that many people first encounter 'debits' and 'credits' by having a bank account; but these terms are used from the bank's perspective and not from that of the account holder. So, when you pay money into your account, you are in fact lending your money to the bank and they say 'you are in credit'.  The bank has a creditor - you - to whom they owe some money.  But from your perspective, you have a debtor - the bank - who owes you money. The bank has a liability (a creditor, a debt)

and therefore you, the account holder, have an asset (a debtor). In other words, to say

 'I am in credit' when you have some money in your account, is technically incorrect in bookkeeping terms.

This is because the language of double-entry bookkeeping is spoken in the 'first person' for whom the records are being maintained, and not the bank's.  So, if a business has some money in its bank account, it is not 'in credit'; rather, as we have seen, it has an asset which is a debit balance.  So the business is in fact 'in debit' with the bank.

 The double-entry bookkeeping system in universally credited to Luca Pacioli (http://en.wikipedia.org/wiki/Luca_Pacioli) 

who in 1494 published the book "Summa de Arithmetica, Geometria, Proportioni et Proportionalità" containing a 27-page treatise on bookkeeping.  However, perhaps the earliest evidence of Double-entry bookkeeping is found in the "Farolfi ledger" of 1299-1300. 

Business transactions were recorded using this method by early traders because it was a reliable means of easuring profits and recording cash owed from customers and to suppliers.  The 'books of ccount' (books) of a trader consisted of separate pages for each account, bound together in 'ledgers'.  Typically, there was a 'sales ledger'; recording sales to and monies received from customers (and therefore a means of establishing balances owed from them), and a 'purchase ledger'; recording purchases and monies paid to suppliers (and therefore a means of establishing balances owing to them). All the other pages required to record expenses and balances for bank, stock and assets used in the business were grouped into a third book, called the 'general ledger' (or 'nominal ledger').  Each of the pages in these 3 ledgers would have a separate debit and credit column to record the

transactions, as each occurred. The mantra of 'every debit has an opposing credit' is

central to double-entry bookkeeping. 

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