A Simple Definition of Bookkeeping
In very simple and basic terms, it can be said that Bookkeeping is the recording of your company’s Income and Expenses into a set of account books known as Ledgers (read section on Ledgers to know more on Ledgers), Income and Expenses are also known as Receipts and Payments, Inflows and Outflows, Revenues and Expenditures, depending on the accepted terminology used by your company, industry or trade.
The Double Entry System
The basis of a good bookkeeping practice is The Double Entry System.
Many non-accountants and non-bookkeepers, these are people who are normally unfamiliar with bookkeeping and accounting principles, get lost in their bookkeeping from the very start, by not fully understanding Double Entry.
What is meant by Double Entry?
Simply put, Double Entry is to enter each piece of data, transaction or information twice (double) into your ledgers.
Whether the data, transaction or information isa sales invoice, a receipt issued for a payment received or a payment voucher for a payment made. All these data will be entered once as a Debit and once as a Credit.
The end result would be, that by entering the same piece of data twice, once as a Debit and once as a Credit, the accounts therefore balances and leaves a balance of zero (0), when the total Debits and total Credits are deducted from each other.
For example, if you receive a payment of $100 for a Cash Sale, you would Debit the Cash or Bank Account and Credit the Sales Account, with the $100. So when you prepare your Trial Balance, your Cash Account balance would have a Debit balance of $100 and your Sales Account balance would have a Credit balance of $100, meaning your Trial Balance balances.
Why Double Entry and not Single Entry?
Of course, some may argue that a Single Entry System is easier to use, since you only need to enter the data or information once.
But what has to be noted, is that a double entry system gives an automatic check and balance and therefore will alert you of any errors and/or omissions that may have occurred in your bookkeeping.
A single entry system will not allow you this check and balance.
So I will only discuss about The Double Entry System and will ignore the Single Entry System.
In the next article, I will write on Debit and Credit.
By: Raja Idris Kamarudin