The Pros And Cons Of Double Entry

So far the records we have looked at have been the ‘single entry’ method (although the sales and purchase ledgers were the first steps towards double entry). The single entry method of bookkeeping, whilst adequate for many purposes, will be incomplete and have shortcomings if your business grows.

By contrast the double entry method of bookkeeping is a complete method. It overcomes the shortcomings, but it may be more than is needed by many small businesses.

Double entry bookkeeping has been around for many years; in fact the first known work on this subject was published in the reign of Henry VII in 1494. The modern system of double entry bookkeeping was first put into general use by Italian merchants at a time when Venice and other cities of northern Italy were Europe’s main trading centres.

Your Double Entry Accounts

So What Accounts Do I Need?

The actual accounts you need to enter up in the nominal ledger will depend upon the nature of your business. In summary:

You may want to keep track of odd items of income such as:

Interest earned from deposits in the bank

Commissions received

Any other special income or fees which you may receive:

Wages

Motor expenses

Telephone charges

Heating and lighting

Rent and rates

Bank charges and interest.

Trade debtors (money owed to you). Note: the accounts maintained in:

the sales ledger are your trade debtors.

Bank account

Cash account

Stock and work-in-progress.

Buildings

Motor vehicles

Plant and equipment (including office equipment).

This will depend on the kind of entity trading.

Limited companies:

Share capital

Profit and loss account

Capital reserve (in certain instances).

Sole traders and partnerships:

The proprietor’s capital account (with separate accounts for each partner if it is a partnership).

Do I Have To Write Up All Of These Entries At The Same Time?

No. It is normal to write up one half of each entry as the transaction occurs and then to complete the double entry at a later date. The books in which you make the initial entries consist of:

The cash book

The purchase day book

The sales day book

The journal (see below). These books are collectively called the books of prime entry.

As we have seen, the cash book is really only one of the nominal ledger accounts, kept as a separate book for convenience.

Strictly speaking, the purchase day book and the sales day book don’t form part of the double entry. Suppose we want to post the purchase of goods for resale in a shop then:

Debit (left) – the purchases account in the nominal ledger.

Credit (right) – the supplier’s account in the purchase ledger.

However, the day books are used for two purposes:

• To form the initial entry where all the transactions of a certain type (either purchases or sales) can be summarised.
• By using analysed day books you can cut the number of entries needed in the nominal ledger accounts (and so save time). Chapter 4 looked at the analysed purchase day book; we saw how all the entries for one type of expense (e.g. motor expenses, or purchases) could be summarised to give a total for the month. Earlier in this chapter we saw that in double entry bookkeeping the total of the debit entries must equal the total of the credit entries. But there’s no reason why several credit entries cannot be balanced by a single debit entry or vice versa, provided that in total all the debits and credits agree. For example, instead of posting every single item of motor expenses individually in your motor expenses account in the nominal ledger, you can just post the monthly total from the day book. The day book is really a memorandum, linking the individual entries on, say, the purchase ledger to the summarised figures posted in the nominal ledger.