Understanding UK Double Entry Bookkeeping
Double-entry bookkeeping aims to minimise errors by listing each transaction twice, from differing perspectives. This produces two running totals, which, for any time period, should be identical. While double-entry bookkeeping is widely used in the United Kingdom, it is not specifically required under accounting laws and practices.
The main principle of double-entry bookkeeping is that every transaction is listed twice: once as a debit and once as a credit. This means that at any stage in the accounting period, the debits and credits should add up to two identical figures. Any disparity between the two figures is clear evidence of an error, either through a figure being omitted or unintentionally duplicated, or through an error in addition.
When keeping records of transactions for accounts, the business will divide its records into two columns. The left-hand column represents debits and shows where a transaction has gone to. The right-hand column represents credits and shows where a transaction has come from.
Most confusion about double-entry bookkeeping comes from the fact that what is classed as a debit and what is classed as a credit is counterintuitive. If a company spends £1,000 on a piece of machinery, the machinery goes to the company assets, and thus the change to its asset total is listed in the debit column. Meanwhile, the money has gone from its bank account, and thus the change to its cash levels is listed in the credit column.
A double-entry bookkeeping system will not catch all errors. For example, if an accountant uses the same incorrect figure for both entries, the final tally-up of credits and debits will not reveal this error. An accountant could mitigate this limitation by manually checking the original figure both times he records it in the accounts. That doubles the opportunity to catch a mistake.
Companies in the U.K. are required to follow the Generally Accepted Accounting Practice. This name is used to refer to all the relevant company laws and accounting standards. These standards are known as Financial Reporting Standards, with the Accounting Standards Board overseeing them.
U.K. companies are not required to use double-entry bookkeeping, and some companies, particularly smaller ones, prefer a more straightforward single-entry system that simply lists each transaction once. U.K. accounting principles and standards are more concerned with the basis on which a firm prepares its accounts and the way in which particular types of transaction are calculated and detailed.