Learn Double-Entry Bookkeeping

Welcome to another bookkeeping course! As always, the course is free and no registration is required!

 

The course is a series of both written and video content. Simply get started below...

Lesson 1: An Introduction to Double-Entry Bookkeeping 

 

What is a bookkeeper?

 

A bookkeeper is someone that keeps "books". In other words, a bookkeeper is someone that keeps accounts. These accounts being the recorded day-to-day financial transactions of an entity - usually a business, company or charity. 

 

What is bookkeeping? 

 

Bookkeeping is the term for keeping record of the day-to-day financial transactions of an entity. These financial transactions include the money in and out of the entity through sales, expenses, loans, asset purchases and other items. 

 

What is double-entry bookkeeping?

 

Double-entry bookkeeping is a method by which financial transactions are accounted for. Double-entry is a bookkeeping method that is used globally and is the preferred method of bookkeeping by most governments and accounting regulators. Every serious bookkeeper and accountant will likely need to understand and use double-entry bookkeeping. 

 

Watch the video below to learn more...

 

Lesson 2: Financial Terms Explained 

 

What is capital? 

 

Cash invested into an entity by it's owners is called capital. This amount is owed back to the owners and is paid back at a later time. When capital is loaned to a business, this is referred to as capital introduced. 

 

What is an asset?

 

An asset is something that an entity owns. Assets are generally tangible, such as machinery, equipment, property, and cash. Assets can also be intangible though.

 

The most common types of assets amongst smaller businesses are cash, trade debtors (sales on credit) and computer/office equipment.  

 

Current assets are assets that are likely to frequently change value, such as a bank balance or debtors list.

 

Fixed assets are assets that will only change value once a year or less, such as equipment or property. 

 

 What is a liability? 

 

Liabilities are something that an entity owes. Liabilities are generally cash owed to another entity or individual, such as loans, wages, taxes and credit cards. The most common liabilities for small businesses are business loans, business credit cards, trade creditors and finance contracts. 

 

Just as assets are categorised as current assets and fixed assets, liabilities can be categorised as current liabilities and long-term liabilities

 

Now watch this video...

 

Lesson 3: Double-Entry Bookkeeping 

 

What is double-entry bookkeeping? 

 

Double-entry bookkeeping is a bookkeeping method. The method is used to account for the financial transactions of an entity. It uses a series of debit and credit entries to create an audit trail and helps to keep more accurate and readable accounts. 

 

Debits and credits explained

 

All transactions recorded in the accounts will have a debit value and a credit value. These debits and credits will balance - they will equal the same value. For example, if 500.00 is debited to the accounts, 500.00 will also need crediting. 

 

Debits and credits are recorded to ledger accounts, such as wages, bank account, equipment, sales, rent, travel, etc, etc. 

 

The easiest way to remember which ledger accounts need debits and which need credits is the PEARLS acronym... 

 

P - Purchases

E - Expenses

A - Assets 

R - Revenue 

L - Liabilities

S - Sales

 

PEA - these are debit accounts

RLS -these are credit accounts

 

So, a sale paid into the bank account is... Credit Sales (Sales) and Debit Bank (Assets)

Payment of rent from the bank account is... Debit Rent (Expenses) and Credit (Reducing Asset)

 

To learn more about double entry bookkeeping and debits and credits, please take The Ultimate Bookkeeping Course - click here!

 

Now watch this video... 

 

Lesson 4: T Accounts

 

Debits and credits are posted to individual ledger accounts called T Accounts. These accounts have space to record both debit and credit transactions.

 

Using T Accounts enables data to be read more easily. 

 

A list of all T Account balances is called a trial balance

 

When T Accounts are totalled (closed), the amount can be transferred to the trial balance and then to financial statements.

 

Now watch this video...

 

Lesson 5: Financial Reports

 

Once T Accounts are closed and you have the ending balance of each account, these ending balances can be used to create financial statements. 

 

The most common financial statements for any entity are the profit and loss statement and the balance sheet. 

 

The profit and loss statement (P&L)

 

The P&L shows the profit or loss made by an entity within a specific period of time. Most businesses and companies create an annual P&L, usually covering the financial year of the business. Large companies may create a P&L for each month of their financial year. 

 

A P&L displays the overall profit of the entity. A typical P&L will look like this...

 

Sales (turnover)

Minus purchases (cost of sales)

Equals gross profit 

Minus expenses (overheads)

Equals net profit

 

Important equations to remember...

 

Sales - Cost of Sales = Gross Profit

Gross Profit Margin = (Gross Profit / Sales) x 100

Net Profit Margin = (Net Profit / Sales) x 100

Sage accounting software offers automated T Accounts, Trial Balances and Financial Reports! Click here for a free trial

The balance sheet

 

The balance sheet details an entities assets and liabilities (items the entity owns and owes). 

 

A typical balance sheet will look like this...

 

Current Assets

Fixed Assets

Total Assets

Liabilities

Equity (capital)

Total Liabilities & Equity

 

Total assets should equal total liabilities and equity, hence the term balance sheet - the totals balance!

 

Important equation to remember...

 

Total Assets = Total Liabilities + Equity

 

Now watch this video...

 

Learn more about double entry bookkeeping for FREE - please click here

Take my Ultimate Bookkeeping Course and gain a certificate of complete - click here

 

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Disclaimer

 

The information on this site cannot be relied on as accurate and up to date. We strongly advise you seek the advice of accounting and tax professionals before making any accounting related decisions.

Visit SM Accounting Ltd

This site contains free bookkeeping and accounting courses and is ideal for anyone looking to learn finance, bookkeeping or accounting. This site contains information on double-entry bookkeeping, basic accounting, credit control, business planning, etc. 

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