What is double-entry bookkeeping?
Double-entry bookkeeping is the method of recording every transaction in two accounts, as a debit in one and an equal credit in another, so the books always balance.
What double-entry bookkeeping means
Every transaction has two sides. When you make a sale, your income goes up and either your bank balance or the amount customers owe you goes up too. Double-entry bookkeeping records both sides: a debit in one account and an equal credit in another. Because every entry is balanced, total debits always equal total credits, which you can check with a trial balance.
The system rests on the accounting equation: assets = liabilities + equity. Every entry keeps that equation true.
The basic rules
| Type of account | A debit | A credit |
|---|---|---|
| Assets (bank, debtors, equipment) | Increases it | Decreases it |
| Expenses | Increases it | Decreases it |
| Liabilities (creditors, VAT owed, loans) | Decreases it | Increases it |
| Income | Decreases it | Increases it |
| Equity (share capital, retained profit) | Decreases it | Increases it |
Example
A VAT-registered web designer invoices a client £1,200, made up of £1,000 for the work and £200 VAT at 20%. When the invoice is raised:
- Debit trade debtors £1,200 (the client owes you)
- Credit sales £1,000 (your income)
- Credit VAT control account £200 (you owe this to HMRC)
When the client pays:
- Debit bank £1,200
- Credit trade debtors £1,200
Debits and credits are equal at each step, and the books show £1,000 of income, £200 owed to HMRC as output VAT, and £1,200 in the bank.
Why it matters for your business
Double entry is what lets you produce a balance sheet as well as a profit figure. It shows what you own and owe, not just what came in and went out. Limited companies need it to prepare statutory accounts, and it makes errors far easier to spot.
The good news is that you rarely post debits and credits by hand any more. When you raise an invoice or reconcile a bank line in Xero or QuickBooks, the software creates the double entry behind the scenes. Understanding the principle still helps you read your reports and spot when something has been coded to the wrong place.
Double entry vs single entry
Single-entry records, such as a spreadsheet of money in and money out, can be enough for a very small sole trader on the cash basis. They cannot track assets and liabilities properly, which is why growing businesses move to double-entry software.
Common questions
Not legally, if your business is simple. A clear record of income and expenses can be enough on the cash basis. But accounting software uses double entry automatically, and with Making Tax Digital for Income Tax you will need compatible software anyway.
In bookkeeping, debit and credit just mean left and right. A debit increases assets and expenses, so a debit to your bank account means more cash. The everyday meaning on a bank statement is reversed because the bank is looking at your account from its own side.
More accounts & bookkeeping terms
- Accounts payable
- Accounts receivable
- Accrual accounting
- Accruals
- Amortisation
- Assets
- Bad debt
- Balance sheet