Double-entry bookkeeping

What is double-entry bookkeeping?

As a self-employed person, your accounting is a crucial tool for continuously getting and keeping a clear picture of the situation of your activity and/or company. It is also a legal obligation to keep correct accounts, so that you can provide sufficient information about all income and expenditure of your self-employed activity or company. Supporting documents substantiate the movements – in and out and internal shifts – think of invoices, bank statements, depreciation tables, … The movements are recorded on accounting accounts or general ledger accounts. Accounting can be done according to two systems: single-entry bookkeeping or cash accounting, and double-entry bookkeeping. According to the principles of good governance, double-entry bookkeeping is the norm.

With double-entry bookkeeping, a transaction is always recorded on two accounts. With a purchase, the stock account will increase by the value of the goods purchased, while the bank account will decrease by that amount. One movement exactly offsets the other, which immediately guarantees that the accountant can check that no mistakes are made.

Every transaction therefore gives rise to (at least) two entries, hence ‘double-entry’ bookkeeping. “At least” because one transaction sometimes involves three items (accounts). The purchase above of a product for which you pay € 121,- results in:

• Stock increases by € 100,- (debit)
• Deductible VAT increases by € 21,- (debit)
• The bank account decreases by € 121,- (credit)

The net result = zero, but administratively the accounts reflect the new situation exactly, with € 100,- extra stock, € 21,- more owed to the VAT administration and € 121,- less in the bank account. So there is always an accounting balance.

The older approach speaks of ledgers and journals, but that is outdated. Your accountant now works directly on the accounts, where one transaction (such as the purchase above) is a ‘journal entry’ that records the movement administratively and for accounting purposes in one combination.

An essential concept in this processing is that of the debit and credit side. Put simply, debit means an increase and credit a decrease. Because there are liability accounts as well as asset accounts, the mechanism of increase and decrease is rather complex. Handling this properly is your accountant’s speciality.

Why double-entry bookkeeping?

Double-entry bookkeeping prevents mistakes and gives much more insight into business operations per financial year because it works with detailed accounts. Expenditure and income are recorded by type, which shows, for example, which customers have not ordered anything for a while, but also and above all: whether and how much profit or loss is being made. This bookkeeping also tracks liquidity and the sources of its increases and decreases, the so-called cash flows. Double-entry bookkeeping is the basis for drawing up an annual balance sheet. On the one hand, it gives a snapshot of the state of a company at the end of a financial year with its assets, receivables from customers and stocks (debit), alongside equity and liabilities (credit side). But it also shows the income statement. That is a statement showing the movements during the financial year: how many sales, which costs and how much, which depreciation, how much was repaid to banks ...