Double-Entry Accounting in Practice

Main rules to learn how to manage double-entry accounting Double-entry accounting is based on four main account categories:

ASSETS	The accounts that represent the positive elements of the estate
LIABILITIES	The accounts that represent the negative elements of the estate
COSTS	The accounts that represent the costs (but not those related to the purchase of estate goods)
REVENUES	The accounts that represent the earnings (not those obtained by the sale of estate goods)

• The account is an entity that groups the amounts that belong to the same transaction category.
• Every account must be registered as debit or credit depending on the type of accounting transaction.
• Double-entry accounting uses debit and credit instead of income and expenses.

The General Rule

ASSETS

→

DEBIT

LIABILITIES

→

CREDIT

COSTS

→

DEBIT

REVENUES

→

CREDIT

• The assets, liabilities, costs and revenues are subject to continuous variations: increases and decreases.

The increasing variations

INCREASE IN ASSETS

→

DEBIT

INCREASE IN LIABILITIES

→

CREDIT

INCREASE IN COSTS

→

DEBIT

INCREASE IN REVENUES

→

CREDIT

 

The decreasing variations

DECREASE IN ASSETS

→

CREDIT

DECREASE IN LIABILITIES

→

DEBIT

DECREASE IN COSTS

→

CREDIT

DECREASE IN REVENUES

→

DEBIT

Instruments in Double-entry Accounting

Double-entry accounting uses the following principal instruments: the Chart of Accounts, Journal, Balance Sheet and Profit and Loss Statement.

 

Chart /Accounts

This is the list of all the accounts that group the different transactions categories together (ex. cash book, bank, purchases, sales, etc.).

• To use Banana Accounting, one must simply take an already predefined accounting plan, adapt it to the proper requirements and insert the transactions. The rest will be executed by the program.

Journal

This is the list of all the operations that influence the activity daily (withdrawals, deposits, purchases, sales, salaries, rent, etc.) It corresponds to that which the larger part of the small businesses already have even if it’s only on paper or Excel, to then give to the accountant.

Balance Sheet

This is a summary outline of the assets and liabilities. The difference between the assets and liabilities represents the net capital amount of the firm.

Profit and Loss Statement

This is a summary outline of all the costs and revenues. The balance represents the operational result (profit or loss).

Starting Accounting

Procedure to start accounting with Banana Accounting

 

1	Take an existing accounting model with a predefined chart of accounts.

2	Adapt the chart of accounts to the proper requirements.

3	Insert the transactions in the journal.

For the user of Banana's Double-entry accounting, it may seem strange that the revenue/income (sales) and the liabilities (start-up capital) appear in negative, while normally one expects that the sales appear in positive and the expenses in negative.

The double-entry accounting is based on the debit and credit principle that usually appear in two seperate columns. If the amounts in debit and in credit appear in one column, the mathematics of the Double-entry accounting anticipates the use of the minus sign (-), so that the amounts in debit can be easily distinguished from the amounts in credit.

Banana goes completely with the mathematical logic of the Double-entry accounting and thus indicates the amounts with the minus sign (and in red print to let the user distinguish even better the amounts in debit and in credit). In the Double-entry accounting the amounts in negative (credit) don't have the same meaning as in the accounting that is based on income and expenses.

The indication of the credit amounts in negative is a much more efficient system than other ones that add codes to amounts, such CR, DEB, CR or brackets.

This system is based on simple mathematical equations which assure that the accounting is correct. It is not by accident that the Double-entry accounting method has in fact been encoded by Luca Pacioli in 1494, one of the most illustrious mathematicians of the Italian Renaissance (he taught mathematics to Leonardo da Vinci). In his "Summa de arithmetica, geometria, proportioni et proportionalita", Luca Pacioli didn't just deal with the Double-entry accounting, but also with other mathematical questions.

In the Renaissance there were no electronic calculators, and so they used to indicate the amounts in debit and in credit in separate columns. The result was that it became easier to totalize the amounts. Today, with the computers, no calculations need to be made and the principal issue is to use a user-friendly system which is at the same time easy and correct.

For those interested in accounting mathematics and the equations on which Banana accounting is based, the following explanation can be interesting. 

Debit/Credit

The Double-entry accounting leans on the principle that each movement is noted in debit as well as in credit and the amounts have to match.

Debit = Credit

The balance (the total difference between debit and credit) has to always be equal to zero

Debit - Credit = 0

In order to easily distinguish (very useful while working on the screen), the amounts in credit are indicated in red, preceded by the minus sign 

Debit + (-Credit) = 0

 

Two transaction examples	Debit	Credit		Debit + (- Credit)
Cash income	200			200
for product sales		200		-200
Several cash payments		170		-170
for purchase of merchandise	100			100
for office supplies	50			50
small expenses	20			20
Total	370	370		0
Balance (Debit - Credit)	0			0

Balance Sheet and Profit/Loss Statement

The mathematics of the Double-entry accounting anticipates the use of two "accounts".

• Balance Sheet Account (Balance Sheet) keeps note of the financial state at a certain moment.
  • Debit represents the Assets
  • Credit represents the Liabilities (here will always means including the Equity)
• Profit/Loss Account (Profit and Loss) keeps note of the progress.
  • Debit represents the Expenses
  • Credit represents the Revenue

The transactions are entered in debit and in credit in the appropriate accounts of the Balance Sheet and the Profit/Loss statement.

	Balance Sheet			Profit/Loss Statement
Registrazioni	Assets	Liabilities		Expenses	Revenue
Cash income	200
for product sales					200
Several cash payments		170
for purchase of merchandise				100
for office supplies				50
small expenses				20
Total	200	170		170	200
Balance (difference debit - credit)	30			30

 

 

Equations with two columns
Debit = Credit	370 = 370
Assets + Expenses = Liabilities + Revenue	200 + 170 = 170 + 200
Assets - Liabilities = Revenue - Expenses	200 - 170 = 200 - 170
Balance = Balance	30 = 30

 

The same transactions can be represented in a single column (credit in negative)

The result is, of course, the same.

 

Transactions	Balance  Sheet		Profit/Loss  Statement
Cash income	200
for product sales			-200
Several cash payments	-170
for purchase of merchandise			100
for office supplies			50
small expenses			20
Balence (debit - credit)	30		-30

 

 

Equations single column (credit in negative)
Debit - Credit = 0	270 - 270 = 0
Assets + Expenses - Liabilities - Revenue = 0	200 + 170 - 170 - 200 = 0
Assets - Liabilities - Revenue + Expenses	200 - 170 - 200 + 170 = 0
Balance - Balance = 0	30 - 30 = 0

 

 

Equations for the business results

The business result is the balance (Debit - Credit) of the Balance Sheet and the Profit/Loss Statement.

 

Equations double column
Assets - Liabilities = Revenue - Expenses	200 - 170 = 200 - 170
Balance of the Balance Sheet = Balance of Profit/Loss Statement	30
Balance of the Balance Sheet = Assets - Liabilities	30

 

 

Equations for the determination of the result (in two columns)
Profit	Assets > Liabilities	Expenses < Revenue
Balance	Assets = Liabilities	Expenses = Revenue
Loss	Assets < Liabilities	Expenses > Revenue

 

One has a profit when the assets are higher than the liabilities and the revenue more than the expenses.

One has a loss when the liabilities are higher than the assets and the revenue is lower than the expenses. 

 

Equations single column (credit in negative)
Assets - Liabilities - (Revenue - Expenses) = 0	200 - 170 - (-200 - 170) = 0
Balance of the Balance Sheet - Balance of Profit/Loss Statement = 0	30 - 30 = 0
Balance of the Balance Sheet	30
Balance of Profit/Loss Statement	-30

 

 

Equations for the determination of the result in a single column
Profit	Assets - Liabilities > 0	Expenses - Revenue < 0
Balance	Assets - Liabilities = 0	Expenses - Revenue = 0
Loss	Assets - Liabilities <0	Expenses - Revenue > 0

 

One has a profit, when the balance of the Balance Sheet is positive and the balance of the Profit/Loss Statement negative.  

One has a loss, when the balance of the Balance Sheet is negative and the balance of the Profit/Loss Statement positive.

Use of noting in a single column

Noting the data in double columns is ideal for transactions in paper books. The amounts in debit and in credit are inscribed in separate columns. The totals are being calculated at the end of the page and the totals and calculation of the results are being done at the end of the period.  

Computerized systems offer the possibility to keep the balances of the accounts constantly updated. For the calculations, the software therefore normally use noting in a single column, with the amounts in debit in positive and the amounts in credit in negative. In order to use noting in double columns, the software would have to register the credit amounts in the Balance sheet in negative, and, in the Profit/loss Statement, register the credit amounts in positive and the debit amounts in negative.

For the programmer's point of view, this solution is more complicated, and thus the majority of the software use internally the mathematics of the single column and noting in double columns only for the presentation. 

Banana Accounting instead systematically uses the minus sign to indicate the credit amounts. Initially, the user has to get used to this system, but it has the advantage of being linear and allows for a better understanding of the mathematics on which the Double-entry accounting is based, especially when more complicated operations are being required like write-off's, profit at the end of the year or VAT due/recoverable.  

For the presentation of the Balance Sheet and the Profit/loss Statement, the logic of the double columns is however more adapted. 

Thus the print-outs of the Balance Sheet and the Profit/Loss Statement that are used for the presentation of the results are edited with Assets, Liabilities, Expenses and Revenue always in positive. When the Profit/Loss Statement is presented in a scalar format (Revenue minus Expenses), the Revenue is indicated in positive and the Expenses in negative.

 

 

 

 

At the basis of the accounting, there are the accounting documents and receipts.
The type of one's organizing with regard to the accounting, depends on the size of the activity and the amount of documents.
The way one organizes things has to be adapted to what is needed.
We are listing down below an indication of possibilities that have proven to be very useful.
 

The different types of documents
It is important to distinguish and organize specifically the different types of documents.

• Basic documents: contracts for rent, telephone subscriptions, statutes, insurance contracts and everything that gets signed only once and is valid for several years. These documents need to be kept in a separate folder or binder, containing just this type of documents. For some of these very important documents (like receipts for down payments, etc.) it may be useful to make a photocopy and keep the original in a safe or a safe place. Don't make holes in important documents, but put them in transparent plastic folders. This binder is the basis of your activity/company and you need to handle it carefully.
• Documents related to employees: Contracts, insurances related to personnel, and other; it is useful to keep these in a separate binder.
  If there are lots of documents, we advise you to use one binder per theme.
• VAT Declarations: it is good to keep a special binder with the different declarations that you present at a regular basis (quarterly, by semester or yearly). For your VAT inscription or other general documents, it is better to keep them together with the basic documents.
• Accounting receipts and documents of the year: these are receipts, invoices or other items that are related to an expense or a receipt. These have to be kept separately, year by year. For every year you will have a binder with these kinds of documents.

 

Accounting documents
A good day- to-day order is needed in order to enter the accounting transactions and to control the situation of the company, such as the cash flow, the totals of debtors and creditors, etc.

1. All accounting documents (receipts, invoices, tickets) usually have to be kept for a minimum of ten years.
2. Classify and put the accounting documents in order by date, together with the related bank statements for the payment or the receipt.
3. Write a progressive number on the accounting documents (statements and others). With this number, that should be inserted in the Doc column, you can locate the accounting document, with the accounting as a starting point.
4. At the end of the year, print a copy of the journal and keep it together with the accounting documents.
5. Usually a new binder is being used for each year for the accounting documents.

Issued invoices or receipts with an accounting at the moment of payment
Small companies and associations enter the invoices only in the accounting at the moment of payment (cash method).

1. Separate the issued invoices and those for which you have received the payment.
2. Verify regularly the invoices on hold for which payment still needs to be received. As soon as the due date for the payment has passed, it is useful to send a payment reminder. Don't let too much time pass by, make sure you receive the payment for unpaid invoices. This takes time, but is it important.
3. Once these invoices are paid, put them together with the normal accounting documents.

Issued invoices or receipts with an accounting on the sales volume
The invoices are being registered at the moment they are issued as well as at the time of payment.
See also: Clients/Suppliers Registers

1. Separate the issued invoices and those for which you have received the payment.
2. Verify regularly the invoices on hold for which payment still needs to be received.
   As soon as the due date for the payment has passed, it is useful to send a payment reminder.
   Don't let too much time pass by, make sure you receive the payment for unpaid invoices. This takes time, but is it important.
3. When you enter the issuing of the invoice in the accounting, make note of the registration on the invoice. On the transaction row, use the "Doc. Original" column to insert the invoice number.
4. Once the are invoices are paid, move them over to the "paid" section, and enter them in the accounting.
5. When you have entered them, make note of the accounting transaction on the invoice (for example with a "checked" sign)

Transactions / frequency

• It is good to regularly enter the transactions in the accounting (daily, weekly, monthly).
• We strongly advise you to not neglect entering the accounting transactions, so that you always have updated information and can evaluate the progress of your activity.
• By going over the different expenses account numbers, you can easily have an overview of the different expenses that you made.
• The accounting is not just done for the tax authority.