What double-entry bookkeeping is

Every single transaction is recorded TWICE - once as a debit (Dr) and once as a credit (Cr) - and the two entries must always be equal in value. This is what keeps the accounting equation in balance: Assets = Liabilities + Capital.

The golden rule

• Debit the account that RECEIVES value or gains an asset/expense.
• Credit the account that GIVES value or gains a liability/income/capital.
• Total debits must always equal total credits for the whole ledger to balance.

DEAD CLIC - the memory aid

Use DEAD CLIC to know which side increases each account type.

• Debit increases: Expenses, Assets, Drawings (DEAD)
• Credit increases: Capital, Liabilities, Income (CLIC)

To decrease any of these accounts, simply post to the opposite side.

Ledger accounts and the T-account

Each account (eg Bank, Sales, Purchases, a specific supplier) is drawn as a T-account with debits on the left and credits on the right. Every transaction affects at least two different accounts (dual effect).

Books of prime entry

Transactions are first recorded in a book of prime entry (eg Sales Day Book, Purchases Day Book, Cash Book, Journal) before being posted to the general ledger. The Journal is used for one-off or unusual entries, such as correcting errors or recording opening balances.

The trial balance

Once all entries are posted, a trial balance lists every account balance in either the debit or credit column. If double entry has been done correctly, total debits equal total credits. A trial balance that balances does NOT prove there are no errors - some errors (eg complete omission, reversal of entries, error of principle) do not unbalance it.

Common mistakes to avoid

• Mixing up which side increases which account type - always check against DEAD CLIC.
• Posting only one side of a transaction (breaks the dual effect).
• Recording the correct amount but on the wrong side (a reversal error) - this does not show up on the trial balance.
• Confusing capital (what the owner puts in - a credit) with drawings (what the owner takes out - a debit).
• Forgetting that increasing a liability or income account is a CREDIT, not a debit.

Worked example

Buying a delivery van for 5,000 pounds cash: Debit Motor Vehicles 5,000 (asset increases), Credit Bank 5,000 (asset decreases). Both entries are 5,000 pounds, so the books stay balanced.

What is the trial balance for?

The trial balance (TB) is a list of every ledger account balance in the general ledger, split into a debit column and a credit column, at one point in time.

If double entry has been done correctly, total debits equal total credits.

It is NOT proof the accounts are error-free - it only checks that debits and credits balance in value.

The ledger structure

• The general ledger (nominal ledger) holds all the individual T-accounts: assets, liabilities, capital, income, expenses.
• Some businesses also keep a sales ledger (customer accounts) and a purchases ledger (supplier accounts) as memorandum ledgers alongside control accounts in the general ledger.
• Every transaction is entered using double entry: one debit and one matching credit of equal value.
• Debit entries go on the left of a T-account, credit entries on the right.

Which side increases which account

• Assets and expenses: increase with a debit, decrease with a credit.
• Liabilities, capital and income: increase with a credit, decrease with a debit.
• Drawings behave like an expense - always debit.

Balancing off an account

At the end of a period, total both sides, insert the balancing figure so both sides agree, and carry the balance down (bal b/d) to the next period on the opposite side to where it was carried forward (bal c/d).

Extracting the trial balance

• List every account name once, put its closing balance in either the debit or credit column based on its normal balance type.
• Add both columns - they must match exactly.
• If they do not match, the difference goes to a suspense account until the error is found.

Errors the trial balance WILL catch

• A single-entry error (only a debit or only a credit posted).
• Two debits or two credits posted instead of one of each.
• Adding up (casting) errors in an individual account or in the TB columns themselves.
• Transposition errors that break the equality (e.g. one side posted as 540 instead of 450 with no offsetting error).

Errors the trial balance will NOT catch

• Error of omission - a transaction left out completely.
• Error of commission - posted to the wrong account of the correct type (e.g. wrong customer).
• Error of principle - posted to the wrong class of account (e.g. an expense debited to an asset account).
• Error of original entry - the wrong figure entered on both sides equally.
• Reversal of entries - debit and credit swapped over.
• Compensating errors - two separate errors of equal value cancel each other out.

Common mistakes to avoid

• Mixing up which side increases assets versus liabilities.
• Forgetting drawings reduce capital and are always a debit.
• Posting an error to suspense and forgetting to clear it once found.
• Assuming a balanced TB means the accounts are correct.

What VAT is

VAT (Value Added Tax) is a tax on the sale of most goods and services in the UK. It is charged by VAT-registered businesses on their sales (output tax) and can be reclaimed on their purchases (input tax). The business pays HMRC the difference.

Registration threshold

• A business must register for VAT once its taxable turnover in any rolling 12-month period exceeds £90,000 (the 2024 threshold, current for 2026).
• A business can also register voluntarily below this threshold, which lets it reclaim input VAT.
• HMRC must be notified within 30 days of exceeding the threshold.

The three VAT rates

• Standard rate: 20 percent - most goods and services.
• Reduced rate: 5 percent - some items, eg domestic energy, children's car seats.
• Zero rate: 0 percent - eg most food, books, children's clothes. Still 'taxable' supplies, so input VAT can be reclaimed.
• Exempt supplies (eg insurance, postage stamps, finance) are different from zero-rated - no VAT is charged and input VAT on related costs generally cannot be reclaimed.

Output tax and input tax

• Output tax: VAT charged by the business on its sales.
• Input tax: VAT paid by the business on its purchases and expenses.
• VAT return figure = output tax minus input tax. If output exceeds input, pay HMRC the difference. If input exceeds output, HMRC refunds the business.

VAT invoices

• A valid VAT invoice must show the seller's VAT registration number, invoice date, tax point, description of goods/services, net amount, VAT rate and amount, and gross total.
• Simplified invoices are allowed for retail sales under £250 gross.

Calculating VAT

• To find VAT on a net amount: net x 20 percent (standard rate).
• To find the VAT included in a gross amount at 20 percent: gross x 1/6 (or gross divide by 6).
• To find the net amount from a gross figure: gross divide by 1.2.

Common mistakes

• Confusing zero-rated with exempt - they are treated very differently for input tax recovery.
• Using the wrong fraction (using 1/5 instead of 1/6 when extracting VAT from a gross figure).
• Forgetting that exceeding the £90,000 threshold triggers a registration duty even if turnover later falls.
• Charging VAT on an exempt or zero-rated item by mistake.
• Missing the tax point date, which decides which VAT period a transaction falls into.

What day books are for

Day books (also called books of prime entry) are where transactions are first recorded, in date order, before they are posted to the ledgers. For this topic you need the Sales Day Book (SDB) and the Purchases Day Book (PDB).

• SDB records all CREDIT sales (invoices sent out to customers).
• PDB records all CREDIT purchases (invoices received from suppliers).
• Cash sales and cash purchases do NOT go in these day books - they go through the cash book instead.

What each entry needs

Every line in a day book should show: date, customer or supplier name, invoice number, and the amounts split into net, VAT and gross.

• Net = the value of goods/services before VAT.
• VAT = usually 20 percent standard rate in the UK (some items are 5 percent reduced or 0 percent zero-rated).
• Gross = net plus VAT, the total invoice value.

Totals and posting to the ledgers

At the end of the period the day book columns are totalled.

• SDB totals: Debit Sales Ledger Control Account (SLCA) with the gross total; Credit Sales Account with the net total; Credit VAT Account with the VAT total.
• PDB totals: Debit Purchases Account with the net total; Debit VAT Account with the VAT total; Credit Purchases Ledger Control Account (PLCA) with the gross total.
• Individual invoice amounts (gross) are also posted to each customer or supplier's personal account in the subsidiary (memorandum) ledger - this is how you keep track of what each individual owes or is owed.

Returns

Sales returns (credit notes issued) go in a separate Sales Returns Day Book; purchases returns (credit notes received) go in a Purchases Returns Day Book. These reduce sales/purchases and are posted with reversed debits and credits compared to the day books above.

Common mistakes to avoid

• Mixing up SLCA and PLCA - SLCA is an asset (money owed TO the business), PLCA is a liability (money owed BY the business).
• Posting the VAT the wrong way round, or forgetting VAT is only ever recorded once per invoice line.
• Recording a cash sale/purchase in the day books instead of the cash book.
• Using the wrong figure (net vs gross) when posting to the ledger accounts - remember only the gross figure hits the control account and personal accounts.
• Numbers must always be entered in date order and cross-cast (row and column totals) must agree before posting.

What is bank reconciliation?

Bank reconciliation is the process of checking the balance on the business's cash book (the bookkeeping records) against the balance shown on the bank statement, to make sure they agree - or to explain any difference.

The two balances rarely match on the day, because of timing differences between when something is recorded in the cash book and when it clears the bank.

The main reasons for a difference

• Unpresented cheques - cheques written and entered in the cash book but not yet cashed by the payee at the bank.
• Outstanding lodgements (deposits not yet credited) - money paid in and recorded in the cash book but not yet showing on the statement.
• Bank charges and interest - the bank takes these straight from the account, so they appear on the statement first; you then update the cash book.
• Standing orders and direct debits - automatic payments the bank processes that may not yet be entered in the cash book.
• Dishonoured (bounced) cheques - a cheque paid in that the bank later rejects; this reduces the bank balance and must be removed from the cash book.
• Bank errors or cash book errors - these must be corrected, not just noted as timing differences.

The method

1. Update the cash book first for anything on the statement that is not yet recorded (charges, direct debits, standing orders, dishonoured cheques, bank-collected income). This gives you the corrected/adjusted cash book balance.

2. Prepare the bank reconciliation statement starting with the balance per the bank statement.

3. Add back outstanding lodgements (money received but not yet credited by the bank).

4. Deduct unpresented cheques (payments issued but not yet cleared).

5. The result should equal the adjusted cash book balance.

Key figures and layout

• Always reconcile to the closing balance, not the opening balance.
• A credit balance on the bank statement usually means the business is in funds (bank owes the business); a debit balance means an overdraft.
• In AAT tasks, work methodically: tick off matching items between cash book and statement, and anything left unticked on the statement needs a cash book entry; anything left unticked in the cash book is a timing difference for the reconciliation statement.

Common mistakes to avoid

• Adding unpresented cheques instead of deducting them (they reduce the bank statement balance to reach the cash book figure, because the bank hasn't paid them out yet).
• Forgetting to update the cash book for bank charges before starting the reconciliation.
• Mixing up debit and credit balances - a bank statement in debit means an overdraft.
• Treating a genuine error (like a transposition mistake) as a timing difference instead of correcting it.
• Not checking both directions - items only in the cash book AND items only on the statement.

What is petty cash?

Petty cash is a small amount of physical cash kept in the office (often in a locked petty cash box) to pay for low-value, everyday expenses - things like stamps, milk, taxi fares or stationery. It saves writing a cheque or doing a bank transfer for tiny amounts.

The imprest system

Most businesses run petty cash on the imprest system. A fixed 'float' (say £100) is set at the start of the period. As money is spent, vouchers are kept for every payment. At the end of the period, the total spent is worked out from the vouchers and exactly that amount is reimbursed from the bank, topping the float back up to £100. The float amount therefore never changes - only what is drawn out to top it up varies.

Petty cash vouchers

Every payment out of petty cash needs a voucher showing the date, amount, reason and an authorising signature. Receipts should be attached. Vouchers are numbered sequentially and analysed into expense columns (postage, travel, sundries etc) in the petty cash book, using analysis columns for easy posting to the general ledger.

The petty cash book

The petty cash book is both a book of prime entry and part of the double-entry system. Receipts (reimbursements) go on the debit side; payments go on the credit side, split across analysis columns. Column totals are posted to the relevant expense accounts in the general ledger - the total of each analysis column debits that expense account, with petty cash credited.

Control accounts

Control accounts (also called total accounts) summarise a large number of individual transactions in one place - the two key ones are the sales ledger control account (SLCA, total trade receivables) and the purchases ledger control account (PLCA, total trade payables). They act as a check: the SLCA balance should equal the sum of all individual customer balances in the sales ledger, and the PLCA balance should equal the sum of all supplier balances in the purchases ledger.

Control account entries

SLCA: debit with credit sales and dishonoured cheques; credit with receipts from customers, discounts allowed, contras and irrecoverable debts written off. PLCA: credit with credit purchases; debit with payments to suppliers, discounts received and contras.

Common mistakes

• Confusing which side receipts and payments go on in the petty cash book.
• Forgetting the float stays constant under the imprest system - only the reimbursement changes.
• Missing or unauthorised vouchers, or vouchers with no receipt attached.
• Mixing up debits and credits in the SLCA/PLCA (remember: SLCA behaves like a debtor, PLCA like a creditor).
• Forgetting that discounts allowed reduce the SLCA and discounts received reduce the PLCA.
• Not reconciling control account balances to the individual ledger balances (list of balances) regularly.