A balance sheet is a snapshot of the business\u2019s position and includes assets, liabilities and Equity. A business buys stock for \u00a3700 using its bank account; two things need to happen \u2013 the bank balance needs to be reduced by \u00a3700, and the stock or inventory needs to be increased by \u00a3700. Bookkeeping teaches you how to accurately record transactions into a manual Double entry system. Once you master this skill you can produce accurate financial accounts for your management.<\/p>\n

The 6 Disadvantages of Double Entry System Bookkeeping<\/h2>\n

By having all this information to hand, companies are also better able to forecast future spending. The equity portion of a balance sheet includes the profit or loss made for all time, including the current period. As a business owner, you need to keep financial records and log any transactions you make through the company.<\/p>\n

The balance of a liabilities account is therefore increased by a credit and decreased by a debit. Most modern accounting software automatically applies double-entry accounting to your figures, says Reza, and will capture the reactions to all your transactions. You decide to buy new equipment for your business that costs \u00a31,000. The equipment is a fixed asset (meaning it\u2019ll last for more than a year), so you add the cost as a debit on your Fixed asset account. Buying the equipment also means you increase your liabilities, so you increase your accounts payable account (which lists the money you owe) by crediting it \u00a31,000.<\/p>\n

Double entry<\/h2>\n

It is bookkeeping in its simplest form and might only include the income and expense account. The advantage of using single-entry bookkeeping is that it\u2019s cheap and easy to use. Audit trails allow you to trace transactions that were posted to the general ledger. For example, if your cash balance seems too high on your balance sheet, you can trace back the transactions made to the cash account and see if they\u2019re accurate. The P & L does not show all changes to the balance sheet (for example the effects of new issues). It should therefore be reconciled to the accumulated profit and loss on the balance sheet.<\/p>\n