Double entry bookkeeping records every transaction twice: once as a debit in one account and once as an equal credit in another, so total debits always equal total credits. It is the system that keeps the accounting equation (assets equal liabilities plus capital) in balance, and it is how a limited company produces records adequate to meet section 386 of the Companies Act 2006.

What is double entry bookkeeping and why does every transaction have two sides?

Every business transaction changes at least two things. When a company buys a laptop for cash, it gains an asset (equipment) and loses another (money in the bank). When it sells on credit, it earns income and gains a debtor. Double entry captures both effects. ACCA’s teaching material describes this as the dual effect: each transaction affects at least two elements of the accounting equation, so total debits will always equal total credits.

The accounting equation sits underneath the whole system. In its simplest form, capital equals assets minus liabilities. Rearranged, assets equal capital plus liabilities, which is exactly how a balance sheet is laid out. Profits increase capital, losses reduce it, and money the owner takes out (drawings, for a sole trader) reduces it. If each transaction is posted with equal debits and credits, the equation cannot fall out of balance.

Single entry records, such as a cash book that only lists money in and out, can be enough for a very small sole trader. They cannot, on their own, produce a balance sheet, track who owes the business money, or show what the business owes. That is why companies, and most businesses of any size, use double entry, usually through accounting software that posts the second side automatically.

Which accounts are debited and which are credited?

The direction of the entry depends on the type of account. ACCA’s material on the accounting equation shows assets as debit balances and liabilities and capital as credit balances, and its worked entries debit expenses and credit revenue. The full pattern is:

Type of account An increase is a A decrease is a Normal balance
Assets (bank, equipment, stock, debtors) Debit Credit Debit
Expenses (rent, wages, purchases) Debit Credit Debit
Liabilities (loans, creditors, VAT owed) Credit Debit Credit
Capital and reserves (share capital, retained profit) Credit Debit Credit
Income (sales, interest received) Credit Debit Credit

Two points cause most confusion. First, a bank statement shows money in as a credit because, from the bank’s point of view, your deposit is a liability it owes you. In your own books, money in the bank is an asset and is a debit. Second, debit and credit simply mean left and right in a ledger account. Neither word means good or bad.

How does a transaction move through the books?

A typical flow runs from source document to ledger to report:

  1. Source documents. Sales invoices, purchase invoices, receipts, bank statements and payroll reports are the evidence for each entry.
  2. Books of prime entry. Transactions are first listed in day books (sales day book, purchases day book, cash book) or as journals for adjustments.
  3. Nominal ledger. Totals are posted to the general ledger accounts, each with a debit and a credit side. Individual customer and supplier balances sit in sales and purchase ledgers that feed control accounts in the nominal ledger.
  4. Trial balance. All ledger balances are listed; debits should equal credits. A trial balance that does not agree points to a posting error.
  5. Year end adjustments and accounts. Depreciation, accruals and prepayments and stock adjustments are journaled, and the profit and loss account and balance sheet are drawn up.

ACCA’s example of a credit sale shows the pattern: the seller posts Dr Trade receivables, Cr Revenue when the invoice is raised, then Dr Bank, Cr Trade receivables when the customer pays. The buyer mirrors it: Dr Purchases, Cr Trade payables, then Dr Trade payables, Cr Bank.

What does a worked example look like?

Illustration only. A new company records five transactions in its first month. VAT is ignored to keep the figures simple.

Transaction Debit Credit Amount
Shareholder pays for shares Bank Share capital £1,000
Buys a laptop, paid from the bank Computer equipment Bank £800
Invoices a customer for work done Trade debtors Sales £2,000
Receives a software bill, unpaid at month end Software costs Trade creditors £300
Customer pays the invoice Bank Trade debtors £2,000

After posting, the bank account shows a debit balance of £2,200 (£1,000 less £800 plus £2,000) and the debtors account is back to nil. The trial balance lists debits of bank £2,200, equipment £800 and software costs £300, totalling £3,300, against credits of share capital £1,000, sales £2,000 and trade creditors £300, also totalling £3,300. The profit for the month is £1,700 (sales of £2,000 less software costs of £300), and the balance sheet shows net assets of £2,700 (bank and equipment of £3,000 less the £300 creditor), matching share capital of £1,000 plus £1,700 of retained profit.

What records does the law and HMRC require?

For a company, section 386 of the Companies Act 2006 requires accounting records that are sufficient to show and explain the company’s transactions, disclose its financial position with reasonable accuracy at any time, and enable the directors to ensure the accounts comply with the Act. The records must contain day to day entries of all money received and spent, with what each receipt or payment was for, and a record of assets and liabilities. A company dealing in goods must also keep year end stock statements and the stocktaking records behind them.

Section 388 sets the company law retention period: three years from the date the records are made for a private company and six years for a public company. HMRC’s own rule for tax is longer. GOV.UK guidance says a company must keep records for six years from the end of the last company financial year they relate to, or longer in some cases, for example where a return was filed late or HMRC has opened a compliance check. The same guidance says a company can be fined £3,000 by HMRC for not keeping records, and directors can be disqualified.

Self employed people must keep records for at least five years after the 31 January submission deadline of the relevant tax year. Many sole traders and partnerships now use the cash basis, which GOV.UK describes as the standard way to record income and expenses for them; see cash basis vs accruals accounting. VAT registered businesses must keep digital records under Making Tax Digital for VAT, and sole traders and landlords with qualifying income over £50,000 in 2024 to 2025 should have started using Making Tax Digital for Income Tax from 6 April 2026.

What mistakes are most common?

  • Posting only one side. ACCA’s examiner reports point to errors of omission to one side of the double entry. Software often parks the difference in a suspense account, which must be cleared before the accounts are finalised.
  • Using suspense as a home for unknown items. An expense paid from the bank should be posted Dr Expense, Cr Bank, not left in suspense.
  • Treating a balanced trial balance as proof of accuracy. Errors of principle (a capital purchase posted to repairs), errors of omission (an invoice never posted) and compensating errors all leave the trial balance balanced. A regular bank reconciliation catches many of them.
  • Personal spending through the company. A director’s private costs paid by the company belong in the director’s loan account, not in business expenses.
  • Transposition errors. Entering £2,620 instead of £2,260 is a classic examiner example.

How does double entry feed the year end accounts?

Once the trial balance is correct and adjusted, income and expense balances are summarised in the profit and loss account and the asset, liability and capital balances form the balance sheet. The profit for the year closes into retained earnings, which is why the balance sheet still balances. Our guide to financial statements explains how those two reports are laid out and what each line means.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.