Double Bookkeeping

A bookkeeping system or accounting system is all about money and transactions: booking money. The so called double bookkeepingsystem is by far the most used accounting system.

Double bookkeeping starts from the idea that by writing transactions twice in a slightly different way (booking), you can compare the numbers and in that way verify that nothing went wrong.

Account

The basis of every accounting system is an account: a place where money can be transferred to or withdrawn from. A bookkeeping system consists of a collection of acounts which together are called the General Ledger.

Bank account

One of these accounts is the bank account: the account you have at the bank from which bills are being paid from and invoices are being paid to. From this bank account however, it is not possible to see which costumers didn’t pay yet, or which bills still need to be paid. In order to figure that out, in the bookkeeping system there are accounts which are used to track this information.

Accounts receivable (“debtors”)

The account for customers is called “Accounts Receivable”. It contains money that you will receive. In Dutch this account is called “Debiteuren” or translated “debtors”. It derives from the Latin word debet which in English became debt. Customers are called debtors as they are in debt to us.

Accounts payable (“creditors”)

The account for vendors is called Accounts Payable as we need to pay money to them. In Dutch this account is called “Crediteuren” or translated “creditors”. Credit is a Latin word which means “to believe” but also can mean “to trust”. We owe money to the vendors.

Invoices

In an invoice these accounts all come together. An invoice constists of a set of lines which mention the products or services being sold. The total amount of the invoice will be written to the “Accounts Receivable” account as soon as the invoice is posted. As long as the customer did not pay, the accounts receivable account will tell you how much money you are still owed by your customers. As soon as the customer pays, it will enter the bank account. Because what you still owed from the customer has become less, you book the paid amount from the accounts receivable account to your bank account. When all customers have paid, the balance (the amount on the account) will be 0.

Bills

With bills it works in a similar way as with the invoices. When you order something, you will get an invoice (which becomes a bill for you). This invoice will become a few lines in the accounts payable account, and the total amount will be written as a negative value to the accounts payable account. This allows you to see how much you still have to pay. As soon as you pay this bill, the amount will be transferred from the bank account to the accounts payable account. When everything is paid, the balance on accounts payable will be 0.

Wrapup

By using two accounts to book transactions, you will keep an overview and you can check whether payments are complete. This is the basis of double bookkeeping. For a complete financial adminstration, you’ll need more accounts, but it works in the same way.