name: bookkeeping-double-entry
description: Use when posting transactions, designing a chart of accounts, reconciling a bank account, clearing suspense and control accounts, running a month-end close, or producing a trial balance, profit and loss account and balance sheet from underlying records. Covers double-entry mechanics, accruals and prepayments, control-account proofs, and the reconciliation discipline that has to hold before any tax return or set of accounts is drawn from the books.
disambiguation: The bookkeeping ENGINE — double entry, reconciliation, control accounts, trial balance — and it is jurisdiction-neutral. UK filing obligations and tax computations live in accounting-uk-ltd and its uk-* siblings. Reading source documents into transactions is financial-document-ingestion. Project budget-vs-actual and EVM is project-finance.
Double-entry bookkeeping
The engine underneath every return and every set of accounts. Get this wrong and everything computed
from it is wrong in a way no downstream check will catch.
1. The rule everything else rests on
Every transaction has equal debits and credits, and the accounting equation always holds:
Assets = Liabilities + Equity
| Debit increases | Credit increases |
|---|
| Assets (bank, debtors, stock, equipment) | ✓ | |
| Expenses (purchases, wages, rent) | ✓ | |
| Liabilities (creditors, VAT owed, loans) | | ✓ |
| Income (sales) | | ✓ |
| Equity (share capital, retained profit) | | ✓ |
Mnemonic that survives pressure: DEAD CLIC — Debit Expenses Assets Drawings,
Credit Liabilities Income Capital.
If a trial balance does not balance, you have made an error — you have not found a rounding
quirk. Do not plug it.
2. Chart of accounts for a small Ltd
Keep it small. A chart nobody can hold in their head gets mis-posted.
| Range | Type | Typical accounts |
|---|
| 1000–1999 | Assets | Bank current, bank savings, trade debtors, stock, equipment, accumulated depreciation |
| 2000–2999 | Liabilities | Trade creditors, VAT control, PAYE/NIC control, wages control, director's loan, corporation tax payable |
| 3000–3999 | Equity | Share capital, retained earnings |
| 4000–4999 | Income | Sales (split by stream if VAT treatment differs), other income |
| 5000–5999 | Cost of sales | Purchases, carriage, direct labour |
| 6000–7999 | Overheads | Rent, utilities, software, professional fees, insurance, motor, depreciation |
| 9999 | Suspense | Temporary only — see §5 |
Split sales by VAT treatment, not by curiosity. Standard, zero-rated, exempt and outside-scope
income must be separable or the VAT return cannot be built without re-analysing everything.
3. Control accounts — the proofs that make books trustworthy
A control account is a running total whose balance must equal an independently-derived figure. When
they agree, a whole class of error is excluded. Prove each one every period.
| Control | Must equal |
|---|
| Bank | The bank statement balance, after listing unpresented items |
| VAT control | The VAT due per the return for the period, plus/minus anything unpaid from prior periods |
| Trade debtors | Sum of unpaid sales invoices in the aged list |
| Trade creditors | Sum of unpaid purchase invoices in the aged list |
| Wages control | Net pay + PAYE + NI + pension per the payroll run — should clear to nil |
| Director's loan | The director's own record; it is a real debt in both directions |
A control account that does not prove is a finding, not a rounding issue. When one will not
prove, ledger-error-diagnosis reads the difference itself to narrow the class before you start
hunting — a difference divisible by 9 is a transposition, twice a real amount is a wrong-side
posting.
4. Bank reconciliation — the non-negotiable one
Balance per bank statement
− unpresented payments (written, not yet cleared)
+ outstanding lodgements (banked, not yet credited)
= balance per cash book
Procedure that actually works:
- Tick statement lines against book entries, oldest first.
- Anything on the statement and not in the books → post it (bank charges, interest, direct
debits, card fees).
- Anything in the books and not on the statement → age it. An unpresented item older than ~6
months is usually an error, not a slow cheque.
- Anything that matches by amount but not by date → check it is not a duplicate.
- Reconcile to zero difference. Not "close". If it will not, go to
ledger-error-diagnosis
rather than absorbing the remainder.
Reconcile before every VAT return and before year end. A return drawn from unreconciled books is
a guess with a number on it.
5. Suspense and clearing accounts — and the discipline they need
- Suspense holds what you cannot yet classify. It is a question, never an answer.
- Clearing accounts hold items mid-journey — payments in transit, inter-account transfers, card
settlement, marketplace payouts. They are legitimate and should clear to nil each period.
Rules that keep them honest:
- Nothing stays in suspense past period end without being reported. List every item, its age and
its amount.
- Never post a balancing figure to suspense to make a trial balance agree. That converts a
visible error into an invisible one — the single most damaging habit in small-company books.
- A clearing account with a residual balance is unfinished work. Investigate the residual; do not
journal it to P&L to tidy up.
- Marketplace and payment-processor payouts belong in a clearing account: gross sale in, fees out,
net payout out. Posting only the net payout understates both turnover and costs — and for a
VAT-registered company understates output VAT, which is an error with penalty exposure.
- The awkward shapes have their own reference —
references/transaction-patterns.md: net-vs-gross
splits, the three processor-fee patterns (including the monthly aggregate deducted from a single
settlement), supplier debit balances and paying in credit, refunds and chargebacks, and
part-payments. Each with its detection signature and the failure it causes.
6. Accruals, prepayments, and getting the period right
Accounts are prepared on the accruals basis: recognise income and expense in the period they
relate to, not when cash moved. (VAT may be on a cash basis if the company is on cash accounting —
these are different questions; see uk-vat.)
| Adjustment | Meaning | Entry |
|---|
| Accrual | Cost incurred, not yet invoiced | Dr Expense / Cr Accruals |
| Prepayment | Paid in advance of the period | Dr Prepayments / Cr Expense |
| Deferred income | Invoiced in advance of delivery | Dr Income / Cr Deferred income |
| Depreciation | Spreading an asset's cost | Dr Depreciation / Cr Accumulated depreciation |
Reverse accruals and prepayments in the following period or they double-count. A permanent
accrual that nobody reverses is one of the most common small-company errors.
7. Month-end close — a repeatable order
- Ingest and post everything (
financial-document-ingestion)
- Reconcile every bank and card account to zero difference
- Prove each control account (§3)
- Clear clearing accounts; report anything left
- Post accruals, prepayments, depreciation
- Review suspense — it should be empty
- Produce the trial balance; confirm it balances
- Produce P&L and balance sheet; compare to prior period and explain the movements
- Record what is unresolved, with its potential impact
Step 9 is not optional. A close that reports only what tidied up hides the part that matters.
8. Reading the statements
Profit & loss — performance over a period:
Turnover − Cost of sales = Gross profit
Gross profit − Overheads = Operating profit
Operating profit − Interest ± Other = Profit before tax
Profit before tax − Corporation tax = Profit after tax
Balance sheet — position at one instant:
Fixed assets + (Current assets − Current liabilities) − Long-term liabilities
= Net assets
= Capital and reserves
Sanity checks worth running every time: net assets equals capital and reserves · retained earnings
moved by exactly this period's profit after tax (plus any dividend) · debtors and creditors are
plausible against turnover · no negative stock, and no bank balance that contradicts the statement.
9. Anti-patterns
- Plugging a difference to suspense so the trial balance agrees.
- Posting only the net marketplace payout — understates turnover, costs and output VAT.
- Never reversing an accrual or prepayment, so the cost lands twice.
- Reconciling to "close enough". Zero or unreconciled; there is no third state.
- Mixing the director's personal spending into overheads instead of the director's loan account.
- A chart of accounts nobody can hold in their head — mis-posting follows.
- Not splitting sales by VAT treatment, forcing a re-analysis at every return.
- Calling the books done while a clearing account still holds a residual.