Double Entry Bookkeeping – DEADCLIC

Double entry bookkeeping is the fundamental skill which underpins all accountancy.  In fact, if you really want to insult an accountant you could tell them that they don’t understand double entry bookkeeping.

Double entry has been a key skill for all accountants and bookkeepers since it was invented in the 15th century by the Franciscan Friar Luca Pacioli.  Luca Pacioli was also good mates with Leonardo da Vinci, and I like to think they chatted about double entry in a wine bar in Milan, although no evidence exists to prove my theory.

bookkeeping

Double Entry Bookkeeping – DEADCLIC

Double entry bookkeeping is the fundamental skill which underpins all accountancy.  In fact, if you really want to insult an accountant you could tell them that they don’t understand double entry bookkeeping.

Double entry has been a key skill for all accountants and bookkeepers since it was invented in the 15th century by the Franciscan Friar Luca Pacioli.  Luca Pacioli was also good mates with Leonardo da Vinci, and I like to think they chatted about double entry in a wine bar in Milan, although no evidence exists to prove my theory.

However, with technology, accountants use double entry less and less, but occasionally there will always occasions where you will need to use your double entry skills.

So, with a recap on double entry bookkeeping if you don’t use it on a day-to-day basis, you will at least be able to come at anyone who suggests you don’t know your stuff!

Where do we start?

It is effectively like learning a new language and no one who decides they are going to learn Peruvian say, reads a book on Peruvian and then 30 minutes later says “yes, that makes total sense” straight away.  It takes time and it takes practice.  You will get things wrong when starting out and that is totally fine, we have all been there! Then with patience, dedication, and hard work, you will just “get it” and you won’t have to think about it, and it will be almost like your native tongue.

What does DEAD stand for?

Initially, I think a good tool to have in your toolbox for learning or recapping your double entry skills is the mnemonic DEADCLIC.  There are others, for example PEARLS, but DEADCLIC is my favourite one as I feel it covers everything you need to know.  DEADCLIC should be split into DEAD and CLIC, and I will deal with them in turn.

DEAD is an acronym for Debit, Expense, Asset and Drawings.  As a reader of AT Magazine, I assume you have a rough knowledge of what each of these are.  These are split into this group as if you want to increase any of expenses, assets and/or drawings you would enter a debit.  For example, if you receive a bill for rent you would enter a debit to rent, and that would increase the rent account in the ledgers.

There is however the golden rule to double entry bookkeeping in that every transaction has to have an equal and opposite transaction.  Everything has to balance.  Very similar to Isaac Newton’s third law of motion.  You must have an equal and opposite debit and credit.  If you don’t, your accounts won’t balance, and you don’t want that!

What does CLIC stand for?

We have looked at the debits, the DEAD part of DEADCLIC, so let’s look at the CLIC part of this.

CLIC is an acronym for Credit, Liabilities, Income and Capital.  Again, I am going to assume you have a working knowledge of these terms.  Much like we have seen before, if you want to increase any of liabilities, income and capital you enter a credit.  For example, if we receive an invoice from one of our suppliers, we need to reflect the fact that we now owe them money, so we enter a credit to liabilities, to increase our liabilities.

Let’s go back to our example of a rent bill.

We need to reflect that we have incurred the expense of the rent, but we also owe our landlord money.  The full double entry will be a debit to the rent account to increase the expense, and then credit our trade payables to reflect the increased amount we owe.

Another example might be is that a customer pays you for goods in cash.  Two things have happened; you have more cash in your business, and you have made a sale.  The double entry for this is to debit our cash, to reflect we have increased assets due to the extra cash, and credit sales to reflect the fact that our income has increased.

Sound relatively straightforward?  Well maybe not initially, but you can’t assume that every time we need to increase something covered under DEAD and increased something under CLIC.  Sometimes we will need to DECREASE something.  Remember we said that to increase expenses, assets and liabilities we enter a debit, to decrease it we enter, you guessed it, a credit.  Then on the flip side to decrease liabilities, income and capital we enter a debit.  We might need to decrease something that is covered under DEAD and decrease something that is covered under CLIC.

An example of this would be when we pay our suppliers for a bill that we owe.  The double entry for this would be debit trade payables to reduce the liability that we owe, and the credit cash, to show that asset that we had in having money in our bank account has been reduced.

But you can’t assume every transaction will involve both the DEAD and CLIC side of DEADCLIC.  Sometimes both sides of our double entry only touch DEAD and sometimes it will only touch CLIC.

One example of only touching the DEAD part of this would be when the business owner takes some money out of the business.  To reflect this transaction, we debit drawings to increase the amount the owner has taken out, and then credit the bank account to show the asset of cash in the business has fallen.  Then might have a transaction which only touches CLIC.  An example of this would be if we are in an overdraft and we owe the bank money, and the business owner injects come capital into the business.  We would debit the liabilities to show that we owe the bank less money, and then credit capital account to reflect the company owes the business owner more money.

However, no matter which aspects of DEADCLIC you need to adjust, you can be sure that you will always need an equal debit and credit.  Please remember though as I mentioned this is something that if you haven’t seen before, or in quite some time, it may well take time to get up to speed with.

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