Double Entry Bookkeeping and Accounts Formatting

Overview

Trust Accounts uses a full double entry approach for its record keeping. Although the reasons for this are obvious to accountants, users from other disciplines may need a brief reminder of how this works. This section also discusses accounts ranges and accounts formatting. The introduction is portrayed in the context of trust accounting, although other types of accounts work in a similar way.

The trust balance sheet often looks something like the following:

Less:

Representing:

The first part of the Balance Sheet lists various assets, the next section shows various liabilities. In this case there is only one (i.e. Creditors). The assets less the liabilities gives the net assets for the trust. There are two groups of beneficiaries who are (or will be) entitled to these net assets, the capital beneficiaries and the income beneficiaries. In a double entry system "nominal accounts" are set up to represent all the items shown in the final accounts. So in addition accounts for all these assets, liabilities and beneficiaries, there are also accounts for income, expenses and tax.

The full list of nominal accounts could appear as follows:

Looking at our Balance Sheet above it is not easy to see where the Income Account figure comes from. This is because in a full set of accounts we show not just the balance on the Income Account but how it is made up including the opening balance, income, expenses, tax and distributions. So accounts are required for all these items and the figure shown for the Income Account is the sum of them. Several ranges of accounts are used:

We know, because of the conventions of double entry, that the Income Account is negative in the Trial Balance. Since income increases the Income Account while taxation and expenses reduce it, it follows that income is also negative (a credit) while taxation and expenses are positive (debits). On the other hand distributions reduce the Income Account; so they are debits. So the Income Account figure is the sum of:

For our Balance Sheet it is slightly inconvenient to have to add up all these accounts. But they are needed because they are shown in the Income and Expenditure Account and in the Beneficiaries’ Income Account.

• A similar principle applies to the Capital Account figure. Accounts in the 3000 range show capital gains, expenses and taxation so that they can be listed on the face of the Capital Account. Accounts in the 9000 range show the other accounts that make up the Capital Account (i.e. the balance brought forward and any capital distributions). Like the Income Account balances, any figure that increases the balance on the Capital Account is negative and any figure that reduces it is positive.

• We can now see how a Balance Sheet can be produced automatically. The Accounts Formatter has an ‘accounts page’ for the Balance Sheet. The accounts page is similar to a spreadsheet and has all the headings that appear on the Balance Sheet. However instead of the balances it specifies the accounts that need to be added up to get the relevant balance. So this one accounts page works on any trust, provided that the trust uses the standard nominal accounts. In the same way other accounts pages are created for the other financial statements.

  Often users wonder whether they are posting an amount to the right account. If a new account is added to a trust and if the new account is in the correct account range, the standard accounts pages still works, as they usually pick up account ranges rather than individual accounts. Put another way, the acid test of whether an account is correct is how it is used on the accounts pages.

  Accounts formatting is discussed in more detail later.

• We now recap on the use of each account range we have encountered so far and indicate whether the balance they hold should be positive (a debit) or negative (a credit):

  0000..2999	Income and Expenditure Account
  0000..009Z	Income	Credit
  0000..109Z	Taxation	Debit
  2000..2098	Expenses	Debit
  3000..3999	Capital gains and expenses
  3000..3049	Gains	Credit
  3050..3089	Expenses charged to capital	Debit
  3090..3098	Taxation on capital	Debit
  6000..6099	Assets and Liabilities - Income
  6000..606Z	Assets	Debit
  6070..607Z	Creditors	Credit
  6090..6099	Taxation	Credit
  7000..7099	Assets and Liabilities - Capital
  7000..706Z	Assets	Debit
  7070..707Z	Creditors	Credit
  7090..7099	Taxation	Credit
  8000..8Y99	Income accounts
  8001..800Z	Balance b/fwd and addition	Credit
  8010..801Z	Distributions and deductions	Debit
  9000..9Y99	Capital accounts
  9001..900Z	Balance b/fwd and additions	Credit
  9010..901Z	Distributions and deductions	Debit

  Finally, it is worth noting that although these ranges have been defined, they are not fixed in the programs. They are simply the accounts that we have chosen to use in writing their accounts pages. You are free to define your own accounts and account ranges and to access them in their own accounts pages.These accounts ranges are not chosen at random. The accounts up to 6000 are Profit and Loss accounts’ (i.e. they record the net income and capital gains that have arisen during the year). The accounts from 6000 onwards are known as the ‘Balance Sheet accounts’. Accounts in the 6000 range and 7000 range are the assets and liabilities, while accounts in the 8000 range and 9000 range are the beneficiary accounts.

  The terms ‘Profit and Loss accounts’ and the ‘Balance Sheet accounts’ are more useful for charities and pension funds than they are for trusts. But even for trusts there are some differences between them. At the year end all of the Profit and Loss accounts are cleared down to zero in preparation for recording next year’s income and gains. Whereas most of the Balance Sheet accounts are not cleared down at the year end. For instance, the opening balance on this year’s bank account is the same as last year’s closing balance. This process of clearing down the accounts is known as ‘closing off the accounts’ and is discussed below.

  We have shown above whether each account range ‘should be’ a debit or a credit. However it is possible that an account has the opposite sign. For instance, the income bank account has code 6051 and so is normally a debit. But if the income bank account was overdrawn then its balance would be a credit. Where nominal accounts have a sign other than their ‘expected sign’ this is usually shown on the final accounts by bracketing the figure or by using an appropriate wording.

• When an entry is posted it updates various accounts on the Trial Balance. We have seen that the Trial Balance always balances. So this means that every entry must also balance otherwise it would ‘throw the Trial Balance out of balance’. So the sum of the debits equals the sum of the credits for every entry on the system whether it is entered manually or generated by the system.
  
  Examples of a few entries are shown below.

  Note: 

  in every case the debits equal the credits.

  		DR	CR
  A dividend received:
  6051	Income bank account	90.00
  	Investment income		100.00
  1001	Tax deducted	10.00

  The money is received into the Income Bank Account, which is an asset and hence a debit. Accounts 0001 and 1001 appear on the Income and Expenditure Account. The income is a credit as we have already seen and the tax is a debit.

  A legal expense paid:
  6051	Income bank account		500.00
  2004	Legal Fees	500.00

  Here we assume the legal expense is an income expense. So it is a debit in the 2000 range of accounts. A capital expense would be a debit in the 3000 range. The income bank account is a debit. However this entry reduces it. So the income bank account posting is a credit.

  A legal expense is accrued:
  2004	Legal Fees	500.00
  6071	Legal Fees		500.00

  The expense account which appears in the Income and Expenditure Account is updated as before, because the Income and Expenditure Account is not affected by whether the bill was paid or not. The difference is in the posting to the Balance Sheet account. Instead of crediting the bank account we credit a liability account. This appears under Creditors on our Balance Sheet.

Here £1,000.00 is paid reducing the debit on the Income Bank Account and reducing the credit on the Legal Fees liability account.

More examples could be given. But it should be clear by now that in every case the debits equal the credits.

• When the year end is reached, some accounts are reset to zero, some carry on from last year and some get the balances from the accounts that are set to zero. This process is known as "closing off the accounts".
• Income and Expenditure Accounts are set to zero at the year end. They are closed off to account 8001 the Income Account b/fwd. This ensures that the Income and Expenditure Account does not show any income from the previous year.
• Capital Gains and Expenses Accounts are set to zero at the year end. They are closed off to account 9001, the Capital Account b/fwd.
• Assets and Liabilities are not closed off at all. Their balances are the same at the start of the new year as they were at the end of the old.
• All the Income Accounts are closed off to account 8001 (apart from 8001 itself). This ensures that the figures for distributions etc. that are shown on the Beneficiaries’ Income Accounts only reflect current year amounts.
• All the Capital Accounts are closed off to account 9001 (apart from 9001 itself).

This closing off is done automatically by the system at the Year End. Each account has a Close-Off Account. Accounts that do not need to close off have a blank Close-off account. Thus the Close-Off Account for every account in the range 0000..2098 is 8001.