The importance of understanding DEBK

Sep 02, 2019
Learning anything by rote will hinder a person’s understanding. This is especially true when it comes to double-entry bookkeeping. Billy O’Connor FCA explains DEBK and why it’s a critical skill. 

Shane is six months into his accountant trainee contract. His manager is impressed so far with his accuracy, timekeeping and can-do attitude. Feedback from clients is that he is very presentable ambassador for the firm and even a bit of a ‘bright spark’. 

Today, at a final client file review, everything was signed off satisfactorily by his manager and partner. They turned to Shane to give him a deserved “well done” but follow up with: “ Shane, if you could just post three journal adjustments reducing down the stock values by €10,000, accrue for the audit fee plus expenses of €5,650 plus VAT and change the depreciation rate from 25% to 20% straight-line, everything will be ready to be sent out the client. See you in 20 minutes, ok?”

Simple! 

Shane left the room with the file, sat down and blood drained from his face. No matter how much he looked at the figures, nothing made sense. He knocked on his manager’s office door after about an hour of anguish, blurting out that he never truly understood double-entry bookkeeping (DEBK) and, as for those three journal adjustments were concerned, he was going to need some help! 

Commit to learning DEBK

Up to now, he had got by in his accountancy exams by remembering what to do, learned by rote and then regurgitated it. The day after these exams, DEBK was a blur. He learned the ‘what’ instead of the ‘why’. 

I am urging you to understand the ‘why’. Trust me when I say that if you do not truly understand DEBK by the time you are done with your training, it will cause you stress and anxiety for the rest of your accountancy career. Yes, it is that serious! 

So why not commit to getting to grips with what is really a simple, linear and logical concept? I promise it’s easy; I’d go as far to describe it as child’s play! 

Simple understanding of DEBK

The first thing you must do is see every single transaction through to the end. Keep it simple. Think of it as a seesaw with two boxes on the left and two on the right that are ready to be filled. 

If I put weight into the boxes on one side, I must put equal weight on the other side for the see-saw to go back to equilibrium. So, what do these boxes represent? On the right, it is money (or value) IN from either sales or funding, and on the left, money OUT to things like trading expenses (used to generate sales in the box on the other side), and assets. That’s it! 

So, how does this apply to DEBK? You must ask two questions about every financial transaction as there must be two elements or sides to each:  

  1. From where did the money come? Where was it CREATED (CRedit)?
  2. To where did the money go? What was the DESTINATION (DEbit)? 
Get to grips with this concept before you move on. The number of people that I have come across in the bookkeeping and accounting world who are confused by and cannot distinguish between a bank statement, which is the bank’s record of a firm’s debits and credits, and the bank account in their firm’s general ledger with its own debits and credits (opposite to the bank’s records), is astounding. 

Finally, there are three rules about understanding DEBK:

  • Do not learn it by rote;
  • Do not learn it by rote; and
  • If in doubt, refer to rules one and two above! 
Billy O’Connor FCA is the Founder of ACCq.