joogy06/agent-foundry/bookkeeping-double-entry

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

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.

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.

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:

1. Tick statement lines against book entries, oldest first.
2. Anything on the statement and not in the books → post it (bank charges, interest, direct

debits, card fees).

1. 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.

1. Anything that matches by amount but not by date → check it is not a duplicate.
2. 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.)

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

1. Ingest and post everything (financial-document-ingestion)
2. Reconcile every bank and card account to zero difference
3. Prove each control account (§3)
4. Clear clearing accounts; report anything left
5. Post accruals, prepayments, depreciation
6. Review suspense — it should be empty
7. Produce the trial balance; confirm it balances
8. Produce P&L and balance sheet; compare to prior period and explain the movements
9. 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.