Double entry accounting basics - recommendations

It depends. If you decide to track a new account that you didn't track before then the new account should be "Equity" You should be setting up all your accounts at one point in time and the "Opening Balances Equity" account should equal zero if you include an "Equity" account.

It's normal practice but you have to make sure you have a set of accounts that balance first before you even start using accounting software - unless you really know what you are doing!

In double entry bookkeeping it is an asset but you may need to treat it as a negative liability in your accounting software.

It's up to you but I wouldn't use "payments" in a Profit & Loss Account. I would use "ISA interest receivable".

Don't use an adjustments account.

Good idea. You don't want to try to understand an accounting software program at the same time as trying to understand bookkeeping.

Look for books by Frank Wood.

At the beginning you want to come up with an opening balance sheet. Then read Frank Wood and that will explain everything from there.

Assets - Liabilities = Equity

but when it extends this to take in income and expenses, it gets it wrong. Well, it doesn't really, see below at [##], but the equation as stated can seem incompatible with the text, and can be a barrier to a newcomer's comprehension of the concepts. That is to say their mistake isn't really in the equation, but in the way it is introduced. It states:

Assets - Liabilities = Equity + (Income - Expenses)

Obviously (a newcomer would think) the plus sign there should be a minus sign, i.e. it should read:

Assets - Liabilities = Equity - (Income - Expenses)

Without that minus sign there would be no need for the brackets, after all, and as the text correctly points out, income serves to increase your net worth (which is what equity is) and this clearly implies that they must have opposite signs if they appear on the same side of the equals sign. Or does it?

I don't think it's all that helpful to treat Equity as an additional fundamental account type. In effect it's just another kind (a special case) of Liability, and so this leaves you with just four fundamental types of account.

The next thing you need to understand is what makes these four types fundamentally different. This four way split is brought about by two orthogonal (i.e. independent) distinctions.

The first, and most obvious, of these is one of sign, i.e. intuitively you tend to think of assets and of income as being in some sense positive, and of liabilities and expenses being in some sense negative. Confusingly, this is one example where intuition leads you astray, and it's really the other way round: Income must have the same sign as liabilities, and expenses the same sign as assets. So if income is positive, assets must be negative. It should become clear shortly why this is so.

The other fundamental distinction is a temporal one. Basically assets and liabilities are in some sense permanent, whereas income and expenses are temporary. More precisely, income and expenses always relate to a certain *period of time*, while assets and liabilities always relate to a single *moment in time*. So income and expense accounts always begin each period with a zero balance, and at (or just before) the end of a period they are made zero again, for the start of the next period, by transferring the balances to the equity account.

In particular, if you look at the two moments which define the beginning and end, respectively, of some specific period, then it is clear that the assets minus liabilities at the beginning of the period (at moment 1), plus the income minus expenses during the period, must equal the assets minus liabilities at the end of the period (at moment 2):

Assets1 - Liabequity1 + Income - Expenses = Assets2 - Liabequity2

Having said earlier that Equity is just a special case of Liability, in this equation I have used the pseudo-term "liabequity" as shorthand for "Liabilities including Equity".

Now, in the very beginning, when a virgin set of accounts first starts up, it does so with a clean slate, with no equity, no assets, and no liabilities. Hence, if we take moment 1 to be this beginning, then:

Assets1 = 0 Liabilities1 = 0 Equity1 = Assets1 - Liabilities1 = 0 Liabequity1 = Liabilities1 + Equity1 = 0

and if we take moment 2 to be the end of the first period of the entity (be it a business or just a private household) described by our accounts, then we find that the above equation:

Assets1 - Liabequity1 + Income - Expenses = Assets2 - Liabequity2

becomes:

or:

Income - Expenses = Assets2 - Liabequity2

If we now split off equity from "liabequity" again, then this equation becomes:

Income - Expenses = Assets2 - (Liabilities2 + Equity2)

which can be rearranged as:

Assets2 - Liabilities2 = Equity2 + (Income - Expenses)

This agrees with original form [##] above, i.e. the plus sign which a newcomer may have doubted is correct after all.

One more thing: Accounting (or bookkeeping) abhors negative numbers. It doesn't use them. It uses the terms Credit and Debit instead. Credits are generally used to represent income, and debits are for expenses, and therefore assets are always debits, while liabilities (and equity) are credits.

The "Principle of Balance" mentioned in the guide is best represented by the mantra "For every credit there must be a debit (and vice versa)". This is where the "double" in double entry comes from.

So when you pay a gas bill, for example, you debit your "gas" account (which is an expense account) and credit your "bank" account (which is an asset account). The mantra applies not only within sets of accounts but also between them. Thus you should not let the opposite "sign" of entries on your bank statement fool you. The credit entry in your "bank" account within your bookkeeping system will correspond to a debit entry in your bank statement, since your account with your bank mirrors its account with you.

It is normal practice. Consider the set of accounts for a small business. For simplicity let's say it's a sole tradership. Its accounts start with a clean slate, with zero balances in all its accounts, and then the owner puts some money into the business, by way of startup capital so that the business can buy some assets and/or stock for sale. He may open a bank account in the name of the business, and when he puts cash or pays a personal cheque into the business account, the bookkeeping entries in the business accounts are (1) to debit the "bank" asset account with the amount in question and (2) to credit an equity account with the same amount, generally this will be an account called "capital introduced".

A credit card account is just another form of bank account. Although in general a bank account is usually "in credit" (as the bank statement would report) (and is therefore an asset, and thus represented by a debit balance in your accounts)), and a credit card account is usually "in debit" (and is thus a liability account and holds a credit balance), there is no reason why a "bank" account should not at times show a credit balance (when you overdraw it) or why a "credit card" account should not show a debit balance (due to this cash back, or if at some point you overpay for some reason).

But don't think of negative balances. Traditionally each account is shown with two columns of numbers, one for debits and one for credits. So for something like a bank account, which will have money both going in and out, you don't have positive and negative entries in a single column, but you have debit entries in one column and credit entries in the other.

You will have a number of income accounts and a number of expenses accounts, in addition to asset and liability accounts. You will maintain an asset account to track your cash ISA holding, and you will maintain an income account to track interest you receive. Whether you have one interest income account for each source of interest, or just a single one for all sources, is neither here nor there, but when interest is paid to you by the ISA provider, then if it is just added to the ISA itself, then the transaction is that you credit the amount to your interest account. The corresponding double entry is to debit the amount to the asset account for the ISA itself. If, instead, the ISA interest were paid into a current account, then you would debit that instead.

Yes.

Thanks Peter and to everyone else who responded with comments to my questions. I have purchased Business Accounting volumes 1 & 2 (11th Ed) by Frank Wood, and will work through them over the next few months.

Cheers, Chris