Skip to content 
The 9 Fundamental Principles of Bookkeeping
Table of Contents
- Assets
- Liabilities
- Equity
- Single-Entry Bookkeeping
- Double-Entry Bookkeeping
- Cash Basis of Accounting
- Accrual Basis of Accounting
- Income Statement
- Retained Earnings
- Final Takeaway
Understanding these nine foundational bookkeeping concepts will help you stay organised, avoid costly errors, and make smarter business decisions. Think of them as the groundwork for long-term financial health and compliance.
1. Assets
Assets represent everything your business owns—both tangible and intangible. Common types of assets include:
- Cash held in bank accounts
- Accounts receivable (unpaid customer invoices)
- Inventory
- Fixed assets such as property, vehicles, and office equipment
For example, if you run a coffee shop, your coffee machines, furniture, and decor would be fixed assets. Your stock of beans, milk, and takeaway cups would count as inventory.
Tracking your assets accurately is essential to understanding your business’s net worth and making decisions around investments, budgeting, or expansion.
2. Liabilities
Liabilities are what your business owes—either in the short or long term. These financial obligations can include:
- Accounts payable (e.g. outstanding supplier invoices)
- Business loans
- Tax liabilities (VAT, Corporation Tax, PAYE, etc.)
If you run a pet grooming business and buy £2,000 worth of supplies on credit, this becomes a liability until it’s paid off. Managing liabilities well ensures better cash flow and timely payments to creditors and HMRC.
3. Equity
Equity is what’s left when you subtract your liabilities from your assets. It reflects the owner’s (or shareholders’) stake in the business.
For example, if your online store has £20,000 in assets and £12,000 in liabilities, your equity would be:
£20,000 – £12,000 = £8,000 (Equity)
For sole traders, this is known as the owner’s capital; for limited companies, it refers to shareholder equity. Tracking equity helps you understand the real value of your business.
4. Single-Entry Bookkeeping
This straightforward method records each transaction once—as either income or an expense. It’s typically used by sole traders or very small businesses with simple finances.
Example: If your flower stall makes a £200 cash sale, you’d log it in a basic cashbook or spreadsheet. However, this method lacks depth and doesn’t give a full picture of your financial health.
5. Double-Entry Bookkeeping
Double-entry bookkeeping is the gold standard for accuracy and compliance. Every transaction is recorded in two places: one account is debited, the other is credited.
For instance, if your recruitment agency spends £500 on office supplies:
- Debit: Office supplies account increases by £500
- Credit: Bank account decreases by £500
This system ensures your books always stay balanced, following the equation:
Assets = Liabilities + Equity
Most accounting software like Xero or QuickBooks is based on this method.
6. Cash Basis of Accounting
Under this method, income and expenses are recorded only when cash is actually received or paid. It’s commonly used by sole traders and small businesses in the UK, and aligns with HMRC’s VAT Cash Accounting Scheme.
For example: Your Brighton-based design studio invoices a client in October but receives payment in November. Under cash basis, you record the income in November.
This method is simple and great for businesses with limited transactions.
7. Accrual Basis of Accounting
Accrual accounting recognises income and expenses when they are earned or incurred, regardless of when the money changes hands. Larger businesses and those exceeding HMRC thresholds are required to use this method.
Example: If your firm completes a £10,000 project in December but gets paid in February, the revenue is still recorded in December.
Accrual accounting provides a clearer view of your business’s financial performance at any point in time.
8. Income Statement
Also known as a Profit & Loss statement, this report summarises your business’s performance over a period of time. It includes:
- Revenue (sales)
- Cost of Goods Sold (COGS)
- Operating Expenses (e.g. salaries, rent, utilities)
Knowing how to read this report can help you spot trends and identify cost-saving opportunities. For instance, a Liverpool-based gift shop owner might realise high rent costs are reducing profitability.
9. Retained Earnings
Retained earnings are the profits your business keeps rather than paying out as dividends. These earnings can be reinvested into growth or used to cover future expenses.
For example: If your business earns £50,000 in profit and distributes £30,000 to shareholders, the remaining £20,000 becomes retained earnings.
This figure reflects the cumulative profitability and reinvestment capacity of your business over time.
Final Takeaway
These nine principles are at the heart of sound bookkeeping. Mastering them will not only keep you compliant with HMRC, but also give you the clarity and control needed to grow your business confidently.
Feeling Overwhelmed by Bookkeeping? You’re Not Alone.
Many entrepreneurs start out without a strong understanding of accounting. But you don’t have to figure it all out yourself. Talking to a professional can save you time, money, and a lot of stress.
At Adena Accountancy, we help business owners like you stay organised, compliant, and in control. Whether you’re just starting out or scaling up, we’re here to guide you through every step of your bookkeeping and tax journey.
Start investing in your business success today.
