Double-Entry Bookkeeping for Nigerian SMEs: Complete Guide
Learn double-entry bookkeeping fundamentals for Nigerian small and medium businesses. Understand debits, credits, and how to maintain accurate financial records.
Last updated: 24 January 2025
Double-entry bookkeeping is the foundation of accurate financial record-keeping. For Nigerian small and medium enterprises, understanding and implementing this system is essential for tax compliance, financial management, and business growth. This guide explains the fundamentals in practical terms.
What is Double-Entry Bookkeeping?
The Basic Principle
Every financial transaction affects at least two accounts:
- One account is debited (increased or decreased)
- One account is credited (increased or decreased)
- Debits always equal credits
Why It Works
This system ensures:
- All transactions are recorded completely
- Books are always balanced
- Errors are easier to detect
- Financial statements are accurate
The Accounting Equation
Assets = Liabilities + Equity
Every transaction maintains this balance.
Understanding Debits and Credits
The Basic Rules
| Account Type | Debit | Credit |
|---|---|---|
| Assets | Increase ↑ | Decrease ↓ |
| Expenses | Increase ↑ | Decrease ↓ |
| Liabilities | Decrease ↓ | Increase ↑ |
| Equity | Decrease ↓ | Increase ↑ |
| Revenue | Decrease ↓ | Increase ↑ |
Memory Aid: "DEALER"
Debits: Expenses, Assets, Losses (increase) Credits: Equity, Revenue, Liabilities (increase)
Common Transaction Examples
1. Cash Sale
Customer pays ₦100,000 cash for products:
| Account | Debit | Credit |
|---|---|---|
| Cash (Asset) | ₦100,000 | |
| Sales Revenue | ₦100,000 |
Cash increases (debit), Revenue increases (credit).
2. Credit Sale
Sell goods worth ₦200,000 on credit:
| Account | Debit | Credit |
|---|---|---|
| Accounts Receivable (Asset) | ₦200,000 | |
| Sales Revenue | ₦200,000 |
Customer owes you (asset increases), Revenue increases.
3. Receive Payment from Customer
Customer pays ₦200,000 owed:
| Account | Debit | Credit |
|---|---|---|
| Cash (Asset) | ₦200,000 | |
| Accounts Receivable (Asset) | ₦200,000 |
Cash increases, Receivable decreases.
4. Purchase Inventory on Credit
Buy inventory worth ₦150,000 from supplier:
| Account | Debit | Credit |
|---|---|---|
| Inventory (Asset) | ₦150,000 | |
| Accounts Payable (Liability) | ₦150,000 |
Inventory increases, You owe supplier (liability increases).
5. Pay Supplier
Pay ₦150,000 to supplier:
| Account | Debit | Credit |
|---|---|---|
| Accounts Payable (Liability) | ₦150,000 | |
| Cash (Asset) | ₦150,000 |
Liability decreases, Cash decreases.
6. Pay Office Rent
Pay ₦500,000 for office rent:
| Account | Debit | Credit |
|---|---|---|
| Rent Expense | ₦500,000 | |
| Cash (Asset) | ₦500,000 |
Expense increases, Cash decreases.
7. Pay Employee Salaries
Pay ₦1,000,000 in salaries:
| Account | Debit | Credit |
|---|---|---|
| Salary Expense | ₦1,000,000 | |
| Cash (Asset) | ₦1,000,000 |
8. Take a Bank Loan
Receive ₦5,000,000 bank loan:
| Account | Debit | Credit |
|---|---|---|
| Cash (Asset) | ₦5,000,000 | |
| Bank Loan (Liability) | ₦5,000,000 |
Cash increases, Liability increases.
9. Purchase Equipment
Buy equipment for ₦2,000,000 cash:
| Account | Debit | Credit |
|---|---|---|
| Equipment (Asset) | ₦2,000,000 | |
| Cash (Asset) | ₦2,000,000 |
One asset increases, another decreases.
10. Owner Investment
Owner invests ₦10,000,000 in business:
| Account | Debit | Credit |
|---|---|---|
| Cash (Asset) | ₦10,000,000 | |
| Owner's Equity | ₦10,000,000 |
Cash increases, Equity increases.
The Books of Account
1. Journal (Book of Original Entry)
Where transactions are first recorded:
- Date
- Accounts affected
- Amounts (debit and credit)
- Description/narration
2. Ledger (Book of Final Entry)
Individual accounts where journal entries are posted:
- Each account has its own page
- Shows all debits and credits to that account
- Running balance maintained
3. Trial Balance
List of all accounts and their balances:
- Total debits must equal total credits
- Used to verify accuracy
- Basis for financial statements
The Accounting Cycle
Step 1: Identify Transactions
Recognize events that need recording:
- Sales and receipts
- Purchases and payments
- Bank transactions
- Adjustments
Step 2: Analyze Transactions
Determine:
- Which accounts are affected?
- Is it a debit or credit to each account?
- What is the amount?
Step 3: Record in Journal
Make the journal entry:
Date: January 15, 2025
Account: Cash Debit: ₦100,000 Account: Sales Revenue Credit: ₦100,000 Narration: Cash sale of products
Step 4: Post to Ledger
Transfer to individual account pages:
- Cash account shows ₦100,000 debit
- Sales account shows ₦100,000 credit
Step 5: Prepare Trial Balance
List all accounts with balances:
- Verify debits = credits
- Identify any errors
Step 6: Make Adjusting Entries
Record items like:
- Depreciation
- Prepaid expenses
- Accrued expenses
- Accrued revenue
Step 7: Prepare Financial Statements
Generate:
- Statement of Profit or Loss
- Statement of Financial Position
- Statement of Cash Flows
Step 8: Close Books
Close temporary accounts (revenue, expenses) to equity for new period.
Common SME Transactions in Nigeria
Sales with VAT
Sell goods for ₦100,000 + VAT:
| Account | Debit | Credit |
|---|---|---|
| Cash/Receivable | ₦107,500 | |
| Sales Revenue | ₦100,000 | |
| VAT Output (Liability) | ₦7,500 |
Purchase with VAT
Buy supplies for ₦50,000 + VAT:
| Account | Debit | Credit |
|---|---|---|
| Supplies Expense | ₦50,000 | |
| VAT Input (Asset) | ₦3,750 | |
| Cash/Payable | ₦53,750 |
Withholding Tax Deducted
Client pays ₦100,000 invoice less 10% WHT:
| Account | Debit | Credit |
|---|---|---|
| Cash | ₦90,000 | |
| WHT Receivable (Asset) | ₦10,000 | |
| Accounts Receivable | ₦100,000 |
PAYE Payroll
Pay salaries with deductions:
| Account | Debit | Credit |
|---|---|---|
| Salary Expense | ₦1,000,000 | |
| PAYE Payable (Liability) | ₦100,000 | |
| Pension Payable (Liability) | ₦80,000 | |
| NHF Payable (Liability) | ₦25,000 | |
| Cash | ₦795,000 |
Common Errors and How to Find Them
Transposition Error
Writing ₦540 instead of ₦450.
- Difference divisible by 9
- Review recent entries
Omission Error
Forgetting to record a transaction entirely.
- Bank reconciliation helps identify
- Regular review of documents
Commission Error
Posting to wrong account of same type.
- Detailed review of transactions
- Verify against source documents
Compensating Error
Two errors that cancel each other out.
- Harder to detect
- Detailed review needed
Trial Balance Doesn't Balance
| Check | Action |
|---|---|
| Addition | Re-add columns |
| Posting | Verify all journals posted |
| Double entry | Each transaction has both sides |
| Amounts | Compare to source documents |
Best Practices for Nigerian SMEs
1. Record Daily
Don't let transactions pile up:
- Enter sales daily
- Record expenses as they occur
- Process bank transactions regularly
2. Keep Source Documents
Maintain supporting documents:
- Sales invoices
- Purchase receipts
- Bank statements
- Contracts
3. Reconcile Regularly
Monthly reconciliations:
- Bank accounts
- Customer balances
- Supplier balances
- Petty cash
4. Separate Business and Personal
Keep business and personal finances separate:
- Separate bank accounts
- No personal expenses through business
- Proper documentation of owner drawings
5. Use Accounting Software
Manual bookkeeping is error-prone:
- Consider accounting software
- Automates double-entry
- Reduces errors
How Finora Handles Double-Entry
Automatic Double-Entry
When you record transactions:
- System creates both debit and credit
- Ensures books balance
- No manual journal entries needed
Transaction Examples
Recording a sale:
- Enter invoice details
- Finora debits receivable and VAT
- Credits revenue and output VAT
- All automatically
Recording a payment:
- Select invoice being paid
- System debits cash
- Credits receivable
- WHT handled automatically
Real-Time Balancing
- Books always balance
- Trial balance available instantly
- Errors prevented, not detected
Financial Statements
Generate accurate statements:
- Statement of Profit or Loss
- Statement of Financial Position
- Cash Flow Statement
- All based on double-entry records
Frequently Asked Questions
Do I need to understand debits and credits to use software?
Not necessarily. Good accounting software handles the debits and credits behind the scenes. You just enter transactions normally.
What if my trial balance doesn't balance?
With proper accounting software like Finora, this shouldn't happen. The system ensures every transaction is properly balanced.
Is double-entry required for small businesses?
While not legally required for very small businesses, double-entry provides the most accurate records and is needed for proper tax compliance.
Can I switch from single-entry to double-entry?
Yes. You'll need to reconstruct your records, but it's possible. Start by listing all assets, liabilities, and equity to establish opening balances.
Conclusion
Double-entry bookkeeping is fundamental to accurate financial management:
- Every transaction has two sides
- Debits equal credits always
- Books stay balanced automatically
- Financial statements are accurate
While the concepts may seem complex, modern accounting software handles the mechanics automatically. Understanding the principles helps you manage your business better.
Finora implements proper double-entry bookkeeping behind a simple interface—you get the accuracy of double-entry without the complexity.
Ready for accurate bookkeeping?
Get started for free and let Finora handle double-entry accounting automatically while you focus on your business.
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