What Is Double-Entry Bookkeeping? A Simple Guide for Small Businesses

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It is based on a dual aspect, i.e., Debit and Credit, and this principle requires that for every debit, there must be an equal and opposite credit in any transaction. The double entry system is a more comprehensive way to maintain an entity’s overall accounts. If you’re not sure whether your accounting system is double-entry, a good rule of thumb is to look for a balance sheet. If you can produce a balance sheet from your accounting software without having to input anything other than the date for the report, you are using a double-entry accounting system. On the other hand, the double-accounting system involves recording each transaction in two accounts—both a debit and a credit. This helps balance your books and gives a more comprehensive view of your finances.

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If your business is any more complex than that, most accountants will strongly recommend switching to double-entry accounting. “It was just a whole revolution in the way of thinking about business and trade,” writes Jane Gleeson-White of the popularization of double-entry accounting in her book Double Entry. In this article, we’ll explain double-entry accounting as simply as we can, how it differs from single-entry, and why any of this matters for your business. Bench simplifies your small business accounting by combining intuitive software that automates the busywork with real, professional human support. All small businesses with significant assets, liabilities or inventory.

• To further maximize these advantages, consider hiring a qualified bookkeeper or using accounting software, like QuickBooks, designed for double-entry bookkeeping.
• The chart of accounts is a different category group for the financial transactions in your business and is used to generate financial statements.
• It is important to detect and correct errors and fraudulent activities as soon as possible to maintain the accuracy of financial records.
• The expense accounts cover the operational costs not directly tied to production, such as administrative and marketing expenses.
• There are two columns in each account, with debit entries on the left and credit entries on the right.

As you complete your transaction, the numbers automatically post to the accounts. Completing an invoice from the software will automatically complete the posting for you, increase your sales, and increase your customer’s balance. Once all the transactions are complete, the financial statements are produced.

Say you purchased $1,000 of supplies for your business every month for a year. You recorded the money coming out of your checking account but didn’t record the supplies expense totaling $12,000. Double-entry bookkeeping is important for small businesses for a number of reasons, one of which is financial health.

Record-Keeping System

When making a double entry transaction, you may make the adjustments on the same side of the equation. If using the example of purchasing a computer at 500.00, they use the bank account instead of using credit. The adjustments are made on the same side of the equation and remain balanced. It involves making sure your debits and credits agree in a double-entry accounting system.If that all sounds like a foreign language, don’t give up just yet! This article will cover the definition of credits and debits, what double-entry accounting is, and why it matters for your business. By tracking all entries in two accounts, double-entry bookkeeping also lets you spot and resolve any mistakes quickly and with accuracy.

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Modified cash-basis and accrual accounting both use double-entry bookkeeping. Remember that example where you bought $5,000 of equipment for your business? Using double-entry accounting, with just a glance at your trial balance, you and your tax preparer would see a missing $5,000 in either the debit column or credit column. Once you investigated and corrected the error, you can take advantage of that valuable tax deduction. For example, if you sell a product on credit, your receivables increase, and your inventory decreases.

This system is similar to tracking your expenses using pen and paper or Excel. For example, an e-commerce company buys $1,000 worth of inventory on credit. Assets (the inventory account) increase by $1,000 and liabilities (accounts payable) increase by $1,000.

Because the double-entry system is what is double entry accounting more complete and transparent, anyone considering giving your business money will be a lot more likely to do so if you use this system. A bachelor’s degree in accounting can provide you with the necessary skills to start an entry-level role as an accountant. A bakery purchases a fleet of refrigerated delivery trucks on credit; the total credit purchase was $250,000. The new set of trucks will be used in business operations and will not be sold for at least 10 years—their estimated useful life. Shaun Conrad is a Certified Public Accountant and CPA exam expert with a passion for teaching. After almost a decade of experience in public accounting, he created MyAccountingCourse.com to help people learn accounting & finance, pass the CPA exam, and start their career.