Double-entry bookkeeping is a foundational accounting concept used to record business transactions accurately. Unlike single-entry bookkeeping, which only records one side of the transaction, double-entry bookkeeping records two sides of each transaction – the debit and the credit. This system helps to ensure that the accounting equation (Assets = Liabilities + Equity) always balances, providing a clear and accurate picture of a business’s financial health.
How Transactions Impact Accounts
In double-entry bookkeeping, every transaction affects at least two accounts. For example, the journal entry below shows that the business purchased $100 worth of office supplies with cash. The office supplies account is debited to reflect an increase in assets, while the cash account is credited to show a decrease in assets. The total debits equal the total credits, maintaining the balance that is central to double-entry bookkeeping.
|Account||Debit ($)||Credit ($)|
|Office Supplies (Asset)||100|
Here are the basics of double-entry bookkeeping:
- Understand the Accounting Equation
The accounting equation is the foundation of double-entry bookkeeping. It states that the assets of a business must always equal the liabilities plus the equity.
Assets = Liabilities + Equity
In other words, everything the business owns (assets) must be financed either by what it owes (liabilities) or by the owner’s investment (equity).
- Identify the Accounts
Double-entry bookkeeping uses a chart of accounts, a list of all the accounts used to record transactions. These accounts are categorized into five main types – assets, liabilities, equity, income, and expenses.
- Record Debits and Credits
In double-entry bookkeeping, every transaction involves at least two accounts – one debited and one credited. The amount debited must always equal the amount credited to keep the accounting equation balanced.
- Understand the Rules for Debits and Credits
The rules for debits and credits depend on the type of account.
- Assets – a debit increases the account balance, and a credit decreases it.
- Liabilities and equity – a debit decreases the account balance, and a credit increases it.
- Income – a debit decreases the account balance, and a credit increases the account balance.
- Expenses – a debit increases the account balance, and a credit decreases it.
- Use Journals and Ledgers
Transactions are first recorded in a journal, a chronological record of all business transactions. These transactions are then posted to the relevant accounts in the ledger, a detailed record of all the transactions affecting each account.
- Prepare a Financial Statement
Financial statements can be prepared once the transactions have been recorded and posted. The main financial statements are the balance sheet, which shows the business’s assets, liabilities, and equity at a specific point in time, and the income statement, which shows the business’s income and expenses over a period of time.
Double-entry bookkeeping is an essential concept in accounting that provides a clear and accurate picture of a business’s financial health. Recording both sides of each transaction ensures that the accounting equation always balances, making it easier to detect errors and prevent fraud. However, double-entry bookkeeping can be complex and time-consuming, especially for people who may not have a strong accounting background (21% of SMB owners confess to having insufficient knowledge about bookkeeping). In such cases, hiring a bookkeeper from Better Accounting can be a wise decision. A professional bookkeeper can handle the intricacies of double-entry bookkeeping, ensuring that your business’s financial records are accurate and up-to-date. This, in turn, will allow you to focus on what you do best – running and growing your business.
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