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

It’s impossible to find investors or get a loan without accurate financial statements, and it’s impossible to produce accurate financial statements without using double-entry accounting. To enter that transaction properly, you would need to debit (increase) your cash account, and credit (decrease) your utilities expense account. Unlike single-entry accounting, which requires only that you post a transaction into a ledger, double-entry tracks both sides (debit and credit) of each transaction you enter.

  • This action increases the company’s total assets by $1,000 while accurately recording the revenue earned from the product sale.
  • The system is designed to keep accounts in balance, reduce the possibility of error, and help you produce accurate financial statements.
  • This then gives you and your investors or bank manager a good picture of the financial health of your business.
  • Check out our article on bookkeeping basics for small-business owners.
  • If that all sounds like a foreign language, don’t give up just yet!

Some accounting software, like Xero and QuickBooks Online, automatically generate journal entries for your GL each time you accept a payment or pay a bill. Other software, such as Zoho Books’ free plan, requires you to make manual journal entries. If your credit entries don’t match your debit entries, you’ll likely need to identify the accounting error and then make an adjusting entry to bring your books back into balance.

Advantages of Double-entry Accounting

A company selling a product for $1,000 is an example of double-entry bookkeeping. The company debits its cash account for $1,000 and credits its revenue account for the same amount. This action increases the company’s total assets by $1,000 while accurately recording the revenue earned from the product sale. This program can identify revenue and expenses, calculate profits and losses, and run automatic checks and balances to notify you if something needs your attention.

  • It means for one or more debit entries there should be one or more credit entries.
  • You’ll be ahead of the game if you’re already using double-entry bookkeeping.
  • A key reason for using double entry accounting is to be able to report assets, liabilities, and equity on the balance sheet.
  • The total of the debit column must equal the total of the credit column.

However, T- accounts are also used by more experienced professionals as well, as it gives a visual depiction of the movement of figures from one account to another. The early beginnings and development of accounting can be traced back to the ancient civilizations 7 best church accounting software 2020 in Mesopotamia and is closely related to the development of writing, counting, and money. The concept of double-entry bookkeeping can date back to the Romans and early Medieval Middle Eastern civilizations, where simplified versions of the method can be found.

Account types

By entering transactions properly, your financial statements will always be in balance. In double-entry accounting, you still record the $5.50 in your cash account, but you also record that $5.50 as an expense. While this may have been sufficient in the beginning, if you plan on growing your business, you should probably move to using accounting software and double-entry accounting. If you’re searching for accounting software that’s user-friendly, full of smart features, and scales with your business, Quickbooks is a great option. When a company pays a six-month insurance premium, the company’s asset Cash is decreased and its asset Prepaid Insurance is increased.

Double entry accounting definition

Give your skills a boost with Intuit Academy Bookkeeping Professional Certificate. You’ll learn bookkeeping basics like double-entry accounting, along with accounting for assets and financial statement analysis. With courses like these under your belt, you’re well on your way to becoming a successful accountant. Any reputable, modern accounting software (like FreshBooks) is double-entry by default, which makes it easy to switch to double-entry bookkeeping for your business. When you collect the money of $5,550, your cash increases (debit), and your receivables decrease (credit) by $5,550.

What does double entry mean?

The first entry to the general ledger would be a debit to Cash, increasing the assets of the company, and a credit to Equity, increasing Lucie’s ownership stake in the company. Here, the asset account – Furniture or Equipment – would be debited, while the Cash account would be credited. It is important to note that after the transaction, the debit amount is exactly equal to the credit amount, $5,000.

The double-entry system requires a chart of accounts, which consists of all of the balance sheet and income statement accounts in which accountants make entries. A given company can add accounts and tailor them to more specifically reflect the company’s operations, accounting, and reporting needs. From these nominal ledger accounts, a trial balance can be created. The list is split into two columns, with debit balances placed in the left hand column and credit balances placed in the right hand column. Another column will contain the name of the nominal ledger account describing what each value is for. The total of the debit column must equal the total of the credit column.

How to get started with double-entry accounting

The double-entry accounting system is the most widely used system around the world. It presents comprehensive and accurate accounting records of an entity. It offers several advantages such as accuracy of records, a modern system, and a strong foundation for financial statements. It means an accurate and consistent double-entry accounting function will lead to a consistent ledger and eventually accurate financial statements of a business. The system is designed to keep accounts in balance, reduce the possibility of error, and help you produce accurate financial statements.

Leave Comment

Twój adres e-mail nie zostanie opublikowany. Wymagane pola są oznaczone *

Witryna wykorzystuje Akismet, aby ograniczyć spam. Dowiedz się więcej jak przetwarzane są dane komentarzy.