Double-entry bookkeeping: What it is and why its important for small businesses

When you receive the money, your cash increases by $9,500, and your loan liability increases by $9,500. The double-entry system helps companies maintain their accounts in detail, which helps control the business. In addition, it shows how profitable and financially strong various parts of the business are and thus helps to make better financial decisions. With double-entry bookkeeping, you get a clear view of how your business is doing financially—short and longer term. If you’d only entered the $200 as a deposit, your bank account balance would be accurate, but your utility expense would be too high. This is how you would record your coffee expense in single-entry accounting.

Double-entry bookkeeping has been in use for at least hundreds, if not thousands, of years. Accounting has played a fundamental role in business, and thus in society, for centuries due to the necessity of recording transactions between parties. The accounting system might sound like double the work, but it paints a more complete picture of how money is moving through your business. And nowadays, accounting software manages a large portion of the process behind the scenes.

Example 3: Paying for Business Expenses

Debits and Credits are essentials to enter data in a double entry system of accounting and book-keeping. While posting an accounting entry, an entry on the left side of the account ledger is a debit entry and right side entry is a credit entry. doc dells just in time inventory management system Are you a small business owner who employs more than one worker, or is looking to apply for a loan? Then double-entry accounting might be right for you—especially because it gives you a more accurate view of how fast your business is growing.

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  • With this method, you just write down all the transactions that happen in a business in order as they happen in a big list.
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For the accounts to remain in balance, a change in one account must be matched with a change in another account. Note that the usage of these terms in accounting is not identical to their everyday usage. Whether one uses a debit or credit to increase or decrease an account depends on the normal balance of the account. Assets, Expenses, and Drawings accounts (on the left side of the equation) have a normal balance of debit.

Why Is Double-Entry Bookkeeping Important?

When all the accounts in a company’s books have been balanced, the result is a zero balance in each account. For businesses in the United States, the Financial Accounting Standards Board (FASB), is a non-governmental body. They decide on the generally accepted accounting principles (GAAP), which are the official rules and methods for double-entry bookkeeping. For example, a copywriter buys a new laptop computer for her business for $1,000. She credits her technology expense account for $1,000 and debits her cash account for $1,000.

Best Online Bookkeeping Services

A double-entry bookkeeping system is where a corresponding entry is made for every transaction, i.e. debits and credits. The basis of the double-entry bookkeeping system is that every transaction has two parts and affects two ledger accounts. The double-entry system of bookkeeping deals with two or more accounts for every business transaction. If the fleet owner would have bought the trucks in cash, then a credit entry has to be made in cash account and a debit entry to the inventory account.

As you can see, the entire accounting process starts with double-entry bookkeeping. Bookkeeping supports every other accounting process, including the production of financial statements and the generation of management reports for company decision-making. Single-entry bookkeeping is a record-keeping system where each transaction is recorded only once, in a single account.

If you’re a small business owner, a single-entry accounting system may work fine for you. However, if you enter a growth phase, want to bring on investors, or plan to apply for small business loans, you’ll want to consider switching to a double-entry system. This then gives you and your investors or bank manager a good picture of the financial health of your business. All popular accounting software applications today use double-entry accounting, and they make it easy for you to get started, allowing you to get your business up and running in an hour or less. If you were using single-entry accounting, you would simply reduce your bank account balance by $500.

It’s possible to manually create multiple ledger accounts, but if you’re making the move to double-entry accounting, you’ll likely want to make the switch to accounting software, too. As always, we recommend that you go directly to your own accountant, CPA, bookkeeper, business banker, or tax advisor. For instance, your CPA can advise you on which accounts to include in your general ledger. They can also explain how double-entry accounting benefits your business, not just businesses generally.

Example of a Double-Entry Bookkeeping System

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. In accounting, a credit is an entry that increases a liability account or decreases an asset account. It is an entry that increases an asset account or decreases a liability account.

How to get started with double-entry accounting

With NetSuite, you go live in a predictable timeframe — smart, stepped implementations begin with sales and span the entire customer lifecycle, so there’s continuity from sales to services to support. A second popular mnemonic is DEA-LER, where DEA represents Dividend, Expenses, Assets for Debit increases, and Liabilities, Equity, Revenue for Credit increases.

All debits do not always equate to increase the account nor do all credits equate to decrease the accounts. A debit entry might increase one account and at the same time decrease another account. Fast forward to today, double-entry bookkeeping continues to be the undisputed standard for financial accounting worldwide. The fundamental principle of maintaining balanced accounts remains unchanged, even as the method continually adapts to technological advancements.

This article is not intended to provide tax, legal, or investment advice, and BooksTime does not provide any services in these areas. This material has been prepared for informational purposes only, and should not be relied upon for tax, legal, or investment purposes. BooksTime is not responsible for your compliance or noncompliance with any laws or regulations. Credits – things are going out of your business, such as money and sales. She uses the skills she learned from her master’s degree in writing to provide guidance to small businesses trying to navigate the ins-and-outs of financing. Previously, she ran a writing business for three years, and her work has appeared on sites like Business Insider, VaroWorth, and Mission Lane.

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