Basics of Double-Entry Bookkeeping

Double-entry bookkeeping is one of the most difficult areas of bookkeeping to understand.

Are you just starting with this concept? Keep reading to learn the basics.

What is Double-Entry Bookkeeping?

It is an accounting system where every transaction is recorded in two accounts: a debit to one account and a credit to another. The amount transferred is always an equal amount of money from one account (or group of accounts) to another account (or group of accounts).

Both sides of the equation must be the same which means it is balanced. Remember, Assets = Liabilities + Equity.

Benefits of Double-Entry Bookkeeping

Double-entry bookkeeping generates many important financial reports like balance sheets and income statements. These financial statements tell businesses how profitable they are. This helps your company make better financial decisions.

If your liabilities and equity don’t equal assets on the balance sheet, then you know that something went wrong in your journal entries. This is a great way to keep your business accountable.

Investors, banks, buyers, and suppliers are more likely to work with you and give your business money if you use the double-entry system. The main reason is that the method allows them to get an accurate reading of the company’s health and offers transparency.

What is the Difference Between Single and Double-Entry Bookkeeping?

In single-entry bookkeeping, income and expenses for every transaction are recorded once in a cash register or log. This process is much simpler than double-entry bookkeeping and does not require formal training. For this reason, many small businesses with a low volume of activity use this method.

It is more accurate to use a double-entry system because it keeps track of your company’s financial situation. You also get information on how fast it’s growing. As your business ramps up, you may need to switch from the single entry system to double entry because of the lack of data on accounts receivable, accounts payable, and inventory.

How to Use a Double Entry Bookkeeping System

When using this form of bookkeeping, it is easiest to use some type of bookkeeping/accounting software. This software can generate reports which makes tax season run much simpler and smoother. If you need to switch from single to double entry, most software has the capabilities and concepts built into it. Your financial statement complexity grows with your business, so it is best to use this method as soon as possible.

You can also hire a bookkeeper to do this work for you. Our team at PL Consulting and Bookkeeping Plus is highly trained and experienced in double-entry bookkeeping. We serve the Baltimore, Maryland area and beyond. We customize our services to each client to maintain good records and financial statements.

Questions about using a double-entry bookkeeping system? Call us at 410.764.3731 or contact us on our website to schedule an appointment with one of our bookkeeping professionals. Stay up-to-date with all things financial by following our LinkedIn.