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

The basic double-entry accounting structure comes with accounting software packages for businesses. When setting up the software, double entry accounting a company would configure its generic chart of accounts to reflect the actual accounts already in use by the business.

• For very small businesses with only a handful of transactions, single entry bookkeeping can be sufficient for their accounting needs.
• This is a cash-based bookkeeping method that tracks incoming and outgoing cash in a journal.
• Pacioli’s book, on the other hand, was responsible for popularizing the system in Europe and other trading nations throughout the world.
• There are two different ways to record the effects of debits and credits on accounts in the double-entry system of bookkeeping.

When you send an invoice to a client after finishing a project, you would “debit” accounts receivable and “credit” the sales account. You always debit the receivers’ account and credit the givers’ account. Under this system of accounting, the picture of all incomes or profits is reflected. Under this system, every debit for a certain amount of money will have corresponding credit for an equal amount. For this reason, this system maintains accounts of all parties relating to transactions.

Using double entry accounting to ensure accurate record-keeping

Debit accounts are asset and expense accounts that usually have debit balances, i.e. the total debits usually exceed the total credits in each debit account. The Grouch Electronics company sells a $5,000 home entertainment installation to a client on credit. This results in a debit of $5,000 of the company’s accounts receivable account and a credit of $5,000 to its sales account. Later, the customer pays the $5,000 invoice, at which point the company records a debit of $5,000 to its cash account and a credit of $5,000 to its accounts receivable account. The end result of these transactions is a sale of $5,000 and an increase in cash of $5,000. With single entries, fraudulent activities become common, and tampering with the record is usual for companies.

A transaction in double-entry bookkeeping always affects at least two accounts, always includes at least one debit and one credit, and always has total debits and total credits that are equal. The purpose of double-entry bookkeeping is to allow the detection of financial errors and fraud.

Single-Entry System: Focus on Revenues and Expenses Only

If you opt for a single-entry accounting system, preparing any financial statement is out of the question. Single entries cannot be reconciled and converted into financial statements and reports. The ease of converting these entries to concrete statements can become a bottleneck for the company’s growth.

In the Double Entry System, transactions have a dual aspect, and every transaction involves two parties – debit and credit, where and they are equal. By entering transactions properly, your financial statements will always be in balance. To enter that transaction properly, you would need to debit your cash account, https://quickbooks-payroll.org/ and credit your utilities expense account. This is how you would record your coffee expense in single-entry accounting. While having a record of these transactions is a good first step toward better managing your cash flow, this type of recording doesn’t make clear the impact each transaction has on your business.

Double Entry Keeps the Accounting Equation in Balance

On the other hand, it’s easy to trackaccounting errorsand issues in a double-entry bookkeeping system when the credit and debit sides don’t tally. Chart Of AccountsA chart of accounts lists all the general ledger accounts that an organization uses to organize its financial transactions systematically. Every account in the chart holds a number to facilitate its identification in the ledger while reading the financial statements.

Thus, the profit on a cash basis is the difference between the cash receipt and the cash payments. Moreover, taxes on income are paid on the receipt of cash and not when the income is accrued. The cash basis of accounting is suitable for the professionals such as lawyers, doctors, etc.

Generally, professionals are hired to maintain accounts under this system, as a strict set of rules is to be followed. This is a partial check that each and every transaction has been correctly recorded. The transaction is recorded as a “debit entry” in one account, and a “credit entry” in a second account. The debit entry will be recorded on the debit side (left-hand side) of a general ledger account, and the credit entry will be recorded on the credit side (right-hand side) of a general ledger account. If the total of the entries on the debit side of one account is greater than the total on the credit side of the same nominal account, that account is said to have a debit balance. Single entry bookkeeping doesn’t allow for this type of verification. Although single entry bookkeeping is simpler, it’s not as reliable as double entry bookkeeping and isn’t a suitable accounting method for medium to large businesses.

Preferably, small businesses and shopkeepers adopt this method of bookkeeping, as there are no set rules to maintain the accounts, hence is comparatively much easier than the double-entry system. Accounting records maintained under this system are also known as incomplete records. It’s easier to explain debits and credits as accounting concepts, as opposed to physical things.

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. You can hire an accountant and bookkeeper to do your business’s double-entry bookkeeping. Or, FreshBooks has a simple accounting solution for small business owners with no accounting background.