Double-entry accounting can be challenging for (small) business owners. This is why we've compiled this short guide to the process and how this can help your organization.
What is the double-entry system in bookkeeping?
Double-entry bookkeeping describes a process where every entry into one business bank account must be matched with an equal entry in another account. This historical method of bookkeeping works on the assumption that for every credit recorded, there must be an equal debit recorded. These records are kept in a business's general ledger (in individual nominal codes). From here, you can then identify the trial balance which is made up of the sum of all the nominal accounts. There is two sides to the trial balance - a debit and a credit side that need to be equal. In a double-entry accounting system, the debits are always recorded on the left-hand side. Debits will increase an asset account or decrease a liability account. Debits also decrease revenue. Credits, on the other hand, are noted on the right-hand side. They increase a liability account and decrease an asset account. They also increase revenue.
What is the purpose of double-entry bookkeeping?
The key to understanding double-entry bookkeeping is to realize that the idea is to create financial statements based on the trial balance. In this accounting method, the profit and loss statement shows the revenue, costs, and profit/loss for a certain period. The balance sheet is used to showcase the assets, liabilities, and equity of your business. There is a basic formula for double-entry bookkeeping: Assets = Liabilities + Equity
You might have heard this being referred to as the accounting equation.
Perks of double-entry bookkeeping
Double-entry bookkeeping is helpful for keeping an accurate record of financial information. Because keeping an eye on income and expenses equally is key for any business in succeeding, we advise every company to use double-entry bookkeeping. The information this accounting method provides also helps inform your forecasting.