What Is Double-Entry Bookkeeping?
Accurate bookkeeping is central to every small business’s success—including yours. Knowing exactly where you stand financially helps you make smart business choices to improve profits while trimming costs.
To maintain the most accurate financial records possible, you need to use the double-entry bookkeeping method (also referred to as double-entry accounting). This method requires you to record every financial transaction twice in your books: as a credit entry in one account, and as a debit entry in a corresponding account.
Honestly, if you use bookkeeping software, that’s nearly all you need to know about double-entry accounting. Most accounting software systems automatically use double-entry bookkeeping to make your accountant’s life easier come tax time and give you peace of mind about your books’ reliability. But if you keep your books by hand—or simply want to know more about what double-entry bookkeeping is and how it helps your business—we have a more thorough overview below.
What is the double-entry bookkeeping system?
Double-entry bookkeeping is the process of recording two entries—a credit and a debit entry—for every one financial transaction.
Let’s break this down even more. Like we said, double-entry accounting means you’ll always record a transaction as a credit (or increase) in one account and as a debit (or decrease) to another account. In this context, accounts don’t refer to bank accounts. Instead, accounts are the different sections that make up your general ledger, or GL. (And for the record, the GL is usually what bookkeepers mean when they refer to “the books.”) There are five main types of accounts that describe every type of financial transaction a business can perform:
- Asset accounts, which record the total value of everything your business owns
- Equity accounts, which record the amount of money you and others invest in your business
- Liability accounts, which record the amount of money you owe
- Revenue accounts, which record the amount of money you make selling products or services
- Expense accounts, which record the amount of money you’re spending on your business
Depending on your business, your GL will contain several of each type of account.
For instance, if you sell inventory, you’ll have an inventory account, which is a type of asset account. And if you hire employees, you’ll need a wages account, which is a type of expense account.
If you’re wondering how on earth you keep track of all these accounts, the answer is a chart of accounts, which lists every account in your ledger. And if you’re not sure which accounts you even need, an accountant can steer you in the right direction.
So how do all these accounts apply to double-entry bookkeeping? Well, money doesn’t appear out of nowhere: it moves from person to person and account to account. This means that every financial transaction always increases one of your accounts while decreasing another.
Let’s say you own a fabric store. If you sell a bolt of cloth, you’ve increased your revenue, but you’ve decreased your inventory. Therefore, if you’re following the double-entry accounting method, you’ll record the sale amount as an increase (or debit, DR) on your cash account and a decrease (or credit, CR) in your inventory account.
How do debits and credits work?
Debit and credit have slightly different meanings when we’re talking about bookkeeping instead of banking. In accounting terms, a debit marks an increase in assets (or total value) and a decrease in liability (or money you owe), and a credit marks a decrease in assets and an increase in liabilities.
Per our example above, selling your fabric increases your revenue and decreases your inventory amount. So to record the sale, you would enter the amount as a debit under an asset account and a credit under an expense account.
Debits and credits are a little confusing, especially since they can represent an increase or a decrease, depending on the type of account you’re talking about. That’s where T accounts come in handy. These types of accounts are divided into a T shape with debits listed on the left and credits on the right. Heads up: each asset accounts has its own T account chart.
You always list an increase in assets in the debit (left) column and a decrease in assets in the credit (right) column. If the total amount in your debit columns matches the total amount in your credit columns, your books are balanced. If the amounts don’t balance, there’s an accounting error somewhere in your records. You can dive in and find it before the issue blossoms into a financial crisis.
A journal entry refers to the record you’ll make in your general ledger (GL) for every financial transaction. 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.
Here’s another example: say you’re investing $10,000 of your own savings into your startup flower shop. You’ll record that $10,000 as a debit on an assets account—which means making a debit journal entry on the left side of a T account. Since that money moved to an asset account from an equity account, you’ll make a credit entry of $10,000 on the right-hand side of that equity account.
What is the single-entry bookkeeping method?
Unlike the double-entry method, single-entry bookkeeping requires you to make one entry per financial transaction. You simply keep a running list of everything you spend and everything you earn. That’s it—each financial transaction has just one line, and you don't make multiple entries in multiple accounts.
Obviously, single-entry accounting is much simpler than double-entry, but it’s also much less accurate. And since it doesn’t break down your cash flow into categories like expenses, assets, and equity, single-entry bookkeeping can’t give you any real insight into your business’s performance.
Single-entry bookkeeping can work for freelancers and sole proprietors who handle just a few financial transactions a month. If you send only two or three invoices and pay only two or three bills a month, you can probably get by with single-entry bookkeeping. (At least, that’s the justification behind FreshBooks’ cheapest plan, which is geared towards freelancers and offers single-entry bookkeeping only.)
But if you’re dealing with a larger client base and have multiple expenses and invoices a month, we strongly recommend using double-entry accounting instead. We recommend double-entry bookkeeping even to freelancers who don’t have more than five transactions a month—it conforms to best accounting practices and is honestly the best way to ensure your financial information is accurate.
What is a balance sheet?
A balance sheet is a key financial report that shows whether your books are balanced at any given moment. It’s based on an equation called (logically enough) the Accounting Equation:
Liabilities + Equity = Assets
This equation is also the foundation of double-entry bookkeeping: everything in your liabilities and equity accounts should always equal the total amount of everything in your assets accounts.
The balance sheet is one of the three most important financial documents for any business owner. Alongside your income statement and cash flow statement, it gives you, your accountant, and your financial investors a well-rounded snapshot of your business’s financial health.
Your accountant or bookkeeper should draw up a balance sheet for you at least once a quarter. If you use accounting software, use it to generate a balance sheet as often as you need to make sure your books are balanced and your company is on track to succeed.
If you want your financial records to be as accurate, clear, and transparent as possible, you absolutely must use the double-entry method of bookkeeping. That advice goes double if you’re hoping to attract investors or take out a small-business loan: investors and lenders have a hard time trusting businesses with simple, error-riddled books.
Recording every financial transaction twice sounds daunting at best, especially if you’ve never dealt with small-business accounting before—but you don’t have to tackle double-entry bookkeeping on your own. Your accountant or bookkeeper can talk you through it and handle the trickiest details themselves, or you can use accounting software that makes balancing your books as painless as possible.
Still have questions about double-entry accounting? 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. Chatting with your trusted financial professional is always the best way to get specific advice on growing your own business.
Want more bookkeeping help as you launch your business? Check out our article on bookkeeping basics for small-business owners.
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