Want to ensure your books are as accurate as possible? You should be using the double-entry bookkeeping system. With this method, each of your financial transactions is recorded twice: once as a credit and once as a debit.
Of course, that’s a pretty simple definition for a hard-to-grasp concept (especially if, like most of us, you didn’t study accounting in college). Here’s a deeper dive into what double-entry accounting looks like, how it works, and what benefits it offers small-business owners compared to the less complicated, less accurate single-entry bookkeeping system.
What is the double-entry bookkeeping system?
To define double-entry bookkeeping, let’s start with Newton’s third law of motion (it relates, we promise): for every action, there is an equal and opposite reaction—or as the musical Hamilton more pithily puts it, “Every action has an equal opposite reaction.”
Newton’s third law is true of objects in motion, but it’s also true of your business’s financial transactions. After all, money doesn’t just appear in your accounts; it moves from one place to another place. Accordingly, every financial transaction increases one account while decreasing another, so to ensure your books are balanced and as accurate as possible, you need to record both the increase and decrease. This is what double-entry bookkeeping is all about.
Where do you record financial transactions?
In double-entry bookkeeping, you should record every financial transaction in a general journal and general ledger (GL). Typically, you’ll use a journal to list every transaction in order by date.
A general ledger breaks down each transaction by account. The main ledger accounts include these:
- Assets, or the total value of everything your business owns
- Owner’s equity, or the amount of money you as the owner have put into your business
- Liabilities, or the amount of money put into your business by other sources
- Revenues, or the amount of money you’re making through sales of products or services
- Expenses, or the amount of money you’re spending on your business
These accounts are called T accounts because they’re divided into a T shape with debits listed on the left and credits on the right.
How do debits and credits work?
When you record a transaction with the double-entry system, you’ll record the transaction twice: as a credit to one account and as a debit to another. Using this system, when you record a financial transaction, you debit the receiving account and credit the giving account. In other words, in expense and asset accounts, a debit marks an increase and a credit marks a decrease.
Say you’re investing $10,000 out of your own savings into your flower shop. Since the owner’s equity account is the giving account in this case, you’ll record the $10,000 as a credit there. And you’ll record the $10,000 as a debit on the assets account, which is the receiving account.
So how do you jot down debits and credits in your ledger? It’s actually fairly simple:
- An increase in assets will always be listed in the debit (left) column.
- A decrease in assets will always be listed in the credit (right) column.
How can accountants and accounting software help?
If you think double-entry bookkeeping is complicated now, imagine how much harder it was back in Ye Olden Days of quill and parchment.
With the advent of accounting software, journals and ledgers aren’t the physical books they used to be—they’re stored online where you and your accountant and bookkeeper can access them anywhere. (Of course, you can keep physical journals if you want to, but they’ll make collaboration a lot harder and are much more difficult to back up than cloud-based files.)
Plus, if you use cloud-based accounting software like QuickBooks Online or Wave, each journal entry should sync automatically with your general ledger (GL). So instead of updating two physical books separately and doing calculations by hand, you just need to update one to update the other.
A balance sheet shows you whether your books are balanced at any given moment. Essentially, it functions as a snapshot of your business’s financial health; it’s also a basic reconciliation of your T sheets and should ensure your debits and credits match and balance.
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.
How do double-entry and single-entry accounting systems compare?
With the single-entry system, you record each transaction once instead of balancing it between two accounts. Think of it like a checkbook—you add income and subtract expenses. Each financial transaction has just one line, and you don’t make multiple entries in multiple accounts.
This process might sound like a time-saver up front, but on the whole, single-entry bookkeeping is inaccurate and unscientific. In other words, it’s a downright dangerous method for a small-business owner who wants to carefully track their business’s financial health.
Our advice? Always choose accounting software that relies on the double-entry bookkeeping method. While double-entry might feel like extra work, approaching your bookkeeping in the most accurate way possible will help you better understand—and trust!—what your financial records are telling you. From this perspective, single-entry accounting isn’t worth your time.
Recording every financial transaction twice, once as a credit and once as a debit, is a lot easier said than done—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 creating journal entries and balancing books as painless as possible.
Want more bookkeeping help as you launch your business? Check out our article on bookkeeping basics for small-business owners.
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