Recording transactions and keeping financial records are an essential part of owning a business. One way you can keep track of your finances is by using double-entry accounting. Read on to learn what is double-entry accounting and how it can benefit your books.
What is double-entry accounting?
Double-entry bookkeeping is an accounting method where you equally record a transaction in two or more accounts. A credit is made in at least one account, and a debit is made in at least one other account.
The double-entry bookkeeping method is based on the idea that every business transaction has equal and opposite effects on at least two accounts.
Double-entry accounting can help you:
Make better financial decisions Catch and reduce bookkeeping errors See a clear snapshot of company finances Maintain accurate accounting records
Single vs. double-entry bookkeeping
Single-entry bookkeeping is very different from the double-entry method. Just like it sounds, you record one entry for every transaction with single-entry.
Single-entry accounting is less complex than double-entry accounting. With the single-entry system, you record cash disbursements and cash receipts. And, you record incoming and outgoing money in the cash book.
The general ledger and double-entry accounting
Post journal entries to your general ledger with the double-entry system of bookkeeping.
Your general ledger is a record that sorts and summarizes your business transactions. You can use your general ledger to see where money is coming from and where it is going. With a general ledger, you can also see the amount of cash you have on hand and how much debt your business has.
The general ledger organizes transactions into accounts. A company ledger typically has five major accounts, including:
Assets: What your business owns Liabilities: What your business owes Equity: Assets minus liabilities Revenue: Money your business earns Expenses: Costs your business incurs during operations
You can also divide the major accounts in accounting into different sub-accounts. For example, you might use Petty Cash, Payroll Expense, and Inventory accounts to further organize your accounting records.
The general ledger reflects a two-column journal entry accounting system. Assets and expenses are on the left side of the ledger. Liabilities, equity, and revenue are on the right side. Both sides of the ledger should have equal balances.
Debits and credits
To balance your books, use debits and credits. Debits and credits are equal but opposite entries in your accounting books. If a debit decreases an account, you will increase the opposite account with a credit.
A debit is an entry made on the left side of an account while a credit is an entry on the right side.
Record credits and debits for each transaction that occurs. With double-entry in accounting, record two or more entries for every transaction.
Credits and debits affect each account differently. Check out this chart to see how each type of account is impacted:
Keep in mind that debits and credits offset each other, and the sum of debits should be equal to the sum of credits.
Use the accounting equation to ensure your transactions are always balanced in your books. The accounting equation shows that liabilities plus equity are equal to your assets. Here is the equation:Continue reading