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

As a small business owner, there are many things you need to be aware of, and one of them is double-entry bookkeeping. If you’re just getting familiar with bookkeeping and everything, this might sound confusing but don’t worry, that’s why we’re here, to explain everything you need to know about double-entry accounting and why it is so important.

What Is a Double Entry Bookkeeping System?

Let’s answer the main question right at the start – double entry bookkeeping can be described as a method or type of bookkeeping where every financial transaction is recorded twice, so there are supposed to be two book entries, one debit entry, and one credit entry.

You’ll often stumble upon the term “double entry accounting system,” and it is the same thing. A transaction always includes one credit and one debit account, and the total of credits and debits must always be equal. The main purpose of a double journal entry is to allow spotting mistakes and fraud.

Who Should Use Double Entry Bookkeeping and Why?

Small business owners in the USA should know that the Financial Accounting Standards Board (FASB) is in charge of creating generally accepted accounting principles and methods used for this type of bookkeeping.

Using the double entry accounting system for every business transaction is a must for all public companies in the US. However, small businesses are not obliged to use this system for recording each and every financial transaction.

Still, it is highly recommended to rely on double-entry accounting for recording transactions, especially if you, as a small business owner, plan to request a bank loan at some point or if you have more than one employee. It will also help you track the growth and financial health of your business.

3 Golden Guidelines for Double-Entry Bookkeeping

To do things right, you have to ensure you follow some general guidelines for double-entry bookkeeping, and they are:

• Making two entries – Every accounting entry or transaction needs to be recorded two times in two different accounts.
• Equal credit and debit side – For every transaction, the credit entry has to have exactly the same amount as the debit entry.
• Assets liabilities – Total assets always have to be the same as total liability + equity so that both parts of the equation are in perfect balance.

Essential Accounting Equation

One might think you need accounting software to solve the accounting equation, but that’s actually not so complicated . Even if you have not paid attention in math classes, you will be able to do this on your own. The essential accounting equation that is the core of double entry bookkeeping goes like this:

 

Liability + Owners Equity = Assets

 

The asset account refers to the inventory account, so in case it increases for, for example, $2,000, liabilities (accounts payable) should also increase for the same amount.

Different Account Types You Should Be Familiar With

If the previously described accounting equation got you confused, don’t worry, here, we are going to explain all accounts you should be familiar with for double-entry bookkeeping.

• Liability account – shows the amount of debt a business has,
• Asset accounts – monetary values of everything that is in the possession of a business.
• Income account – shows revenue and keeps track of the money that’s coming in.
• Expense account – records payroll and other things a business spends money on.
• Equity account – a difference between liabilities and assets (business’s book value).

What Are Credits and Debits?

Credits and debits are common terms used to explain two sides of every transaction in double-entry bookkeeping. Credits stand for all decreases to an account, while debits stand for increases, they should always be equal.

• Debits – always inserted on the left side of your general ledger, for example, when you get a payment from a client, which adds to (debits) to the asset account.
• Credits – always inserted on the right side of the general ledger, for example, when a business purchase has been made, which decreases from (credits) the asset account.

Why Is Double Entry Bookkeeping So Important?

Many small businesses prefer to rely on single entry bookkeeping at the very beginning. However, although it might seem more complex, double-entry accounting comes with many advantages.

• Provides a financial picture – small business owners should rely on this accounting system because it allows them to track the financial well-being of their business, reduces the risk of fraud, and produces important reports such as an income statement and a balance sheet.
• Helps you make wiser decisions – from the financial statements you get, you can easily tell how profitable a business is and what its financial status is. Making decisions about loans, debts, and investments is much easier when you have a clear picture of the current state.
• Reduces the number of errors – a quick look at the balance sheet will easily tell you if any errors occurred. So if your credits and debits are not equal, there’s been a mistake.
• Looks good for banks and investors – whether you need a bank loan or an investment, you need to prove to the other side that your business is stable and profitable, and there is no more transparent way to do so than double-entry bookkeeping.

What’s the Difference Between Double Entry and Single Entry Accounting?

Both are good methods for keeping records of financial transactions. However, the difference is very straightforward, with single entry bookkeeping, each financial transaction is recorded just once and in one account. It is very similar to just using an Excel sheet to record your expenses. You get only a one-sided picture of transactions.

How Can Small Businesses Start With Double Entry Bookkeeping?

You can always do some research and hire a bookkeeper or an accountant to take care of this. However, the best way to do double-entry bookkeeping is by using reliable accounting software that makes the process look straightforward, even for beginners. One of those is LessAccounting, a perfect solution for modern businesses looking to do less accounting and more of what they know the best.