Double-entry bookkeeping is a system of bookkeeping that provides a more detailed view of your financial transactions at a glance.
For those new to bookkeeping, double-entry bookkeeping can seem complex. We’ll break down what you need to know about it, how it works, and how it differs from single-entry bookkeeping.
What is Double-Entry Bookkeeping?
Double-entry bookkeeping is a bookkeeping method. Like single-entry bookkeeping, the goal of double-entry bookkeeping is to have your books balanced.
Another goal of double-entry bookkeeping is to have all debits and credits accounted for. Debits and credits appear on transaction entries in double-entry bookkeeping, and each has a few important rules.
How Does Double-Entry Bookkeeping Work?
Whenever your small business does a transaction, double-entry bookkeeping occurs. When an account decreases in value as a debit, the other will increase in value as a credit.
Double-entry bookkeeping has several rules that you should know about. The most important is in regards to debits and credits because both affect other parts of your chart of accounts.
- Decrease liabilities and owner’s equity on balance sheets
- Increase assets on balance sheets
- Increase expense accounts on an income statement
- Decrease assets on balance sheets
- Increase liabilities and owner’s equity on balance sheets
- Increase revenue on an income statement
The chart of accounts, showing your balance sheets and income statement, will have five categories that debits and credits will influence:
- Accounts receivable
- Inventory assets
- Petty cash balance
- Prepaid insurance
- Savings funds
- Undeposited funds
- Accounts payable
- Accrued liability
- Notes payable
- Company credit card balances
- Owner’s equity
- Common stock
- Preferred stock
- Retained earnings (accounts associated with the owner’s equity)
The chart of accounts affects credits and debits in the following ways:
- Assets: Increase debit; Decrease credit
- Liabilities: Increase credit; Decrease debit
- Equity: Increase credit; Decrease debit
- Revenue: Increase credit, Decrease debit
- Expenses: Increase debit, increase credit
On an income statement, debits increase balances in expenses and loss accounts. Credits will decrease those balances. Debits will decrease revenue, while credits increase the revenue balance.
Every transaction that your business makes will require one debit and one credit. There is no limit to the number of transactions that can use credits or debits.
Double-entry bookkeeping must also follow this equation: Assets = Liabilities + Equity.
- Cash equivalents
- Liquid assets (certificates of deposit or Treasury bills)
- Dividends payable
- Long-term debt
Equity, or shareholders’ equity, is the company’s total assets minus its liabilities. This is the equivalent of the money that shareholders would receive if assets were liquidated and debts were paid.
Companies can also have retained earnings. Retained earnings are part of shareholders’ equity. These earnings are equal to the percentage of net earrings unpaid to shareholders as dividends.
How is it Different than Single-Entry?
In double-entry bookkeeping, each account has two columns per transaction, and each transaction is in two accounts: debit and credit. Single-entry only requires one entry per transaction, one that can affect either expenses or revenue.
Double-entry bookkeeping accounts list accounts for assets, expenses, income, and liability. On the other hand, single-entry bookkeeping only lists expenses and income.
Double-entry bookkeeping also allows you to monitor multiple accounts. This can help you manage a larger business. All of your company’s financial activities will appear in one place, and transactions will have easy to find descriptions.
Finally, double-entry bookkeeping contains more detailed information about your financial transactions. You’ll examine your equity, losses, and profits instead of only profits and losses like single-entry bookkeeping.
Example of Double-Entry
An example of double-entry bookkeeping may help you understand how double-entry bookkeeping works. If your business spends $5,000 on office supplies purchased in cash, you’ll add how you purchased the item, and the item purchased.
Cash works as an asset. This means that it will increase credits. You’ll add the $5,000 as an entry in both the credit and the debit sections. After doing this, you’ll have records of how you purchased the office supplies and what you used the money to purchase.
On the income statement, you’ll add the following information:
- The type of account and any sub-categories (either expenses and losses or revenue and gains)
- The name you’ll record the transaction as
- Amount paid for each item, listed in the column to the right of the transaction name
- The total amount for the category
To write this entry as an accounting journal entry, you’ll write this entry similarly.
First, you’ll write four columns:
- Account Name
Then, you’ll add:
- The date of the entry (in the top row in the left-most column)
- The account name (office supply expense, in this case) and payment type (cash)
- Debit (the amount paid for the office supplies)
- Credit (the amount used to purchase the office supplies)
Work with the Professionals
Double-entry bookkeeping is a complex but beneficial form of bookkeeping to use for your business’s finances. If you have questions about your bookkeeping or are interested in hiring a professional accountant to handle your finances, work with the pros at 1-800Accountant.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.