How To Do Double Entry Bookkeeping?
Double-entry accounting and double-entry bookkeeping mainly use debit and credit to record and manage financial transactions. Double entry accounting at the core is based on the accounting equation where the assets would be equal to the liability and the owner’s equity. You can be assured of all the transactions following the rules of the accounting equation when you use double-entry bookkeeping. Using this system is just the way to do that. It is very different from single-entry bookkeeping, which requires only that you post a transaction in the Ledger. At the same time, a double increase keeps track of both sides, including the debit and credit for all transactions you enter.
The basics you need to know about double-entry bookkeeping?
All the transactions under double entry bookkeeping are recorded in 2 accounts: the Ledger, which is the debit to one account, and credit to another. For more challenging transactions, there might be more than two entries also. For example, selling a product might increase the revenue account, decrease your inventory account, and create a tax liability when the sales tax is collected.
Understanding the main elements of Ledger
- Assets
Assets are anything your business owns, like inventory, cash, and accounts receivable.
- Liabilities
The business owes liabilities, like loans, taxes, and accounts payable. The next planet’s equity reflects retained earnings and owner’s equity.
- Revenue
Revenue is the money that flows into your business which includes things including sales and investment.
- Expenses
It includes the money that flows from the business, like the rent, advertising insurance, and payroll.
The working of double-entry bookkeeping
You now know that when you choose double-entry bookkeeping, you must make two journal entries to record the business transaction. So if the transaction involves trading around one set for another asset, you have to adjust both your equipment and the cash account. To make the adjustment well, you must follow some debit and credit rules. The debit and credit rules make all the difference.
Debits
- They increase your asset account
- Decrease your liability or equity account
- Decrease your revenue account
- Enhance your expense account.
Credits
- They decrease the asset account.
- Enhance the liability or equity account
- Increase your revenue account
- and minimize the expense account
Why is double-entry bookkeeping vital?
Double-entry bookkeeping provides a complete 3D picture of the finances, which is very different from your single-entry method. It makes for a more insightful way to keep a tab on your company’s financial health. The double entry system also provides the accountants with all the information they need to create financial statements like balance sheet income statements, cash flow statements, and the statement of retained earnings.
The double-entry bookkeeping system is pretty accurate and is one of the best ways to check how quickly the business is growing. Additionally, it is more complete under a transparent system which is the preferred method for all the buyer’s investors and the bank. Hence you should consider double-entry accounting for your business instead of single-entry bookkeeping.
