Double Entry Accounting

Double entry bookkeeping is an accounting method that keeps a company's accounts in balance, showing a true financial picture of the company's finances. This method is based on the use of the accounting equation Assets = Liabilities + Equity.

Credits from one account must equal debits from another to keep the equation balanced. Accountants use debit and credit entries to record transactions for each account, and each of the accounts in this equation is shown on the company's balance sheet.

Double-entry accounting has been used for hundreds, if not thousands, of years; It was first documented in a book by Luca Pacioli in Italy in 1494.

Definition of double entry accounting

True to its name, double-entry bookkeeping is a standard accounting method that involves recording each transaction in at least two accounts, resulting in a debit to one or more accounts and a credit to one or more accounts.

The total value of the transactions in each case must be balanced, ensuring that all dollars are accounted for. Debits are generally posted on the left side of the ledger, while credits are generally posted on the right side.

Public companies must follow the accounting rules and methods dictated by generally accepted accounting principles (GAAP), which are controlled by a non-governmental entity called the Financial Accounting Standards Board (FASB).

Double-entry bookkeeping also serves as the most efficient way for a business to monitor its financial growth, especially as the scale of the business grows.

Keep accurate books

As a company's business grows, the likelihood of clerical errors increases. Although double-entry bookkeeping does not completely prevent errors, it limits the effect that any errors have on the general accounts.

Because the accounts are set up to check every transaction to ensure there is a balance, errors will be reported to the counters quickly, before the error results in subsequent errors in a domino effect. Additionally, the nature of the account structure makes it easy to track entries to discover the source of an error.

Account types

When you use double entry accounting, you will need to use several types of accounts. Some main account types include:

Asset accounts show dollars associated with things a business owns, such as money in its checking account or the price paid for your deposit.
Liability accounts show what the business owes, such as a construction mortgage, equipment loan, or credit card balances.
Income accounts represent money received, such as sales income and interest income.
Expense accounts show money spent, including goods purchased for sale, payroll, rent, and advertising costs.
The double entry system requires a chart of accounts, which consists of all the balance sheet and income statement accounts to which the accountants post. A given business can add accounts and customize them to more specifically reflect the business's reporting, accounting, and operational needs.

Using accounting software

Most business accounting programs use double entry accounting; Without this feature, an accountant would have a difficult time tracking information such as inventory and accounts payable and preparing year-end and fiscal records. The basic double-entry accounting framework comes with business accounting software packages. When setting up the software, a company would configure its generic chart of accounts to reflect the actual accounts that the company already uses.

Accounting software generally produces several different types of financial and accounting reports, in addition to the balance sheet, income statement, and cash flow statement. A commonly used report, called a trial balance, lists all the G / L accounts that have some activity.

The trial balance identifies all accounts with a normal debit balance and those with a normal credit balance. The balance sheet total must always be zero and the total debits must be exactly equal to the total credits.

Examples of double entry accounting

As an example of double entry bookkeeping, if you were to record sales revenue of $ 500, you would need to make two entries: a debit entry of $ 500 to increase the account balance called "Cash" and a credit entry of $ 500 to increase income. account statement called "Income".

Another example could be buying a new computer for $ 1,000. In this example, you would need to enter a debit of $ 1,000 to increase your "Tech" expense account on the income statement and a credit of $ 1,000 to decrease your "Cash" balance account.

The reverse is also true: if your business borrows money from a bank, your assets will increase, but your liabilities will also increase accordingly. Double-entry bookkeeping checks for accuracy because after completing your entries, the sum of the accounts with debit balances must equal the sum of the accounts receivable, ensuring that you have captured both sides of the transaction.

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Source: Daniel King

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