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