What Is Double-Entry Bookkeeping? A Simple Guide for Small Businesses
Double-entry bookkeeping is a system of accounting in which every financial transaction is recorded in two places. In other words, every time you make a sale, it's also recorded as an expense.
This system helps businesses keep track of their income and expenses with the help of SME cloud accounting software, and it also provides a record of how much money is owed to and by the business.
As a small business owner, you need to understand double-entry bookkeeping. This guide will teach you the basics and how to get started.
Who Uses The Double Entry System?
Double-entry bookkeeping is the standard system of accounting that is used by businesses and organizations all over the world. But why is it so popular? Well, because it's a system that helps businesses keep track of their expenses and income in a very accurate way. A debit and a credit are both recorded for every transaction. This way, business owners can track where their money is coming from and where it's going.
You must learn about double-entry bookkeeping if you're a small business owner. It's a system that will help you keep your finances in order and ensure your business runs smoothly.
What are The Rules of Double-Entry Bookkeeping?
By following the rules of double-entry bookkeeping, you can be sure that your accounts are accurate. These rules include the following:
- You must use at least two accounting books to record every business transaction or accounting entry.
- For each transaction, there must be an equal number of reported debits and credits.
- An organization's total assets must always equal its total liabilities plus equity. They must balance on both sides of this equation.
Double Entry Bookkeeping Examples
Double-entry bookkeeping records two entries for every transaction, one debit and one credit. This helps ensure that your books are balanced and takes into account both parts of a transaction. To illustrate this concept further, let's look at a few examples of double-entry bookkeeping:
- When you get paid for goods or services rendered, you will record a debit in Accounts Receivable and a credit in Cash.
- When you pay a vendor for goods or services received, you will record a debit in Cash and credit in Accounts Payable.
- When loan payments are made to a lender, you will record the debit in Cash and the credit in Loans Payable.
Double-entry bookkeeping ensures that your records stay accurate and up to date by making two opposite entries into two different accounts. It also eliminates any potential discrepancies between your records and those of other parties involved in the transaction.
Why Is Double Entry Bookkeeping Important?
Double-entry bookkeeping is essential in managing your business finances because it helps ensure that your accounts are accurate and up-to-date. By recording each transaction twice, you can keep tabs on your financial health and promptly address discrepancies.
Plus, double-entry bookkeeping lets you track how money flows through the business by creating actual financial statements. This helps to identify cash flow problems or cost overruns and any other possible issues within a company's budget. So you don't have to worry about hidden expenses or revenue sources—you can see exactly where the money is coming from and where it is being allocated.
How Is Single Entry Bookkeeping Different?
At its core, single-entry bookkeeping is the opposite of double-entry; transactions are only recorded once instead of twice. It's the more basic, straightforward bookkeeping method and records income and expenses in one ledger.
The upside to this type of system is that it's fast and simple to use (you only record transactions once, as opposed to twice), so it's ideal for small businesses with little to no accounting experience. The downside is that errors may go undetected since there are no checks and balances in place—which could lead to misinterpretations or sudden consequences down the line.
How Do You Start Double Entry Bookkeeping?
The first step to setting up a double-entry bookkeeping system is to create an appropriate chart of accounts through SME cloud accounting software. This allows you to classify your transactions into logical categories: revenue, expenses, and liabilities.
The next step is to enter your financial transactions into the appropriate account in your SME accounting software and reconcile them with bank records. Once all of your transactions are reconciled, you should then be able to generate reports like income statements and balance sheets. This will give you a better picture of your business financially.
Finally, ensure that you review your reports regularly to provide all the numbers add up correctly and that all the transactions have been entered correctly.
Conclusion
Double-entry bookkeeping can be an excellent way for small businesses to understand their finances better quickly and easily. While it may seem daunting, it can be relatively simple once you get the hang of it. If you're a small business owner, it's worth considering adopting this system.
