What is double-entry bookkeeping, and how does it work?

As a small business owner, you could use an Excel sheet to keep track of your money. You could also look at your bank statements to see how much money you have spent or saved. It's a good place to start, but only if you're just beginning. "Single-entry system" is the term used in this case.

A single-entry system will make it more challenging to keep track of records as your business grows. The answer you need is double-entry bookkeeping. This method of accounting is more complex, but it gives you a more complete picture of your business's finances.

Double-entry bookkeeping is the backbone of your business's financial reporting. Business owners need to be aware of this method to manage their accounting processes and analyze their financial results. Let's find out more about double-entry bookkeeping and an example of it.

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Table Of Content

What is double-entry bookkeeping?

Why is double-entry bookkeeping important?

How does double-entry bookkeeping first work?

Three rules to remember for double-entry bookkeeping

A real example of double-entry bookkeeping

Closing

What is double-entry bookkeeping?

Double-entry bookkeeping ensures that financial records are correct (also referred to as double-entry accounting). It means that every financial transaction has to be written down twice, in two different accounts. Every transaction must be entered twice: once as a credit in one account and once as a debit in the account that goes with it.

A double-entry system gives each transaction a check and balance, which helps make sure it is correct and prevents fraud. This system also lets you keep better track of your business' finances and make better business decisions.

Why is double-entry bookkeeping important?

You may find many benefits when implementing double-entry bookkeeping:

  • Reduces errors in bookkeeping

  • Make more accurate financial statements (balance sheets, income statements)

  • Deliver a clear picture of how a company's money is doing

  • Spot mistakes and fraud easier

  • Have useful information when making decisions

How does double-entry bookkeeping first work?

Double-entry bookkeeping starts with the balance sheet, which includes assets, liabilities, and equity. A balance sheet ensures that the accounting equation is balanced.

Assets=liabilities+equity

The accounting equation helps spot errors. When the total debits for all accounts don't equal the total credits for all accounts, a mistake has occurred.

Yet, completing the equation does not guarantee that no errors will arise. There may still be a "balance" even if the incorrect ledger accounts have been debited or credited.

So, more businesses are shifting to software to standardize the accounting process while also improving accuracy and error detection.

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Three rules to remember for double-entry bookkeeping

  1. Every company transaction or accounting entry must be recorded in at least two accounts.

  2. Each transaction's debits and credits must balance.

  3. Total assets must equal total liabilities plus equity for a firm. This equation must balance.

A real example of double-entry bookkeeping

Double-entry bookkeeping for a business expense:

A business website domain costs you 10 dollars. When you purchase the domain, your advertising expense rises by $10 but your cash falls by $10.

To record this transaction in your ledger, money is credited while advertising costs are debited.

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Closing

Double-entry bookkeeping is commonly done with the help of accounting software. The software allows businesses to create accounts. You may also connect your business bank account if you'd like to simplify your company's financial record-keeping.

Accounting software makes it easy to produce reports, which simplifies tax season and year-end preparations.

When it comes to your company's double-entry accounting, you may choose to hire an accountant and bookkeeper. If you own a small construction firm and don't know bookkeeping, CCA can help. We are a team of bookkeeping professionals who specialize in the construction sector and utilize accounting software with double-entry bookkeeping features. Let us handle your bookkeeping while you focus on running your own business. You can schedule a free call with us at any time to learn more about how we can help your construction bookkeeping.

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