Jurnal Enterpreneur

What is Double Entry Bookkeeping? How Does It Work?

Double entry bookkeeping is one method for keeping track of your finances. Continue reading to find out what double-entry accounting is and how it can help you with your finances.

Every company’s accounting system is built on the foundation of journal entries. Financial transactions are recorded by bookkeepers as journal entries, which increase or reduce the amount of money in various accounts depending on the type of transaction.

Each journal entry in double entry bookkeeping updates at least two accounts in the general ledger of the company, using an equal balance of debits and credits to those accounts.

Each journal entry is considered to have two sides since it contains both debits and credits.

What is Double Entry Bookkeeping in Accounting?

Double entry bookkeeping is an accounting method in which a transaction is simultaneously recorded in two or more accounts. A credit is applied to at least one account, while a debit is applied to at least one other account.

Every company transaction has equal and opposite consequences on at least two accounts, according to the double entry accounting approach.

Consider a spreadsheet that has two columns: one for expenses and the other for credits. The term “double-entry” refers to the fact that each transaction is recorded twice, once in the expenses and once in the credits. You can look into why the columns aren’t balancing.

Let’s imagine you have a $5,000 amount on a business credit card that you wish to pay off. The cash account of your corporation would be depleted by $5,000; this is a debit/expense.

Simultaneously, you would deduct $5,000 from the company’s present debt, which is considered a credit. To balance the line items, the transaction is recorded twice, once in subtraction and once in addition.

Double entry bookkeeping can assist you in the following ways:

  • Improve your financial decisions
  • Minimize errors in bookkeeping
  • Get a detailed picture of the company’s finances.
  • Keep a precise financial records.

Double Entry vs Single Entry Bookkeeping

For recording financial activities, single-entry accounting is an alternative to double entry bookkeeping. Single-entry accounting resembles a check register or bank statement with a list of transactions.

The usage of cash-basis accounting vs. accrual accounting is directly related to single-entry accounting and double-entry accounting. Each entry in cash-basis accounting consists of a debit or credit to a single account, as the name implies.

While single-entry accounting is easier to set up, it has a number of drawbacks when compared to double-entry accounting.

Because it lacks the double entry bookkeeping control method of balancing accounts, it is more prone to errors, particularly omissions and duplications.

Furthermore, because it simply tracks cash inflows and outflows, reflecting when cash is in hand versus when it is earned, single-entry accounting does not provide a complete financial picture of the organization.

It also doesn’t account for items like credit card sales. Finally, producing balanced financial accounts necessitates more effort during the closing process.

Because single-entry accounting isn’t recognised by GAAP, it can’t be used by public corporations.

Type of Accounts

When documenting transactions in double entry bookkeeping organizations can utilize any combination of the five categories of accounts – assets, liabilities, equity, revenue, expense, gains and losses.

There are two sides to each journal entry, with debits on the left and credits on the right. Whether an account has a typical debit or credit balance, and hence whether debits or credits increase the balance, is determined by the account type.

The Equation of Accounting

When we look at the accounting equation, one of the fundamental concepts of accounting, the above becomes evident. On both sides, the answer to this equation must be the same.

Here’s how it works:

Liabilities + Equity = Assets

As a result, if assets increase, liabilities must increase as well in order for both sides of the equation to balance.

Need An Accounting Software for Your Business? Jurnal is The Solution to the Double Entry Bookkeeping System

Accounting software is typically used to perform double entry bookkeeping. A business can use bookkeeping software to create special accounts,  to track purchases of items. You can also link your business bank account to make transaction logging even easy.

Accounting software also makes it simple to prepare reports, which makes preparing for tax season and the end of the year much easier.

You can engage an accountant to help you with this. Jurnal by Mekari, on the other hand, offers a straightforward accounting solution for small business owners with no prior accounting experience.

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