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.

Who Invented Double Entry Accounting?

Luca Pacioli, a monk with a penchant for numbers and a touch of magic, stumbled upon this unique accounting method in Venice. In 1494, he penned an extensive mathematical tome, dedicating a chapter to the intricacies of double-entry accounting.

With the advent of the printing press, his work gained widespread popularity. Among its early admirers was Leonardo da Vinci, then immersed in creating The Last Supper. Da Vinci was particularly captivated by Pacioli’s insights into the math behind perspective painting.

However, Pacioli’s lasting legacy remains that small chapter on accounting. Today, double-entry bookkeeping is universally adopted by businesses and nations alike.

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? Mekari 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. Mekari Jurnal, on the other hand, offers a straightforward accounting solution for small business owners with no prior accounting experience.

Get a 14-day free trial or contact us for more information.

The Significance of Double-Entry Accounting

Before delving into the features of double-entry accounting software, it’s crucial to understand the underlying accounting method. Double-entry accounting is a foundational accounting principle that dates back to the 15th century. It’s based on the premise that for every financial transaction, there are at least two entries made – a debit and a credit. These entries ensure that the accounting equation (Assets = Liabilities + Equity) remains in balance.

Double-entry accounting provides several benefits, including:

1. Accuracy: By requiring every transaction to have two corresponding entries, double-entry accounting reduces the likelihood of errors and omissions in financial records.
2. Transparency: It offers a clear and comprehensive view of a company’s financial position, making it easier to analyze and make informed decisions.
3. Compliance: Many regulatory bodies and accounting standards, such as Generally Accepted Accounting Principles (GAAP), require businesses to use double-entry accounting for financial reporting.

Now, let’s explore the key features of double-entry accounting software that facilitate these benefits.

Key Features of Double-Entry Accounting Software

In the realm of accounting, precision and accuracy are paramount. Whether you’re managing the finances of a small business, a midsize enterprise, or even your personal financial matters, keeping a clear and organized record of your financial transactions is essential. This is where double-entry accounting software comes into play. Such software is designed to help you maintain financial records meticulously, ensuring that every financial transaction is recorded accurately, ultimately leading to a balanced and error-free financial picture. In this comprehensive guide, we will delve into the essential features of double-entry accounting software and explore some of the top options available in the market.

1. Cash Flow and Income Statements

Accurate and up-to-date cash flow and income statements are fundamental for understanding a business’s financial health. Double-entry accounting software provides the capability to generate these statements seamlessly. Cash flow statements outline the movement of cash into and out of the business, helping to identify trends and ensure sufficient liquidity. Income statements, also known as profit and loss statements, detail revenues and expenses, ultimately revealing the profitability of the business.

These statements are crucial for making informed financial decisions and are often required for reporting to stakeholders, investors, and tax authorities.

2. Balance Sheets

A balance sheet is another critical financial statement that provides an overview of a company’s assets, liabilities, and equity at a specific point in time. It serves as a snapshot of the company’s financial position. Double-entry accounting software automates the creation of balance sheets by continuously updating and reconciling the data from financial transactions.

Balance sheets are invaluable for assessing a company’s solvency, determining its ability to meet short-term and long-term obligations, and evaluating its overall financial stability.

3. Bank Reconciliation

Bank reconciliation is the process of matching and comparing a company’s recorded financial transactions with those on the bank statement. Discrepancies, such as missing transactions or errors, can be identified and rectified through bank reconciliation. Double-entry accounting software streamlines this process by automatically importing bank and credit card transactions and facilitating reconciliation.

Bank reconciliation is vital for ensuring the accuracy of financial records and preventing discrepancies that can lead to financial mismanagement.

4. Invoicing and Expense Tracking

Efficient invoicing and expense tracking are essential for managing a company’s cash flow. Double-entry accounting software typically includes features for creating and sending invoices to customers, tracking payments, and recording expenses. This functionality simplifies the invoicing process, reduces manual data entry, and helps maintain a comprehensive record of all financial transactions.

Invoices generated through accounting software are often customizable, allowing businesses to add their branding elements and tailor the content to their specific needs.

5. Accounts Payable and Receivable

Accounts payable (AP) and accounts receivable (AR) are core components of a company’s financial operations. Accounts payable refers to the money a business owes to its suppliers and creditors, while accounts receivable represents the money owed to the business by its customers. Double-entry accounting software includes features to manage both AP and AR effectively.

For accounts payable, the software enables the tracking of outstanding bills, due dates, and payment scheduling. On the other hand, for accounts receivable, it assists in monitoring outstanding invoices, payment collection, and aging analysis to identify overdue payments.

6. Mobile Accessibility

In today’s fast-paced business environment, mobility is key. Many double-entry accounting software solutions offer mobile apps or responsive web interfaces, allowing users to access their financial data from anywhere, at any time, using smartphones and tablets. This mobility is especially beneficial for small business owners who are constantly on the go and need to manage their finances remotely.

Now that we have a clear understanding of the essential features of double-entry accounting software, let’s explore some of the top options available in the market.

Top Double-Entry Accounting Software Options

To help you kickstart your search for the right double-entry accounting software, we’ve compiled a list of some of the best options, each known for its unique features and capabilities:

1. Kashoo

Key Features:

• Designed for small business owners
• User-friendly interface
• Collaboration with accountants
• Mobile apps for on-the-go accounting
• Real-time dashboard views for tracking debit and credit entries

Kashoo is highly regarded for its simplicity and user-friendliness, making it an ideal choice for small business owners who prefer to manage their accounting independently. It offers native apps for both iPhone and iPad, allowing users to access their financial data on any device. Kashoo’s real-time dashboard provides a clear view of financial transactions, making it easier to track and balance accounts.

2. QuickBooks Online

Key Features:

• Popular choice among small business owners
• Comprehensive dashboard for tracking payments, reports, and invoices
• Custom report creation
• Cash flow and expense tracking
• Multiple pricing plans to suit various business needs

QuickBooks Online is a powerhouse in the world of accounting software, with a large user base among small business owners. It offers a robust dashboard that allows users to monitor payments, create custom reports, manage profit and loss statements, and handle billing and invoicing tasks. The software also excels in tracking cash flow, due dates, income vs. expenses, and more.

3. Sage Intacct

Key Features:

• Ideal for midsize businesses
• Robust double-entry accounting capabilities
• Workflow and cash management
• Automation of transaction processing and approvals
• Customizable templates for invoices and reports

Sage Intacct stands out as a top choice for midsize businesses seeking full control over their double-entry accounting processes. While it comes at a higher cost, it offers comprehensive features, including workflow and cash management, balance sheets, and automation of transaction processing. Users appreciate the flexibility to customize templates for invoices, email communication, and reports.

4. Wave

Key Features:

• Tailored for small teams (nine employees or less)
• Free accounting software
• Automated bank connections for seamless data entry
• Real-time collaboration with bookkeepers
• Invoicing and credit card payment collection

Wave is an excellent choice for budget-conscious small businesses with a limited number of employees. It offers free accounting software with automated bank connections, simplifying data entry. Users can collaborate with bookkeepers in real time, send invoices, and collect credit card payments. Wave’s automatic updates upon receiving payments streamline financial tracking.

5. Xero

Key Features:

• Focus on providing clear accounting information
• Dashboard for tracking outstanding invoices and bills
• Automatic import of bank and credit card transactions
• Real-time transaction matching
• Multiple pricing plans to accommodate different business sizes

Xero is designed to offer small business owners clear and concise accounting information. Its dashboard provides an overview of outstanding invoices, upcoming bills, and key financial metrics. The software excels in automatically importing daily bank and credit card transactions and matching them with corresponding accounting entries. Xero offers multiple pricing plans, making it suitable for various business sizes and budgets.

Choosing the Right Double-Entry Accounting Software

Selecting the right double-entry accounting software is a crucial decision that can significantly impact your financial management processes. To make an informed choice, consider the following steps:

1. Identify Your Business Needs: Start by assessing your business’s specific accounting requirements. Consider factors such as the size of your business, the number of transactions, and the complexity of your financial operations.
2. Budget: Determine your budget for accounting software. Some solutions, like Wave, offer free options, while others, such as Sage Intacct, may require a substantial investment.
3. Scalability: Choose software that can grow with your business. Scalability is essential if you anticipate an increase in transaction volume or business expansion.
4. User-Friendliness: Consider the ease of use of the software, especially if you or your team members are not accounting experts. A user-friendly interface can streamline the learning curve.
5. Integration: Check if the software can integrate with other tools and software you use in your business, such as payment processors, e-commerce platforms, or customer relationship management (CRM) systems.
6. Mobile Accessibility: If you need the flexibility to manage your finances on the go, prioritize software that offers mobile apps or responsive web interfaces.
7. Support and Training: Ensure that the software provider offers adequate customer support and training resources. Quick and responsive support can be invaluable when you encounter issues or have questions.
8. Reviews and Recommendations: Read user reviews, seek recommendations from peers, and explore independent assessments of the software’s performance and reliability.

By following these steps and considering the features of double-entry accounting software discussed in this guide, you can make an informed decision that aligns with your business’s financial needs and goals.

Conclusion

In the world of accounting, precision and transparency are non-negotiable. Double-entry accounting software plays a pivotal role in helping businesses, from small startups to large enterprises, maintain accurate financial records and make informed financial decisions. By offering features such as cash flow statements, balance sheets, bank reconciliation, invoicing, and expense tracking, this software empowers users to manage their finances effectively.

As you embark on your search for the right double-entry accounting software, keep in mind that the choice should align with your business’s unique requirements, budget constraints, and growth aspirations. Whether you opt for a user-friendly solution like Kashoo, a well-established platform like QuickBooks Online, or a robust system like Sage Intacct, the goal remains the same – achieving financial clarity and control.

Investing in the right double-entry accounting software is an investment in the financial health and longevity of your business. Make your choice wisely, and let precision and accuracy guide your financial journey.