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

Double-entry bookkeeping is widely adopted by businesses to help manage finances. It works by entering each transaction into at least two different accounts, once as a debit and once as a credit.

Whilst it may sound simple in theory, credit and debit have different meanings in the world of accounting.

Key terminology:

Debit: When it comes to accounting, debit is what increases assets or expense accounts
Credit: Credit increases a liability, equity, or revenue account
Journal entry: This indicates what accounts are affected by a transaction, and whether they are debited or credited
Ledger account: Where journal entries get posted, providing an account-by-account view of a company’s financials
Balancing: The sum of all debits must be equal to the sum of all credits

This is all tied to the accounting equation. The equation states that assets must always equal liabilities plus equity.

In more simple terms, the things you own (assets) are financed by debt (liabilities) or investments (equity).

Benefits of double-entry bookkeeping

Although complex, there are a plethora of reasons why so many are using double-entry bookkeeping to keep tabs on their business’ finances.

One of the biggest benefits of using double-entry bookkeeping is the accuracy of it. Since each transaction is recorded at least twice and must balance, it means that your finances are checking themselves. If your accounts are not balanced, it is a quick way to spot mistakes that need investigation.

Double-entry bookkeeping also builds a complete financial picture of your business. Decision-making and financial planning are made easier by this bookkeeping method, tracking what you own, what you owe, and how you finance it.

It also allows you to report your financials more easily, to better understand your business#’ financial health. You can systematically generate your Balance Sheet, Profit and Loss Account, and Cash Flow Statement.

Can I do this myself?

Whilst some business owners do double-entry bookkeeping themselves, it is not recommended for the faint-hearted. There are many challenges of double-entry bookkeeping, including:

Complexity: In theory, double-entry bookkeeping appears to be straightforward, but it can be complicated for the uninitiated to implement. Small mistakes from the start can lead to imbalances that negatively impact your business.
Time-consuming: Any form of bookkeeping can be an arduous task. However, double-entry bookkeeping is particularly time-consuming. Business owners are often better off spending their time in other areas of their business.
Cost-effectiveness: While outsourcing bookkeeping to an accountant may sound expensive, it can often save you time and money in the long run. An accountant can provide expert advice and insight into your business’ finances, allowing you to make the most of your money.

Double-entry bookkeeping is a vital tool for providing accuracy, understanding, and reporting of your business’s financial management.

Due to its complexity, it is highly recommended to outsource your double-entry bookkeeping to a trusted accountant. Whilst it may appear to be an unnecessary cost, it is an investment into your business’s future.

If you would like to start using double-entry bookkeeping for your business, get in touch with one of our experts today.