If you own a small business, you have to record business transactions using one of two methods: or single-entry or double-entry bookkeeping.
These might sound like difficult things to do, but we’re here to help!
In this article, we’re going to explain double-entry bookkeeping in layman’s language, how it’s different from single-entry bookkeeping, how to go about it, and why it’s vital to your business.
Double-entry bookkeeping explained
Double-entry bookkeeping is a field of accounting that involves recording transactions into two types of accounts – for instance, credit to one account and debit to another.
For example, when a business gets a £750 loan, assets are credited £750, and liability is debited £750. The £750 is an outstanding debt and an increase in cash.
How is it different from single-entry bookkeeping?
Single-entry accounting involves entering all business transactions (payroll, revenues, and expenses) in a single ledger. This method is quick and easy, but this is as far as the benefits go.
Single-entry bookkeeping doesn’t track liabilities or assets, meaning there’s a higher risk of mistakes. This means it won’t always show you the true health of your business.
In order to minimise these errors, the new double-entry bookkeeping system was invented.
The double-entry bookkeeping system provided accountants with all the information they needed to make considerable financial statements like:
- Statements of cash flows
- Income statements
- Statements of retained earnings
- Balance sheets
In short, double-entry bookkeeping enables us to perform modern day accounting.
How to perform double-entry accounting
Double-entry accounting is performed using accounting software. Businesses can create a custom account to record the purchases of smartphones, computers, and printers.
You can also connect your business’s bank account to make recording your transactions easy. If you prefer, you can also hire accountants to do this work for you.
Double-entry bookkeeping rules
- Increase expenses account
- Entered on the left side of the ledger sheet
- Decrease a liability or an equity account and increase an asset account
- Decrease revenue
- Recorded on the right side of a ledger
- Increase revenue
- Increase a liability or equity account. Or decrease an asset account
- Decrease expense account
Let’s assume that you’ve purchased a new £2,000 laptop for your business.
You’ll make two entries in double-entry bookkeeping. You make a trade for one asset (cash) and another asset (laptop). You then have to enter cash and asset accounts in your book.
Take a look at the below table which gives an example:
Every debit has a corresponding credit that conforms to the below equation balance:
Assets = Liabilities + equity
This is referred to as the accounting equation and forms the basis of double-entry bookkeeping. If this equation is out of balance, it means a mistake has been made along the way.
In our example, only the asset side of the equation is affected. Your cash asset decreases by £2,000 and your laptop asset increases by £2,000, keeping the equation balanced.
Should you use double-entry accounting?
If you have a simple sole proprietary business that doesn’t have any inventories or debt, has a few employees, and not many accounts to keep track of, a single entry might be just enough for your needs.
If you have a complex business, it’s advisable to switch to double-entry bookkeeping.
This is because double-entry bookkeeping has a more complete and comprehensive view of your business finances.
It also decreases the chances of making accounting errors, increases the transparency of your finances, and facilitates accountability.
If you’re looking for professional double-entry accountants, look no further than Accountants East London. You can rely on us for an efficient accountancy service without breaking the bank.