How does double-entry bookkeeping work?

double entry accounting

Double-entry bookkeeping can appear complicated at first, but it’s easy to understand and use once the basic concepts have been learned. There are recorded instances of double-entry bookkeeping from as far back as 70 A.D. When you log into your bank account online, double entry accounting or receive your bank statement in the mail, you’ll see a list of all of your activity for the month. That activity includes things like the $5.50 you spent at the coffee shop during your breakfast meeting as well as the customer payment you deposited.

Single-entry bookkeeping is much like the running total of a checking account. You see a list of deposits, a list of purchases, and the difference between the two equals the cash on hand. For very small businesses with only a handful of transactions, single-entry bookkeeping can be sufficient for their accounting needs. If a company sells a product, its revenue and cash increase by an equal amount. When a company borrows funds from a creditor, the cash balance increases and the balance of the company’s debt increases by the same amount.

Debit Definition

Double-entry bookkeeping creates a “mirror image” of both sides of each financial transaction, allowing you to compare one column of credits against a column of debits and easily spot any discrepancies. Although single-entry bookkeeping is simpler, it’s not as reliable as double-entry and isn’t a suitable accounting method for medium to large businesses. The double entry accounting system would record this even by crediting cash, an asset account, for the payment to the dealership and debiting vehicles, another asset account, for the receipt of the new car.

The sheet is balanced because a company’s assets will always equal its liabilities plus equity. Assets include all of the items that a company owns, such as inventory, cash, machinery, buildings, and even intangible items such as patents. A debit entry will increase the balance of both asset and expense accounts, while a credit entry will increase the balance of liabilities, revenue, and equity accounts. Thus, the asset account is increased with a debit and the liabilities account is equally increased with a credit.

Leave a Comment

Your email address will not be published. Required fields are marked *