QuickBooks Double-entry bookkeeping is the standard accounting system used by small and large businesses today. It involves recording every financial transaction in two different accounts within the general ledger - a debit in one account and a corresponding credit in another account.
If you are the owner of a small enterprise and have stumbled upon the concept recently, then you should give this article a thorough read. The elaborately explained guide will present you with an insight into the nitty-gritty of the system, the working mechanism, and more.
What is the Concept of Double-Entry Bookkeeping?
The notion that every transaction involves at least two accounts if not more, is central to the concept of double-entry accounting. For instance, if a corporation procures a loan, the cash account will lead to an increment in the funds from that loan. Additionally, the liability account will also increase under the specific account category (also known as loans payable). Similarly, if a corporation buys a print ad, its cash account shrinks but its expenditure account, which falls under the category of advertising expense, grows.
The essential logic is to always maintain a balance, so the double-entry bookkeeping system can employ the accounting equation, also called the financial compliance equation by many experts. The equation can be understood better by the following representation.
The key principles of double-entry bookkeeping are:
Assets = Liabilities + Equity
This fundamental accounting equation ensures that the balance sheet always balances, as the total assets of a business must equal the total of its liabilities and equity.
Debits and Credits
Each transaction is recorded with a debit (an increase) in one account and a credit (a decrease) in another account. This ensures the accounting equation remains in balance.
Another aspect of the double-entry notion is that amounts recorded as debits must be identical to amounts added as credits in general ledger accounts.
The underlying principle in each of these components is that every transaction has two impacts that must be considered, commonly known as the Duality Principle. This notion states that even when a firm spends money from its accounts, it receives something in return, such as an advertisement or something else. An accounting system would only present a limited picture of how a firm handles its money if it did not recognize that there is an asset acquired for every spend.
Each transaction is entered into a document or general ledger sheet, which is typically a balance sheet ledger account (liability, asset, and equity components) or income statement ledger account (expenditures and income) with columns for credit and debit entries.
- Debit entries, which appear on the left side of a transaction, have specific consequences, such as a rise in costs or assets and a loss in income, equity, or debt.
- Other consequences occur on the credit entry side, which is located on the right side of a transaction, such as a drop in costs or assets and an increase in revenue, equity, or liabilities.
What is the Use of the Double-Entry Accounting System?
Here are some instances of how this theory is used in real-world accounting to demonstrate what it implies:
- Purchasing equipment with cash results in a debit for the equipment and credit for the cash, resulting in a drop in assets.
- Receiving interest from putting funds into a business bank account would result in a debit for the cash received and credit for finance revenue, resulting in an income rise.
- Issuing ordinary shares in your company for cash results in debit for the cash received, which indicates a rise in assets, and credit for share capital, which represents an increase in equity.
- Receiving a bank loan principle loan would result in a debit for the amount received and a rise in assets, but crediting the bank loan account would increase liabilities.
- Paying an energy bill would be recorded as a debit under utility expenditure, increasing expense, but adding a credit to cash would result in a drop in assets.
Although seemingly straightforward, the entries can become increasingly complex when multiple accounts are involved, usually, more than two.
The Setup and the Industry Practice for Double-Entry Accounting
When creating financial records for a firm, it's critical to develop a precise listing known as a chart of accounts. Accounting software often recommends the kind of accounts that a firm may need.
Once set up, the chart of accounts serves as a point of reference whenever two or more accounts are chosen to record a transaction into the general ledger. Additional accounts may be added to the chart of accounts as the process grows, while some may be deleted if you see they will never be utilized.
The first input is usually the account and amount to be debited. The following line displays the account and amount to be credited, which is indented to distinguish it from the preceding item. A generic journal entry is defined as one of these two-line entries.
Accounting software handles this automatically when you enter amounts and specify whose account they belong to. Even better, accounting software may produce these entries when a sales invoice or cheque is prepared. When you use software to handle typical processes like invoicing and cost monitoring, you get more accuracy while saving time.
What are the Added Benefits of Double-Entry Bookkeeping?
Using double-entry accounting has several advantages. This includes the capacity to detect mathematical errors as well as the benefit of having extensive financial data that provides insights into financial performance. It also makes it easier to collect data for crucial financial statistics like income and net worth.
Given these benefits, it is logical to use this bookkeeping approach for your company. While mastery will take time, there are countless guides, lessons, and suggestions available online to assist.
How Does Double-Entry Bookkeeping Differ from Single-Entry Bookkeeping?
Single-entry accounting is similar to a current account's running total. You see a list of deposits and purchases, and the distinction between the two equals cash on hand. Single-entry bookkeeping might be sufficient for extremely small organizations with only a few transactions.
Double-entry bookkeeping reveals every penny entering in, money moving out of the general ledger, and, perhaps most importantly, the sources of each company transaction. If you observe in the credit column that you made $1,000 in sales but only have a $500 debit entry in an asset account named "cash", double-entry accounting will reveal that you will also have a $500 debit entry in another asset account from another source, such as credit card transactions.
Double-entry accounting generates a "mirror image" of both sides of any financial transaction within the general ledger, allowing you to readily identify inconsistencies by comparing one column of credits against another. This form of verification is impossible with single-entry accounting. Although single-entry bookkeeping is easier to use, it is less dependable than double-entry bookkeeping and is not appropriate for medium to big organizations.
How Can You Record a Journal Entry?
Accountants will utilize the general journal to keep track of their records. The general journal is the first record in which accountants write basic information about a company transaction, such as when and where it happened, as well as the total amount. A journal entry is the term used to describe each of these documented business transactions.
A journal entry is a record of debits and credits used to publish an accounting entry, as well as a transaction description. Journal entries are posted in columns, with the account number and title in the left column. There are two columns on the right, one for credits and one for debits. Each journal entry is followed by a thorough description of the transaction.
The double-entry bookkeeping system posts accounting transactions and keeps the balance sheet equation equal by using debits and credits. This strategy is sometimes misinterpreted, thus it's important to grasp these ground rules:
- A debit entry appears on the left side of an accounting entry, whereas credit entries appear on the right side.
- Most asset and cost accounts are increased by debit entries, whereas most liability and income accounts are grown by credit entries.
- Debits must always be equal to credits. If you try to publish an unbalanced entry into accounting software, you will get an error.
The mismatch between the balance sheet equation and the requirement for debits to equal credits is what causes misunderstanding. You should keep in mind that any account, whether liability, asset, or equity, will have both debit and credit entries.
When employing the double-entry accounting method, two elements must always be balanced. The general ledger, which keeps track of credit and debit entries, must always be in balance. In addition, the balance sheet, where assets minus liabilities equals equity, must be balanced. The examples below will help you understand the rules of double-entry bookkeeping.
How Double-Entry Accounting Can Be Used to Ensure Accurate Record Tracking?
Understanding the fundamental accounting concept of double-entry bookkeeping is vital for the success of your small business, whether you handle it yourself using small business bookkeeping software or employing a bookkeeper.
If you have previously utilized a single-entry accounting system, you might be wondering how to convert to a double-entry system. Do not worry, as most current accounting software, like QuickBooks, has double-entry features by default.
The intricacy of your finances will increase as your firm expands. Adopting a double-entry accounting system can help you to better use your financial statements, allowing you to assess your financial health and detect faults more rapidly.
Final Words
The article delves into the concept of double-entry bookkeeping and gives you an in-depth understanding of the working principle and benefits. You also get to know how you can record a journal entry and the important points that separate the process of single-entry and double-entry bookkeeping.
However, if you were unable to grasp the concept or wonder how you can put it to us in QuickBooks, you can always take the help of professional QuickBooks experts. If you have other queries, you can also contact our expert team.
Frequently Asked Questions
Why is Double-Entry Bookkeeping Crucial?
Double-entry bookkeeping is the traditional way of accounting, and employing it gives a few major advantages:
- The balance sheet offers a clear perspective of your company's financial health.
- Allows you to rapidly identify and correct problems in the general ledger.
- Determines successful and unprofitable business elements.
- Gives an overview of your company that banks and investors can simply grasp.
When an enterprise is using double-entry accounting, what elements of the ledger have to be equal?
The total credit and debit aspects of all general ledger accounts should always be similar in double-entry bookkeeping.
Is the double-entry bookkeeping challenging?
The concept of double-entry accounting might appear intricate at first, but once you get the hang of it, you can deal with it easily.
What is the difference between debits and credits in double-entry accounting?
A debit entry represents a spike in the account balance for assets and costs, whereas a credit entry indicates a rise in the revenue account balance.
Can accounting software create a difference?
Single-entry accounting is adequate for a sole proprietorship, but if you want your firm to develop, you should learn double-entry accounting immediately. Double-entry accounting will provide you with a better knowledge of your company's financial health, enabling you to detect accounting errors faster and share a picture of your firm with potential investors. Double-entry accounting gets considerably simpler with accounting software.
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