If you are running a business or just getting started with accounting, you might have heard about the double entry system of bookkeeping. It may sound confusing at first, but it is actually a simple and reliable way to manage your financial records.
In this blog, we will be walking you through everything you need to know about what is double-entry accounting, how it works, and how you can start using it even if you are a complete beginner. Let’s break it down into simple steps so you can learn without any stress.
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What is Double Entry Bookkeeping?
So what is double entry bookkeeping? It is a method of accounting where every transaction is recorded in two accounts.
For example, if your business receives cash from a customer, you record that money as an increase in your “Cash” account and also as an increase in “Sales” or “Revenue.”
This way, your books stay balanced. The system ensures that for every credit entry, there is an equal debit entry. This helps in reducing errors and gives a clear view of your business’s financial health.
Why Should You Use the Double Entry System?
You might be wondering, “Why not just use a simple method to track income and expenses?”
It is indeed a fair question.
However, while a single entry system might seem easier at first, the double entry system offers far more accuracy and reliability when managing your business finances.
The double entry system of bookkeeping ensures that every transaction is recorded in two accounts – one as a debit and the other as a credit.
This approach helps you clearly track where your money is coming from and where it is going. It also allows you to generate accurate financial statements, like the balance sheet and income statement, which are important for understanding your business’s performance. On top of that, the system adds a layer of protection against errors and fraud, since your records must always balance.
Overall, it gives you a more complete and trustworthy view of your financial health.
How Does Double Entry Work?
Let’s understand what double-entry accounting is with a real-world example.
Imagine you buy a laptop for your business for $1,000. You pay using your business bank account. Here’s how it’s recorded:
- Debit: Equipment (Laptop) – $1,000
- Credit: Bank Account – $1,000
Your total assets (equipment) go up, while your cash goes down – keeping the books balanced.
Here’s a simple table to help you understand this better:
| Transaction | Account Debited | Account Credited | Amount |
| Sold product for $500 cash | Cash | Sales | $500 |
| Bought office supplies $200 | Office Supplies | Bank | $200 |
| Received loan of $5,000 | Bank | Loan Payable | $5,000 |
| Paid rent of $1,000 | Rent Expense | Bank | $1,000 |
In each of these cases, you can see that two accounts are affected every time.
A Step-by-Step Guide to Get Started
Getting started with double entry bookkeeping might feel intimidating, but breaking it down into simple steps makes it much easier. Here’s a quick guide to help you set up your double entry book keeping system the right way.
Step 1: Choose an Accounting Tool
You can use platforms like Excel when you are just starting. Many of these tools are designed for beginners and help you learn as you go.
Step 2: Set Up Your Chart of Accounts
List down all the types of income, expenses, assets, and liabilities your business deals with. This will form the base of your accounting system.
Step 3: Record Transactions with Debits and Credits
Each time you make a sale, pay a bill, or make a purchase, record both sides of the transaction. Always ensure that your debits equal your credits.
Step 4: Check Your Balances Regularly
At the end of the week or month, check if everything balances. If not, go back and see where you may have made an error.
Step 5: Review and Analyze
Look at your income and expenses, check your profit or loss, and analyze how your business is doing.
Although managing your bookkeeping on your own might seem convenient at first, it can quickly become overwhelming as your business grows. That’s why it’s ideal to connect with a professional like Orbit Accountants as we have the expertise to handle your books at its best.
Here, at Orbit Accountants, we have been providing expert bookkeeping services in Canada. We streamline your business finances with tailored services and expert support. From bookkeeping and payroll to managing taxes and providing fractional CFO services, we handle the numbers so you can focus on growing your business stress-free and with complete confidence.
And if you are not sure which service is the right fit? Our team is here to help! Book a free consultation, and we’ll learn about your business, answer your questions, and guide you to the perfect solution.
In Essence
Mastering what is double entry bookkeeping may seem tough at first, but with a step-by-step approach, it becomes much easier. By understanding the basics, using the right tools, and following good practices, you can manage your books confidently and accurately.
Whether you are running a small shop, freelancing, or managing a growing business, the double entry system of bookkeeping is your foundation for financial success.
Start simple, stay consistent, and don’t hesitate to ask for help when needed.
FAQs
Why is double-entry bookkeeping important for businesses?
Double-entry bookkeeping is very important because it ensures accurate financial records, helps detect errors, and provides a complete overview of your business’s finances, supporting better decisions and compliance at all times.
What are debits and credits in double-entry bookkeeping?
In the double-entry bookkeeping system, debits and credits are the foundation of every transaction. A debit records money going into an account, like assets or expenses, while a credit records money going out, such as income or liabilities. This balanced system ensures accurate records and helps track the true financial health of a business.
How do I record a transaction using double-entry bookkeeping?
To record a transaction using double-entry book keeping, you enter it in two accounts: one as a debit and the other as a credit. For example, if you buy equipment with cash, you debit the equipment account and credit the cash account. This keeps your books balanced and ensures accurate financial tracking.
How does double-entry bookkeeping help maintain accurate financial records?
Double-entry bookkeeping helps maintain accurate financial records by ensuring that every transaction is recorded in at least two accounts – once as a debit and once as a credit. This system creates a balance where the total debits always equal the total credits, making it easier to spot and correct errors. It also provides a clear and complete picture of all financial activities, helping businesses track income, expenses, assets, and liabilities. This accuracy supports better decision-making, compliance, and transparency in financial reporting.
