Double-entry is a bookkeeping method that involves the use of a credit and a debit for each financial transaction. It’s designed to track a business’s money more closely. When using the double-entry bookkeeping method, you’ll record a credit and a debit for each of your business’s financial transactions.
If your business sells a product, for example, its liquid cash account will increase, whereas your business’s inventory account will decrease. The liquid cash account will receive a credit, while the inventory account will receive a debit. If your business buys a piece of equipment, conversely, its cash account will receive a debit and its asset account will receive a credit. Considering that many businesses use the single-entry bookkeeping method, you might be wondering what pros and cons the double-entry bookkeeping method offers.
Pros of Double-Entry Bookkeeping
Using the double-entry bookkeeping method creates a more accurate view of your business’s financial health. It’s considered a complete form of bookkeeping in the sense that it takes into account both credits and debits when recording financial transactions.
All financial transactions have a credit and a debit. Unless you record both of them, you won’t have a complete and accurate depiction of your business’s financial health. Using the same example from above, if you sell a product but only record it as a credit, your business’s inventory account won’t be correct. Selling a product will reduce your business’s inventory account, so you need to record a debit for it as well. The double-entry bookkeeping method requires the use of both a credit and a debit for each financial transaction, including product sales.
Cons of Double-Entry Bookkeeping
On the other hand, the double-entry bookkeeping method requires more work than its single-entry counterpart. It’s essentially twice the work of the single-entry bookkeeping method. For every financial transaction, you’ll have to record both a credit and a debit. That’s the basis on which the double-entry bookkeeping method works. If you run a small business, such as a sole proprietorship, you may discover that it’s not worth the additional time and energy.
Because it requires more work, the double-entry bookkeeping method is prone to more errors than its single-entry counterpart. If a transaction doesn’t have both a credit and a debit, the trial balance won’t be correct. As a result, you’ll have to go back and add the missing credit or debit.
What are your thoughts on the double-entry bookkeeping method? Let us know in the comments section below!