There are two primary bookkeeping methods used in accounting: single-entry and double-entry. While single-entry is typically the easiest, some businesses prefer the double-entry bookkeeping method. What is the double-entry bookkeeping method, and how does it work?
What Is the Double-Entry Bookkeeping Method?
The double-entry bookkeeping method is a business accounting method that records each financial transaction in at least separate accounts: a debit account and a credit account. It’s based on the fundamental accounting equation, which states that assets must equal liabilities plus equity. Every transaction affects at least two accounts with the double-entry bookkeeping method. The total debits must always equal the total credits, ensuring that the business’s books are always in balance.
How Does the Double-Entry Bookkeeping Method Work?
The double-entry bookkeeping method begins with identifying the transaction. Whether it’s a sale, purchase or receipt, the transaction must be identified. You can then determine which accounts are affected by the transaction. As previously mentioned, all transactions affect at least two accounts, including a debit account and a credit account.
Now you can record the transaction. This involves making entries in the general ledger. The general ledger typically has separate accounts for assets, liabilities, equity, revenue and expenses. When using the double-entry bookkeeping method, you’ll need to record the transaction in a debit account and a credit account.
The Benefits of the Double-Entry Bookkeeping Method
Unless you’ve used it in the past, you might be wondering what benefits the double-entry bookkeeping method offers. One of the main benefits of using the double-entry bookkeeping method is accuracy. Errors can occur with all accounting methods, but they are less likely to occur with the double-entry bookkeeping method. This is because each transaction is recorded twice, which helps to ensure that your business’s books are always in balance.
The double-entry bookkeeping method offers protection against fraud. With each transaction affecting at least two accounts, you can use it to identify both fraud and errors. It’s easier to identify discrepancies and inconsistencies when using the double-entry bookkeeping method. If you’re worried about fraud or errors, you may want to choose this alternative accounting method for your business.
Another reason to use the double-entry bookkeeping method is transparency. It offers a clear and comprehensive picture of your business’s financial health. You can use the double-entry bookkeeping method to closely track your business’s revenue, expenses, assets and liabilities.
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