The idea of double-entry bookkeeping sounds confusing, doesn’t it? Many people are confused by the concept of double-entry accounting systems though it is one of the most standard of accounting practices.
You might think that the easiest way of keeping track of your accounts is to simply make a single recording of every transaction made by your company. However, when you start to think about it more deeply, you will start to understand why double-entry bookkeeping has become the industry standard.
While many business owners are more than happy to leave all accounting, single or double-entry, in the hands of a qualified accountant; it makes sense for an entrepreneur to have some knowledge of his or her own ledgers as well.
If you don’t yet have an accountant to take care of your bookkeeping and all of your other financial tasks, you can find qualified accountants working near you on Asia Accountants Network. Simply filter a search by location and accounting specialty and find pre-verified accountants working near you today.
Read on to learn more about the basics of the double-entry bookkeeping system:
What Double-entry Means
Put simply, double-entry bookkeeping simply means that every transaction is recorded twice. And both transactions are recorded in separate columns, called credits and debits, that must balance each other. Double-entry bookkeeping uses this equation to keep the books balanced: assets = liabilities + equity.
Most of us are used to the idea of a single transaction recorded in a balance sheet. We are used to the simple idea that when one thing increases, such as cash or profits, another thing must be diminished, such as inventory. However, with double-entry bookkeeping, a sale may be seen as an increase in cash or profit while the loss of stock may also be recorded as an increase in liabilities.
In this case, the equation is balanced because the profit and liability columns both increased by the same amount, thus equalling each other. Everything entered as a debit must equal everything entered as a credit.
While double-entry bookkeeping requires that each transaction must be entered twice, it becomes more confusing because there are often many more than just two accounts in play. Accounts might include asset, liability, income, expense, sale, loss and more.
Why Double-entry is Used
Because each transaction is entered twice, there is less room for mistakes and a higher likelihood that, if a mistake has been made, it will be caught quickly when the accounts don’t balance out.
The system is based on a series of debits and credits. Debits are recorded on the left-hand side of a ledger and they increase the debit account balance. Credits are recorded on the right-hand side and increase the credit account balance. When an account receives value, it is recorded alongside the sum in the debit column. When an account gives value, it is recorded alongside the sum in the credit column. The rule of thumb in these transactions is: “always debit the receiving party and always credit the giving party.”
Double-entry versus Single-entry
Single-entry bookkeeping is rarely used in business for the simple reason that it’s very easy for mistakes to happen and a small chance of them being caught quickly and corrected.
Single-entry bookkeeping is similar to keeping a check register. As money is added to a business, it’s recorded once and added to a total, as assets are spent, they are recorded once and subtracted from the total. It’s one column with an ongoing influx or exit of cash or assets.
However, by using a single-entry system, it would take lots of work to extract the data needed to see exactly how much money/assets is coming in and what is going out.
While some very small businesses might use a system such as this simply for its ease, it holds many disadvantages. These include an inability to track assets and liabilities, including accounts payable and those receivable. The company’s financial position is not easily visible and mistakes may not be caught until there are issues at the bank. This can lead to stress, embarrassment and the payment of expensive fees to cover the mistakes.
If you have more questions about double-entry bookkeeping or other accounting issues, you can find verified and qualified accountants working in your area on Asia Accountants Network.
This article is written by Adrian Mah from Asia Law Network.
This article does not constitute legal advice or a legal opinion on any matter discussed and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and practice in this area. If you require any advice or information, please speak to practicing lawyer in your jurisdiction. No individual who is a member, partner, shareholder or consultant of, in or to any constituent part of Interstellar Group Pte. Ltd. accepts or assumes responsibility, or has any liability, to any person in respect of this article.