What Is Double-Entry Accounting? - NerdWallet

Double-entry accounting is a system that requires two book entries — one debit and one credit — for every transaction within a business. Manyoralloftheproductsfeaturedherearefromourpartnerswhocompensateus.Thismayinfluencewhichproductswewriteaboutandwhereandhowtheproductappearsonapage.However,thisdoesnotinfluenceourevaluations.Ouropinionsareourown.Hereisalistofourpartnersandhere'showwemakemoney.Bench:America'sLargestBookkeepingServiceforSmallBusinesses.Get30%offYourFirst3Months!ReadreviewDouble-entryaccountingisasystemthatrequirestwobookentries—onedebitandonecredit—foreverytransactionwithinabusiness.Yourbooksarebalancedwhenthesumofeachdebitanditscorrespondingcreditequalszero.Contrarytosingle-entryaccounting,whichtracksonlyrevenueandexpenses,double-entryaccountingtracksassets,liabilitiesandequity,too.Thesystemmightsoundlikedoublethework,butitpaintsamorecompletepictureofhowmoneyismovingthroughyourbusiness.Andnowadays,accountingsoftwaremanagesalargeportionoftheprocessbehindthescenes.Single-entryvs.double-entryaccountingSingle-entryDouble-entryTrackingTracksrevenueandexpensesonly.Tracksassets,liabilities,equity,revenueandexpenses.EntriesOneentrypertransaction.Twoentriespertransaction.AccountingerrorsPronetomistakes.Reducesaccountingerrors.ProcessCanbehandwrittenormaintainedinaspreadsheet.Shouldbeusedwithaccountingsoftware.InsightCan’tproducemuchinsightbeyondaprofitandlossstatement.Canprovidevaluableinsightintoacompany’sfinancialhealth.Bestfor Soleproprietors,freelancersandservice-basedbusinesseswithverylittleassets,inventoryorliabilities.Allsmallbusinesseswithsignificantassets,liabilitiesorinventory.Single-entryaccountingexampleSingle-entryaccountingislikekeepingacashbook.Entriesgenerallyincludeadate,description,amountandremainingbalance.Let’ssayyoupaidrentandreceivedaloanfromthebankinOctober2021.Youstartedoutthemonthwith$50,000inyourbusinessbankaccount.Here’showtheentriesmightlook:DateDescriptionRevenueExpenses Balance10/1/21Startingbalance$50,00010/2/21Receivedbankloan$20,000$70,00010/15/21Paidrent$3,000$67,000Itlookslikeyourbusinessis$17,000aheadofwhereitstarted,butthatdoesn’ttellthewholestory.Youalsohave$20,000inliabilities,whichyou’llhavetopaybacktothebankwithinterest.Glancingbackattheseentries,you’dalsohavenoideawhichaccountthe$3,000forrentwaswithdrawnfrom.Thisiswhysingle-entryaccountingisn’tsufficientformostbusinesses.Double-entryaccountingexampleYou’reinthesamesituationasabove,butusingadouble-entrysysteminsteadofsingle-entry.Here’swhatitmightlooklike:DateDescriptionAccountDebitCredit10/2/21ReceivedbankloanCash$20,000Liabilities$20,00010/15/21PaidrentRent$3,000Cash$3,000Now,youcanlookbackandseethatthebankloancreated$20,000inliabilities.It’salsoapparentthatrentmoneycamefromyourcashaccount.Moneyflowingthroughyourbusinesshasaclearsourceanddestination.Bench:America'sLargestBookkeepingServiceforSmallBusinesses.Get30%offYourFirst3Months!Readreview»MORE:Chartofaccounts(COA):definition,guideandexamplesWhatdoesdebitandcreditmean?It’seasiertoexplaindebitsandcreditsasaccountingconcepts,asopposedtophysicalthings.Everytransactionwithinyourbusinessproducesadebitinoneaccountandacreditintheother.Together,theyrepresentmoneyflowingintoandoutofyourbusiness—asoneaccountincreases,anotherhastodecrease.Atransactionthatincreasesyourassets,forexample,wouldberecordedasadebittothatparticularassetsaccount.Ontheflipside,thattransactionwouldalsogetrecordedasacreditinanotheraccount.Creditsincreaserevenue,liabilitiesandequityaccounts,whereasdebitsincreaseassetandexpenseaccounts.Debitsarerecordedontheleftsideofthepageandcreditsarerecordedontheright.Thesumofeverydebitanditscorrespondingcreditshouldalwaysbezero.AccounttypeDebitCreditAssets⬆⬇Expenses⬆⬇Revenue⬇⬆Liabilities⬇⬆Equity⬇⬆»MORE:9basicaccountingconceptseverysmall-businessownershouldknowWhatistheaccountingequation?Thisequationisattheheartofdouble-entryaccounting:Assets=Liabilities+Equity.Liabilitiesandequityaffectassetsandviceversa,soasonesideoftheequationchanges,theothersidedoes,too.Thishelpsexplainwhyasinglebusinesstransactionaffectstwoaccounts(andrequirestwoentries)asopposedtojustone.Forexample,whenyoutakeoutabusinessloan,youincrease(credit)yourliabilitiesaccountbecauseyou’llneedtopayyourlenderbackinthefuture.Yousimultaneouslyincrease(debit)yourcashassetsbecauseyouhavemorecashtospendinthepresent.Thesamegoesifyouinvestyourownmoneyintoyourstartupbusiness.Yourassetsincrease(aredebited)becausenowyourbusinesshascash.Atthesametime,owner’sequityincreases(iscredited)becausenowyou’reashareholder.»MORE:NerdWallet’sbestsmall-businessappsDouble-entryaccountingsoftwareMostmodernaccountingsoftware,likeQuickBooksOnline,XeroandFreshBooks,isbasedonthedouble-entryaccountingsystem.Whenyouenteryourtransactionsintothesoftware—typicallyusingaformthatlookslikeacheck,invoiceorbill—thesecondpartofthetransactionisautomaticallyhappeningbehindthescenesaspartofthesoftware’sprogramming.NerdWallet’sroundupofthebestaccountingsoftwareforsmallbusinessescanhelpyouchoosetherightoptionforyou.Ifyou’renotsurewhetheryouraccountingsystemisdouble-entry,agoodruleofthumbistolookforabalancesheet.Ifyoucanproduceabalancesheetfromyouraccountingsoftwarewithouthavingtoinputanythingotherthanthedateforthereport,youareusingadouble-entryaccountingsystem.Evenifyouuseaccountingsoftware,therecouldbeerrorsrecordedinyourbookkeeping.Sometimes,automatedbankfeedseithermisstransactionsorduplicatethem.Topreventthisfromhappening,youshouldcompleteaprocesscalledaccountreconciliationonaregularbasistokeepyourbooksaccurate.Thatmeansyoumatcheverytransactioninyouraccountingsoftwaretoitscorrespondingbankstatement.Abouttheauthors:HillaryisaQuickBooks-certifiedsmall-businesswriteratNerdWallet.HerworkhasbeenfeaturedinMarketWatch,YahooFinance,NasdaqandEntrepreneur.ReadmoreBillieAnnehasbeenabookkeepersincebeforetheturnofthecentury.SheisaQuickBooksOnlineProAdvisor,LivePlanExpertAdvisor,FreshBooksCertifiedPartnerandaMasteryLevelCertifiedProfitFirstProfessional.ReadmoreOnasimilarnote...S-Corpvs.C-Corp:HowTheyDiffer(andHowtoChoose)HowCreditCardProcessingWorksforSmallBusinesses6WaysSmallBusinesses—andTheirCustomers—CanDealWithInflationPaymentGatewayvs.PaymentProcessor:TheDifferenceDiveevendeeperinSmallBusinessWhatIsBookkeeping?ASmall-BusinessOwner’sGuidebyBillieAnneGriggReadmoreBestInvoicingSoftwareforSmallBusinessesbyRosalieMurphyReadmoreExploreSmallBusiness