A Beginner's Guide to Double-Entry Accounting

Unlike single-entry accounting, which requires only that you post a transaction into a ledger, double-entry tracks both sides (debit and credit) of each ... Thisdeviceistoosmall Ifyou'reonaGalaxyFold,considerunfoldingyourphoneorviewingitinfullscreentobestoptimizeyourexperience. Skiptomaincontent EditorialDisclosure Wehavenotreviewedallavailableproductsoroffers.Compensationmayimpacttheorderofwhichoffersappearonpage,butoureditorialopinionsandratingsarenotinfluencedbycompensation. 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Imagesource:GettyImages Double-entryaccountinganddouble-entrybookkeepingbothusedebitsandcreditstorecordandmanagefinancialtransactions.Atitscore,double-entryaccountingisbasedontheaccountingequation,whichis:Assets=Liabilities+Owner’sEquityByusingdouble-entryaccounting,youcanbesureallofyourtransactionsarefollowingtherulesoftheaccountingequation.Usingthissystemistheonlywaytodothat.Unlikesingle-entryaccounting,whichrequiresonlythatyoupostatransactionintoaledger,double-entrytracksbothsides(debitandcredit)ofeachtransactionyouenter.Usingthissystemreduceserrorsandmakesiteasiertoproduceaccuratefinancialstatements.Ataglance:Howdouble-entryaccountingworksStep1:Createachartofaccountsforpostingyourfinancialtransactions.Step2:Enteralltransactionsusingdebitsandcredits.Step3:Ensureeachentryhastwocomponents,adebitentryandacreditentry.Step4:Checkthatfinancialstatementsareinbalanceandreflecttheaccountingequation.Anoverviewofdouble-entryaccountingBenedettoCotrugli,anItalianmerchant,inventedthedouble-entryaccountingsystemin1458.ThesystemwaslatersharedbyItalianmathematicianandFranciscanmonkLucaPacioli,whowroteTheCollectedKnowledgeofArithmetic,Geometry,Proportion,andProportionalityin1494,whichincludedadetaileddescriptionofthedoubleentry-accountingsystem.Ifyou’reafreelancer,soleentrepreneur,orcontractor,chancesareyou’vebeenusingsingle-entryaccounting,especiallyifyouaren’tusingaccountingsoftware.Whilethismayhavebeensufficientinthebeginning,ifyouplanongrowingyourbusiness,youshouldprobablymovetousingaccountingsoftwareanddouble-entryaccounting.Inordertounderstandhowimportantdouble-entryaccountingis,youfirstneedtounderstandsingle-entryaccounting.Theclosestexampleofthisbasicaccountingisthebankaccountledgeryouusetokeeptrackofyourspending.Whenyoulogintoyourbankaccountonline,orreceiveyourbankstatementinthemail,you’llseealistofallofyouractivityforthemonth.Thatactivityincludesthingslikethe$5.50youspentatthecoffeeshopduringyourbreakfastmeetingaswellasthecustomerpaymentyoudeposited.Whilehavingarecordofthesetransactionsisagoodfirststeptowardbettermanagingyourcashflow,thistypeofrecordingdoesn’tmakecleartheimpacteachtransactionhasonyourbusiness. Date Check# Description Spending/Debit Deposit/Credit Balance 10/01/19 BeginningBalance 5,000.00 10/25/19 Coffee 5.50 4,994.50 Thisishowyouwouldrecordyourcoffeeexpenseinsingle-entryaccounting.Whileyourledgergivesyouanideaofhowmuchmoneyisinyouraccount,itdoesnothingtohelpyoutrackyourexpenses,orknowhowmuchmoneyyourcustomersoweyou.Indouble-entryaccounting,youstillrecordthe$5.50inyourcashaccount,butyoualsorecordthat$5.50asanexpense. Date Account Debit Credit 10/25/19 MealsandEntertainment 5.50 10/25/19 CashAccount 5.50 Thisshowsthesametransactionrecordedusingdouble-entryaccounting.Ifyouhavefiveorfewertransactionsmonthly,youcanprobablyusesingle-entryaccounting,butyou’llwanttoswitchtodoubleentryifyou:AreinagrowthphaseArecurrentlylookingforinvestorsAreplanningonapplyingforabankloanorotherfinancingforyourbusinessHowdouble-entryaccountingworksIt'spossibletomanuallycreatemultipleledgeraccounts,butifyou’remakingthemovetodouble-entryaccounting,you’lllikelywanttomaketheswitchtoaccountingsoftware,too.Theproductsonthemarkettodayaredesignedwithbusinessowners,notaccountants,inmind.Evenifyourknowledgeofaccountingdoesn’textendbeyondAccounting101,you’llfindmostaccountingsoftwareapplicationseasytouse.Ifyou'renotsurewhichaccountingsoftwareapplicationisrightforyourbusiness,besuretocheckoutTheAscent'sin-depthaccountingsoftwarereviews.Onceyoudecidetotransitiontodouble-entryaccounting,justfollowtheseeasysteps.Step1:SetupachartofaccountsWhileyoucancertainlycreateachartofaccountsmanually,accountingsoftwareapplicationstypicallydothisforyou.Onceyouhaveyourchartofaccountsinplace,youcanstartusingdouble-entryaccounting.Accounttypesyou’llbeusinginyourchartofaccountsinclude:Assets:AnythingyouownLiabilities:AnythingyouoweRevenue/income:WhatyourbusinessearnsExpenses:ThecostofdoingbusinessOwner’sequity:ReflectsyourcurrentownershiplevelStep2:UsedebitsandcreditsforalltransactionsAdebitisalwaysontheleftsideoftheledger,whileacreditisalwaysontherightsideoftheledger.Adebitentrywillincreasethebalanceofbothassetandexpenseaccounts,whileacreditentrywillincreasethebalanceofliabilities,revenue,andequityaccounts. Account ToIncreaseBalance ToDecreaseBalance Assets Debit Credit Liabilities Credit Debit Revenue Credit Debit Expenses Debit Credit Equity Credit Debit Commonaccounttypesandhowtheyareincreasedordecreased.Step3:MakesureeveryfinancialtransactionhastwocomponentsOnceyourchartofaccountsissetupandyouhaveabasicunderstandingofdebitsandcredits,youcanstartenteringyourtransactions.Forexample,youoverpaidyourelectricbillinerrorlastmonth,andyoureceivearefundof$200.00fromtheelectriccompany.Toenterthattransactionproperly,youwouldneedtodebit(increase)yourcashaccount,andcredit(decrease)yourutilitiesexpenseaccount. Date Account Debit Credit 10/31/19 Cash 200 10/31/19 Utilities 200 Thisistheproperwaytoenterarefundfromtheelectriccompany.Ifyou’donlyenteredthe$200asadeposit,yourbankaccountbalancewouldbeaccurate,butyourutilityexpensewouldbetoohigh.Thiscanbeparticularlyimportantwhencreatinganinvoiceorpostingmultipleexpensereportsfortravel.Forinstance,let’sassumeyourecentlyspent$500ontravel.Ifyouwereusingsingle-entryaccounting,youwouldsimplyreduceyourbankaccountbalanceby$500.Butwhenusingdouble-entryaccounting,youwouldpostyourtravelexpensesindetail,allowingyoutoseejusthowmuchyou’vespentontransportationorothertravelexpenses,whilealsoprovidingyouwiththefinancialinformationyouneedtomakebetterdecisionsabouttravelinthefuture. Date Account Debit Credit 10/31/19 Transportation 200 10/31/19 Accomodation 225 10/31/19 Meals 75 10/31/19 Cash 500 Double-entryaccountingallowsyoutobettermanagebusiness-relatedexpenses.Step4:RunyourfinancialstatementsIt’simpossibletofindinvestorsorgetaloanwithoutaccuratefinancialstatements,andit’simpossibletoproduceaccuratefinancialstatementswithoutusingdouble-entryaccounting.Byenteringtransactionsproperly,yourfinancialstatementswillalwaysbeinbalance.Howtogetstartedwithdouble-entryaccountingIfyou'rereadytousedouble-entryaccountingforyourbusiness,youcaneitherstartwithaspreadsheetorutilizeanaccountingsoftware.1.UseaspreadsheetIfyourbusinessisreallysmall,youmaybeabletogetbyusingaspreadsheetapplicationinordertopostyourfinancialtransactions,butspreadsheetsareonlyusefulifyouhaveaverysmallbusinessandareusingsingle-entryaccounting.2.UseaccountingsoftwareWhileit’spossibletocreateanadequatebusinessledgerforyourbusinessmanually,you’llfindyourselfspendingalotoftimereferringtomultipleaccountbookstomakeentries,calculatetotals,andlatertransferthosetotalstothecorrectaccountsinordertoproducefinancialstatements.Thebestwaytogetstartedwithdouble-entryaccountingisbyusingaccountingsoftware.ManypopularaccountingsoftwareapplicationssuchasQuickBooksOnline,FreshBooks,andXeroofferadownloadabledemoyoucantry.Allpopularaccountingsoftwareapplicationstodayusedouble-entryaccounting,andtheymakeiteasyforyoutogetstarted,allowingyoutogetyourbusinessupandrunninginanhourorless.Usingsoftwarewillalsoreduceerrorsandeliminateout-of-balanceaccounts.Decidingifdouble-entryaccountingisrightforyouDoyou:Needtobetakenseriously?Needtoopenalineofcredit?Needtoopenabusinesscreditcard?Needtoattractinvestors?Needtoapplyforaloan?Ifso,youshouldutilizedouble-entryaccounting.Thesystemisdesignedtokeepaccountsinbalance,reducethepossibilityoferror,andhelpyouproduceaccuratefinancialstatements.Thisthengivesyouandyourinvestorsorbankmanageragoodpictureofthefinancialhealthofyourbusiness.Eventhesmallestbusinesscanbenefitfromdouble-entryaccounting. AbouttheAuthor MaryGirsch-Bock icon-button-linkedin-2x icon-button-twitter-2x MaryGirsch-BockistheexpertonaccountingsoftwareandpayrollsoftwareforTheAscent.Shepreviouslyworkedasanaccountant. ShareThisPage FacebookIcon ThisiconsharesthepageyouareonviaFacebook BlueTwitterIcon SharethiswebsitewithTwitter LinkedInIcon ThisimagelinkstosharethepageoverLinkedIn. EmailIcon Sharethiswebsitewithemail We'refirmbelieversintheGoldenRule,whichiswhyeditorialopinionsareoursaloneandhavenotbeenpreviouslyreviewed,approved,orendorsedbyincludedadvertisers. TheAscentdoesnotcoveralloffersonthemarket.EditorialcontentfromTheAscentisseparatefromTheMotleyFooleditorialcontentandiscreatedbyadifferentanalystteam. TheMotleyFoolhasnopositioninanyofthestocksmentioned.TheMotleyFoolhasadisclosurepolicy. Manyoralloftheproductsherearefromourpartnersthatpayusacommission.It’showwemakemoney.Butoureditorialintegrityensuresourexperts’opinionsaren’tinfluencedbycompensation.Termsmayapplytoofferslistedonthispage. 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