Double entry bookkeeping is an accounting system where every transaction is recorded in two accounts: a debit to one account, and a credit to another. Double entry book keeping aims to track the knock-on effects of every business transaction to reflect these in your accounts, with the total debits and credits balancing each other.
What is double entry accounting?
Double entry accounting is another name for double entry bookkeeping. But, what is double entry bookkeeping, and why do we do it?
Double entry book keeping is designed to reflect the truism of business in that you don’t get something for nothing. If something comes into your business, it is usually because something else was given up. Both sides of every transaction need to be acknowledged and reflected in your books, which requires an extra entry.
Studying for an AAT Level 2 Bookkeeping course will enable you to harness the power of double bookkeeping.
Are there always two entries in double bookkeeping?
The name comes from the fact that there are at least two entries for each transaction. But, with double bookkeeping, there might be more. For example, a sale might increase value, lower stock and create a tax liability on the VAT collected; the more complex the transaction, the more entries there will be.
How to do double entry bookkeeping: double entry bookkeeping explained
There are three major rules to double entry book keeping:
- Every business transaction has to be recorded in at least two accounts
- Each transaction must have equal credits and debits recorded
- Total assets must always equal total liabilities plus equity of a business (they must balance)
What are the different types of accounts?
There are five different types of accounts in a business:
- Assets: This refers to the monetary value of what a business owns.
- Liabilities: Liabilities are the amount a business owes on things (lines of credit or a mortgage).
- Equity: This is the difference between assets and liabilities.
- Revenue: This refers to money coming in.
- Expenses: These are what you’ve spent money on.
So when following a double entry book keeping process, if you have an expense (such as the purchase of a new laptop for the business), the asset account should also reflect this.
Why is double bookkeeping important?
Double bookkeeping delivers a complete financial picture for a business. Double entry book keeping helps to make better financial decisions, reduces bookkeeping errors, and is preferred by investors, banks, and buyers.
How is single entry bookkeeping different?
In a single entry bookkeeping system, each transaction is recorded only once. For example, if you pay to attend a conference, you would only track the money going out. It’s a more simple way of showing the flow of one account but won’t tell the full story of your finances.
How do you start double entry bookkeeping?
Double entry bookkeeping can be done using accounting software, which can create custom accounts.
However, with the right accounting qualifications, you won’t need software; you can answer the query “what is double entry bookkeeping” yourself. If you are an experienced bookkeeper, you can manage the double entry book keeping system in the way you decide is best.
Discover how to become a bookkeeper and all the qualifications you will need.