If you’re a small business owner setting up your bookkeeping, you must decide on your accounting system: double-entry or single-entry?
Though single-entry bookkeeping is very straightforward and easy to implement, it can’t provide a business with sufficient financial data and a secure, accurate recording system.
That’s why double-entry bookkeeping might be more beneficial to your business, and if so, this article is written just for you.
In this article, we’ll explain double-entry accounting as simply as possible and show you the best practices for using this bookkeeping method.
What Is Double-Entry Accounting?
Double-entry accounting, or double-entry bookkeeping, is a bookkeeping method that helps you keep track of your business’s financial activities. With double-entry, each financial transaction creates two entries: one debit and one credit. Corresponding to these two entries are two accounts that the transaction affects. For example, your business just sold a product for $500. This transaction will make a debit on the cash account as it increases $500 in cash and create a credit on the inventory account as a $500 good has been gone (we will explain in detail later what creates a debit or a credit.)
If you record all the transactions correctly, the credit balance will be the same as the debit balance. This is why you will have fewer accounting errors, compared to the single-entry bookkeeping method.
All public firms are required to use double-entry accounting.
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The 4 double-entry best practices that you must know
We’ve gathered the top 4 practices for small businesses using the double-entry bookkeeping system. These practices will ensure you have an efficient and accurate recording procedure.
Let’s check them out!
1. Always remember the golden rule of accounting
To ensure your double-entry bookkeeping is compliant and accurate, you must ingrain this equation into your mind:
Assets = Equity + Liabilities
Assets: all economic resources owned by your company.
Equity: investments and retained earnings of your company.
Liabilities: debts and financial obligations owed by your company.
All experienced accountants/bookkeepers are familiar with this accounting equation because this is the core mechanism that makes double-entry work. If both sides of the equation do not have the same figures, it means there’s at least one mistake in your books.
2. Categorize your financial transactions
You must know how to classify transactions—or in other words, put them in the correct accounts.
Depending on your business’s nature, you can have several different accounts, but the following are the most fundamental ones that nearly every business has in its accounting system:
- Account receivables: the money owed to you from your buyers.
- Petty cash: money available to pay small expenses.
- Inventory: your goods and products .
- Account payables: expenses you have incurred but not yet paid for.
- Sales tax: financial obligation to the government.
Income accounts (revenue accounts)
- Sales: money earned from selling products or services.
- Earned interest: the amount of interest earned from your investments.
- Payroll: the amount you compensate for your employees’ work.
- Rent: the cost for renting office.
- Cost of goods sold (COGS): the money you spent to buy materials, goods and products to resell.
3. Have a double-entry accounting cheat sheet
Knowing only your accounts is not enough. You’ll also need to wrap your head around debits, credits, and how each kind of business transaction affects each account and financial statement.
To make things a bit easier for you, we’ve prepared a cheat sheet to show you how debits and credits work under the double-entry bookkeeping system.
Also, remember to record debits on the left of a ledger sheet and credits on the right side.
For example, if you make a $400 payment received on account from a customer, the journal entry for debits and credits would look like this:
4. Find suitable software tools
With the advent of technology, it wouldn’t be wise to do everything by yourself manually, as it’s error-prone and costs time. Software can help you eliminate those issues. For instance, accounting software can help you keep your eyes close to your business’s finances and helps manage clients, reconcile bank accounts, and generate insightful financial reports that help your business grow robustly in the future.
No less important than keeping your records accurate is to have your finance receipts organized and stored carefully. This is because the IRS requires you to provide receipts and other financial proof to be eligible for business deductions. Shoeboxed can help you with that. Shoeboxed is a receipt tracker that helps you digitize and categorize documents smartly in the cloud.
Start having a smooth and errorless accounting system today with advanced technology tools for your business!
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The double-entry bookkeeping system has been used and proven to be effective and productive for decades in the business world. If you opt to do the same for your business, we hope this article has clarified what you can do to have a smooth and highly-functional accounting system.
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