Double-entry Bookkeeping Best Practices for Small Businesses

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:

Asset accounts

  • Account receivables: the money owed to you from your buyers.
  • Petty cash: money available to pay small expenses.
  • Inventory: your goods and products .

Liability accounts

  • 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.

Expense accounts

  • 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.

A double-entry accounting cheat sheet.

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. 

There are many popular options for accounting software now on the market, such as Quickbooks, Zoho Books, Freshbooks, Bench, etc. 

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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Final thoughts 

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. 

About Shoeboxed

Shoeboxed is a receipt management application that turns your receipts and business documents into a digital format in just one click by taking a picture straight from your smartphone or scanning a pdf. It automatically extracts, categorizes, and human-verifies important data from your receipts so that you can go over and check your records anytime with ease. Shoeboxed ensures you will always have your receipts securely stored and ready for tax purposes. More importantly, Shoeboxed helps you track mileage using your phone’s built-in GPS for unmatched ease and accuracy. Access your Shoeboxed account from your web browser or smartphone app.

Stay audit-ready with Shoeboxed for FREE now!

10 Reasons Why Bookkeeping Is Important To All Businesses

The main purpose of bookkeeping is to track the financial activities of a business. Alongside the growth of the business, bookkeeping becomes more complex with why the introduction of tax, assets, loans, and investments. Bookkeeping allows businesses to keep an up-to-date record of their revenue and expenses, the amount owed by the business, investors, and customers, and so much more. 

Obvious, detailed, and thorough bookkeeping is crucial for businesses of all sizes. This article will give you a detailed answer to the question “Why is bookkeeping important to all businesses?”

10 reasons why bookkeeping is important to all businesses

1. Optimizes your budget 

Bookkeeping is vital to any business because it makes budgeting so much easier. Bookkeeping helps you organize your income and expenses properly,  and makes it simple to review your financial resources and costs. A clear budget in turn creates a clear financial plan for your business. Then you can plan for future expenses and the anticipated resources needed to cover those expenses. 

See more: 9 Basic Types Of Bookkeeping That Every Bookkeeper Should Know.

2. Simplifies tax planning

Every business has to file their taxes at the end of the tax year. And for many accountants, tax season means scouring their desks to find missing paperwork. If this sounds familiar to you, then you may need to consider setting up a bookkeeping system. With an efficient bookkeeping process, you will have your financial information ready for tax season and your accountants will no longer need to spend hours on the tax filing process. Bookkeeping is important for your personal tax return as well. For business owners, a large part of their income comes from their business. To know their total annual income, they need to know what their business earned first. Having detailed balance sheets over time helps you predict your annual profits more accurately. 

3. Supports decision-making

The best decisions are informed decisions, and to make an informed decision, you need to have access to all available information. Bookkeeping tracks and compiles all of the information needed to support your financial decisions. 

An inaccurate understanding of your financial status and key performance indicators can lead you to make some erroneous decisions that could jeopardize your business. For example, in the short term, if you don’t understand your cash inflows and outflows correctly, you may experience overdrafts, late fees, and difficulty in making your payroll timely. In the long-term, if you don’t know your sales profitability, you may miss many opportunities to invest in the more profitable lines of your business, which leads to lower earnings. The same thing can happen to non-profit organizations. If you don’t know the true cost of your programs, you may make bad decisions on which programs to invest more resources in. Business owners can prevent these types of situations by maintaining accurate books and records. This will simultaneously optimize business operations as well. 

4. Tracks profit and growth

Bookkeeping provides financial information about your company through financial statements. Financial statements, including balance sheets, income statements, and cash flow statements provide information for a set period. For example, you can see if your business is profitable or not from the income statement. Together, all these statements take a snapshot of your business, allowing you to see how well the business has performed. 

Bookkeeping also helps to track business growth. Over time, you will collect months and years of data. You can use this data to observe trends and better understand your business progress and compare results across periods. By keeping regular financial records, you can map out your business goals more accurately and achieve steady growth. 

5. Manages and improves cash flow

Bookkeeping allows business owners to take control of their business’ finances. It draws a clear picture of how you spend money. As a business owner, you need to ensure that your customers’ invoices are paid on time. You can track when your customers and vendors pay their invoices through the routine records of revenues, expenses, liabilities, and receivables. You can also notice if you are paying your bills on time to avoid penalties. 

So, how does bookkeeping improve your cash flow? Bookkeeping provides information regarding your outstanding invoices, such as customer or vendor names, amounts, issued dates, and due dates. Business owners can use this information to implement better cash flow policies, such as shortening payment deadlines or adjusting the time of payment for vendor invoices. By doing so, you can increase the average amount of cash you have on hand at any given time. 

6. Greater focus on strategy

Disorganized books can weigh heavily on a business owner’s mind. Your bookkeeping should not be keeping you up all night. When your books are completed and in order, you can rest easy knowing that your company’s financial information is review-ready. You will then find your mind at ease and more focused on other elements of the business, such as planning and strategy. 

Tactical and strategic planning are at the core of business operations. As you are always thinking of growing and developing your business, bookkeeping will bring you closer to your short and long-term goals. You can use the information provided by bookkeeping to track the results of your strategy and adjust your goals accordingly. 

7. Maintains organized records

As your company’s financial records are important to a number of stakeholders – investors, lenders, customers, employees, etc, providing the information requested by these parties is vital to your ongoing operation. In this case, being organized is a skill that every business owner should be able to find information at any time. If you cannot provide records to the IRS, your business can face penalties and fees. If you don’t provide records that investors and lenders requested, it could result in the stoppage of cash flow and so on. Being disorganized with your books can compromise or even terminate your relationships with these parties. 

Furthermore, the last-minute stress of finding a crucial piece of paperwork can lead to missed deadlines and other errors. Businesses of any size can’t afford to make mistakes, and regular bookkeeping can help with that. By keeping an eye on your bookkeeping frequently, instead of leaving it to the last second, you will be able to maintain organized records and save a lot of time finding the information you desperately need. 

8. Meets law requirements

The law requires businesses to keep their financial records separate from the owner’s personal expenses. Failing to do this can lead to the termination of your business. 

Accurate financial records are essential to filing your tax return properly, and can also minimize the chance of being audited and/or incurring tax penalties. Businesses with bad bookkeeping practices tend to file late and may lack the proper documentation to support their filings. This can land you in deep trouble with the IRS. If you are audited and cannot support your income and deductions, the result can cost your organization a lot. 

9. Data analysis 

Bookkeeping matters because it helps with business analysis. Bookkeeping is a management tool used to analyze business performance. 

One of the most useful products of bookkeeping is the financial statement. Business owners should generate the financial statement regularly to know which lines of business are working or not working. Financial statements allow business owners to focus on their business’s strengths and improve on its weaknesses. 

Bookkeeping reveals the previous financial performance of your business. In order to make future plans, you need a good understanding of your situation. Bookkeeping will give you a clear picture of what does work and what does not. 

10. Makes it easier to report to investors

Investors and shareholders want to know the financial performance of your business so that they can determine the value of their investment. Let financial statements do the work. The combination of the balance sheet, income statement, and cash flow statement presents the value of the business. 

As stated above, the main product of bookkeeping is financial statements. Bookkeeping provides investors with up-to-date and accessible information. Then, investors will be able to make better, well-informed decisions, which is the ultimate purpose of bookkeeping. Bookkeeping is not only vital for current investors but future investors, too. Potential investors are more likely to invest in your business when you have organized information. Speaking of which, if you were an investor, would you invest in a company that did not have accessible and organized financial records? 

Final thoughts 

So now you have the answer to the question “Why is bookkeeping important?” It saves your money, time, and energy and helps you manage your business’s finances better. You can streamline the process even further by implementing a paperless bookkeeping system using Shoeboxed. Shoeboxed helps you clear your desks and turn your data into actionable information. Let us scan and organize your receipts, extract key data, create expense reports, and manage them in standard categorizations. Business owners no longer have to worry about keeping so many receipts, documents, and other accounting paperwork. Just leave it to experts. Contact us today and get ready to see how bookkeeping benefits your business. 

If you have any other reasons why bookkeeping is important to businesses, let us know in the comments!