Is Double-Entry Accounting Right for Your Business? Your Complete Guide!

If you’re a freelancer, sole entrepreneur, or independent contractor, you have to decide your business’s accounting system: double-entry or single-entry? You might have been using single-entry accounting, especially if you aren’t using accounting software. While this may have been sufficient initially, you should probably move to use accounting software and double-entry accounting if you plan to grow your business. 

In this article, we’ll walk you through double-entry accounting as simply as possible. We’ll explain how it differs from single-entry, and help you decide which accounting system suits your business best.

What is double-entry accounting?

Double-entry accounting is a bookkeeping method that maintains the balance of a company’s accounts. This method shows the most accurate picture of the company’s finances. At its core, this method relies on the accounting equation Assets = Liabilities + Equity. 

This accounting system was invented by Benedetto Cotrugli, an Italian merchant, in 1458. This system was later shared by the Italian mathematician and Franciscan friar Luca Pacioli, the author of The Collected Knowledge of Arithmetic, Geometry, Proportion, and Proportionality, which included a detailed description of the double-entry accounting system.

Using double-entry accounting is the only way to make sure all of your transactions follow the accounting equation rules. Unlike single-entry accounting which only requires that you post a transaction into a ledger, double-entry tracks both sides (debit and credit) of each transaction you enter. Using the double-entry accounting system reduces errors and makes it easier to produce accurate financial statements. Later in the article, we will take a look at a real-world example to help make these concepts even more clear.

See more: A Small Business Guide To General Ledgers.

Types of accounts

When you employ double-entry accounting, you will need to use several types of accounts. Some key account types include:

  • Assets: Assets are resources owned by a company, which represent future economic value. Some examples of asset accounts are accounts receivable, cash, and equipment. 
  • Liabilities: Liabilities are amounts owed or committed by a company, such as accounts payable, loans, and accrued expenses. 
  • Equity: Equity is the amount of funds invested in a business by its owners plus all retained income from operations. Common examples of equity are paid-in equity (funds from investors), retained earnings, and common stock. 
  • Revenue: Revenue is the money generated from any operating activities, like product sales, service fees, and interest income. 
  • Expenses: Expenses are all costs incurred in running a business, such as inventory purchases, employee wages, and depreciation. 

What are debits and credits?

Debits and credits are fundamental to the double-entry system. In accounting, a debit entry appears on the left side of an account ledger, while a credit entry appears on the right side. A transaction’s total debits and credits must be equal to be in balance. Credits don’t necessarily imply increasing, and debits don’t always imply decreasing. 

A debit may increase one account while decreasing another. For example, a debit increases asset accounts but decreases liability and equity accounts, supporting the general accounting equation of Assets = Liabilities + Equity. 

Debits increase the balances in expense and loss accounts on the income statement, while credits decrease their balances. Debits decrease revenue and gain account balances, while credits increase their balances.

To make things a bit easier, we’ve made this table to show you how debits and credits work under the double-entry bookkeeping system:

DebitsCredits
– Are always recorded on the left side
– Increase an asset account, or decrease a liability account or equity account (such as owner’s equity).
– Increase an expense account.
– Decrease revenue
– Are always recorded on the right side
– Increase a liability or equity account, or decrease an asset account.
– Decrease an expense account.
– Increase revenue

How double-entry accounting works

Setting up and operating a double-entry accounting system includes four key steps. It starts with setting up the accounts in which bookkeepers will record transactions and ends with using account information to generate financial statements. The steps are: 

  • Stage 1: Create a chart of accounts for posting your financial transactions. This chart is a complete listing of all the general ledger accounts that a company can use to record transactions. It contains all the accounts for each of the five types: assets, liabilities, equity, revenue, and expense. Nowadays, most accounting software comes with pre-made charts of accounts available for customization, while other accounting solutions offer customized charts of accounts.
  • Stage 2: Enter all transactions with equal amounts of debits and credits to reflect the elements of a transaction. Debits and credits can be recorded in any monetary unit, but the currency should be consistent throughout the accounting process.
  • Stage 3: Ensure each entry has two components; debit and credit. And, ensure that they are in balance with the accounting equation. Using accounting software can help you with this. 
  • Stage 4: Check and ensure that financial statements balance and reflect the accounting equation. The net account totals in the double-entry accounting system are fundamental to creating the company’s working and final balance when closing the books at the end of each accounting period. The final adjusted balances flow into financial statement line items. Nowadays, accounting software can automate the integration and process flow necessary to do this.

An example of double-entry accounting

Let’s explore a realistic example of double-entry accounting for a common business transaction. If you buy a new $1000 laptop for your freelance startup and you would like to record the expense, here’s how you’d do it: 

First, you need to enter a $1,000 debit to increase your asset statement “Laptop” expense account and a $1,000 credit to decrease your balance sheet “Cash” account. 

DATEACCOUNTDEBITCREDIT
12/29/21Office equipment$1,000
12/29/21Cash Account$1,000

In double-entry accounting, you still record the $1,000 in your cash account, but you also record that $1,000 as an expense.

Should I use double-entry or single-entry accounting? 

Single-entry might be enough for your accounting needs if your business is very simple, has only one employee, doesn’t have any inventory or debts, and doesn’t have many accounts to keep track of. 

Otherwise, if your business is any more complex than that, most accountants will strongly recommend switching to double-entry accounting.

Why? Though single-entry accounting is simpler to implement, it has significant drawbacks compared with double-entry accounting. Single-entry accounting is more prone to errors, especially omissions and duplications, because it lacks the control method of balancing accounts.

Furthermore, single-entry accounting can’t create a complete financial picture of the business. It only records cash inflows and outflows, indicating when cash is in hand versus when it is actually earned. It also doesn’t indicate items like sales made on credit. Moreover, single-entry accounting requires extra work in the closing process to yield balanced financial statements. Lastly, single-entry accounting is unsuitable for public companies because it’s not accepted under GAAP (Generally Accepted Accounting Principles.)

Double-entry accounting provides you with a more complete, three-dimensional view of your finances than the single-entry method ever could. Since you’re recording where your money is coming from and where it’s going, you can then collate that information into financial statements. This gives you comprehensive insights into the profitability and health of various parts of your business. That’s a win because accurate financial statements can help you make better decisions about spending money in the future.

Double-entry accounting also reduces the risk of bookkeeping errors, improves financial transparency, and provides a layer of accountability to your business that single-entry accounting cannot.

If you want your business to be taken seriously by investors, banks, and potential buyers, you should be using double-entry.

The bottom line

Accounting entries are the foundation of every company’s accounting system. Taking good care of those documents means better control over your expenses. 

Shoeboxed can help you with that! Shoeboxed is a receipt scanning and expense management solution that helps businesses digitize piles of paper receipts in just a few clicks. After scanning your receipts, the app will automatically extract the key data and categorize them in proper order. You can then create clear and comprehensive expense reports, export, share or print all of the information you need for easy tax preparation or reimbursement. 

What’s more, Shoeboxed ensures that all your digitized receipts are human-verified and accepted by both the Internal Revenue Service and the Canada Revenue Service in the event of an audit. 
Using Shoeboxed saves you time and hustle collecting and keeping those paper receipts for report-making, especially when it comes to tax preparation. Sign up for free and go paperless with Shoeboxed!

A Small Business Guide To General Ledgers

The general Ledger is nothing new to the accounting world. It was invented hundreds of years ago, along with the double-entry bookkeeping system. However, if you’re a new business owner and have trouble understanding it, this article is for you! 

Read on to know what a general ledger is, why it is important and whether your business needs one. 

What is a general ledger?

To better understand general ledgers, let’s first go through a brief explanation of the bookkeeping process. We’ll start with journals. A journal is known as a book of original entries. That’s where you record every business transaction when it first happens, sothe records are always chronological. Once this is done, transactions in the journal are grouped by accounts (e.g., cash account, sales account, etc.). The categorized data are then posted to the general ledger, also named the book of final entries. The general ledger contains a separate form for each account, which is why ledger entries appear in the order of accounts instead of in chronological order as they are in the journal. 

Think of a general ledger (GL), or a nominal ledger, as a collector. It collects all financial data from journals, then summarizes and categorizes them systematically.  

An example of the general ledger

Below is a simple example to show you how bookkeepers record data; first in a journal, then in a general ledger. 

Example: A company sold goods to customers for$55,000, paid in cash, on July 16, 2019.

First, the transaction is recorded in the journal with a double-entry system and relevant details such as the date. The data is then posted to the Cash account and Sale account in General Ledger. 

general ledger example
Source: WallStreet Mojo

Categories of general ledger accounts 

The general ledger typically includes a list on the front page called the chart of accounts, which names all the accounts documented within. An account ledger refers to the documentation of a single account. 

Generally, most companies use the following five categories to group hundreds of accounts to organize their records: assets, liabilities, equity, revenues, and expenses. 

  1. Assets: Assets are any resources owned by the business and provide economic benefits. Assets can be tangible like cash, inventory, property, equipment, or intangible like trademarks and patents.
  1. Liabilities: Liabilities are debts owed by the company. There are two types of liabilities: current liabilities and non-current liabilities. Employee salaries and taxes are current liabilities, while bank loans, mortgages, and leases are non-current liabilities as you pay the debts over time.
  1. Equity: Equity is the difference between the value of the assets and the liabilities. Equity can include common stock, treasury stock, and/or venture capital. 
  1. Revenue: Revenue is what a business earns from the sales of its products and/or services, such as sales, interest, and royalties.
  1. Expenses: Expenses include all spending required to make a product or provide a service. Some examples are rent, utilities, travel business fees, postage, and stationery. 

Double-Entry Bookkeeping

The double-entry bookkeeping method makes sure that the general ledger of a business is always in balance. In account ledgers, every entry of a financial transaction debits one account and credits another in the same amount. For example, when you pay an expense of $1000, you debit $1000 on the expense side and credit $1000 on the cash side.

This bookkeeping system ensures that the general ledger is always in balance to maintain the accounting equation:

Assets = Liabilities + Equity

What does a general ledger look like?

The image below shows a common template of a general ledger. 

Double-entry Bookkeeping
Source: Double-entry Bookkeeping

As you can see, a general ledger sheet usually has a Journal reference column. Not only does it make it easy to keep track and reconcile if there are any discrepancies, but it also plays a vital role as an audit trail.

After being filled out, an account in the general ledger might look like this:

Source: Accountancy Knowledge 

Listed below are a few resources that offer free general ledger templates that you might want to check out (in case you don’t use accounting software):

After all, it’s you who decides what your general ledger’s format should look like. This depends on your business model, your accounting system, and your country registration as well. 

Why is a general ledger important for your business?

There are several reasons why the general ledger has survived for so long in the standard accounting procedure. Here are the two main reasons that can give you some insight into why:

It’s the foundation for your business’s financial statements. 

Financial statements indicate your business’s current financial health and growth trends in the future. For example, the balance sheet (statement of financial position) can tell you how much your business owns and owes or how much you would have left if you sold all of your assets and paid off your debts. The income statement (profit or loss) shows your revenue and expenses incurred in the fiscal year, deciding if and how much you gain or lose. The cash flow statement lets you know how cash has been allocated and earned over the year, revealing your spending habits, profit generators, and reliable forecasts. All of these reports and information are essential and invaluable to any business. In fact, one of the core objectives of accounting is to produce financial statements. 

All of these statements are made from the general ledger’s data. Accountants extract relevant and important information from the general ledger to create each report. 

It helps you manage expenses better.

Making the right spending decisions can be tricky. Make the wrong one and not only could you lose money, but there could also be additional consequences. To make smart decisions, you need to be fully aware of your spending habits, for instance, which areas of your business consume a lot of resources but don’t translate into a positiveROI? Or which area has the potential to generate more profits but doesn’t get enough attention? You can find the answers to those questions through the general ledger. Keep accurate, organized records and maintain your most useful source of financial advice. 

Plus, you should also pay great attention to every transaction’s receipt so that you can go over and double-check your spendings at any time. A well-managed receipts system means better control over your expenses. Shoeboxed can help you with just that! Shoeboxed is a receipt scanner app that helps you digitize every single paper receipt in just a click. Your receipt data will be automatically extracted and categorized with human verification

Why risk your money with the stacks of receipts lying everywhere in your office? Try Shoeboxed and experience the paperless world. 

General ledger codes – What are they?

If you’re dealing with a large number of transactions per month, it can get really difficult to keep your general ledger organized. That’s when general ledger codes (GL codes) come in. GL codes are the numeric codes that you assign to different accounts, quickening your recording process and making it easier to keep track of your accounts and transactions. 

It’s totally up to you to design your own coding system. For example, many business owners prefer to assign their revenue accounts with numbers starting at 100 and expense’s ones starting at 200 (e.g., 202 – phone payments, 203 – electricity payments). Or you could assign four-digit codes for all your accounts in your own unique way that suits your business. 

This image is an example: 

  Source: Planergy 

Final thoughts 

The general ledger groups and records all financial transactions within your business. It can be difficult to grasp at first, but once you understand and use it, you’ll realize how powerful and beneficial it can be for your business. More importantly, it helps you produce your financial reports – the invaluable tools that allow you to understand and improve your business’s financial health. 

8 Simple Practices For Small Businesses To Organize Receipts Efficiently

Keeping a record of your business transactions is considered a top priority for a self-employed or small business owner. Keeping your records properly saves you from being audited by the IRS. Plus, staying organized will save you time during tax season. 

However, we understand that keeping track of all your receipts and records can be tedious and time-consuming. That’s why in this article, we’ve outlined eight best practices to help you organize receipts and records efficiently. 

1. Use a business account and credit card instead of cash

As the IRS will continue to enforce its audit rules, keeping a better set of bookkeeping and receipts for all of your expenses will help you save time and hustle. This simple yet important tip can help you cope with it. Avoid using cash — it’s easy to spend, hard to track, and nearly impossible to match up cash spent with receipts. 

On the other hand, a credit card or debit card will provide you with monthly statements, enabling you to cross-check details with your paper receipts. It’s also a good idea to have a separate business account and credit card, so you don’t mix business expenses with your personal spending. 

2. Save your receipts

Don’t just rely on bank statements, credit card statements, or canceled checks! The IRS won’t accept your bank or credit card statements to justify deductible expenses. You will need an itemized receipt that corresponds with the transaction. 

Hang on those itemized receipts, which are also called “source documents,” for at least six years after your last Notice of Assessment since the IRS will ask to see them in the event of an audit. You can keep a physical or digital version of receipts. 

3. Choose email receipts instead of paper receipts

Nowadays, many merchants offer this service to their customers. You can choose to receive your receipts via emails, label and categorize them in a specific order. Email receipts are convenient and friendly to the environment as they go straight to your inbox and clear your desk and drawers from piles of paper receipts. You can always find them easily, create expense reports, and do so much more. 

4. Review your receipts once a month

Spending some time reviewing, categorizing, and organizing receipts for 30 minutes every month can make a huge difference! It keeps things manageable as the year progresses and helps you keep track of your spending so that you won’t miss out on any tax deductions. 

You can purchase an accordion folder every year to store all business receipts and make sure each folder contains all receipts for the year. These folders are inexpensive and easy to obtain. They allow you to organize receipts by category and year, making it easier than ever to find any receipt even years later. 

5. Make notes on the back of receipts

This is an especially great idea to keep track of dining and entertainment expenses. It’s easy to recall why you bought a printer, but it can be difficult to suddenly remember who you went to dinner with and what the business purpose was in 2015. By starting this simple habit, you will rest assured that you will not miss any dining and entertainment expense deductions for business purposes.

6. Create a spreadsheet for work-from-home expenses

Whether you have always been working from home, or you are working remotely due to the Covid-19 pandemic, there will always be some noticeably deductible business expenses. These expenses include a portion of cleaning materials, utilities, home insurances, office supplies, along with part of your property taxes, mortgage interest, and capital cost allowance.

To claim these expenses, you need to calculate the percentage of your home used for business and apply that percentage to the tax deduction. Create a spreadsheet including your receipts for home office expenses throughout the year. By making it a habit to update the spreadsheet once a month, you’ll save yourself the headache of scrambling to input and tally up all your work-from-home expenses at the end of the tax year.

7. Back up your receipts

Since paper receipts tend to fade with time, keeping a digital copy of each receipt can save you from getting in trouble with the IRS. The simplest practice is to snap a picture of each receipt on your phone, then upload it to a central location later and keep it for at least six years. The IRS allows digitally stored receipts, however, don’t forget to back up stored receipts (on the cloud or a memory device) in case your hard drive crashes and deletes all your important information by accident. 

8. Scan and store your receipts digitally

Storing receipts digitally has been proven to improve business efficiency. It provides several benefits including time and cost-saving, easy to store and access, tax-ready, reduces clutter,  lessens the risk of data loss, increases security, and so much more. 

There are plenty of receipt scanning apps that you can use to scan and store your receipt digitally. Each offers special features for particular purposes, so anyone can choose the most suitable one and benefit from it. 

Shoeboxed is a painless receipt scanning and organizing solution for freelancers and small businesses owners. This versatile app serves many purposes: scan, store and organize receipts, manage business expenses, store business cards and even track mileage for business travelers. 

Shoeboxed’s OCR engine and human data verification features ensure that your receipts are legibly scanned, clearly categorized, and accepted by both the Internal Revenue Service and the Canada Revenue Service in the event of an audit. What’s more, Shoeboxed enables you to create clear and comprehensive expense reports that include images of your receipts. You can then export, share or print all of the information you need for easy tax preparation or reimbursement… within a few clicks. 

Shoeboxed is now available on iOS and Android. Get your free trial before choosing the perfect plan

Conclusion

Organizing your receipts can keep you proactive and productive, which saves you lots of time, stress, and even money in the long run. Going digital helps you organize receipts and keep track of your expenses easier than ever. As everything is digitally stored and accessible through a cloud-based system, you will be able to work with them anytime, from anywhere, with any device, within a few clicks. 

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