Double EntryDefined with Examples & More
Double-entry accounting requires two entries for each transaction, a debit, and a credit.
If the debit and the corresponding credits for each transaction add up to zero, the business’s books remain balanced.
This is different than single-entry accounting, in which only expenses and revenue are tracked.
Double-entry accounting tracks liabilities, equity, and assets as well as revenue and expenses.
Double-entry accounting does involve more work, but it also gives a better picture of how money is flowing through a business.
Also, considering the amount of accounting software available today, double-entry accounting is not nearly as difficult as it used to be.
Advantages and Disadvantages of Single Entry Accounting
A single-entry accounting system is better for most businesses.
However, there are some advantages to having a single entry accounting system for particularly small businesses.
We are going to list both the advantages and disadvantages of a single entry accounting system.
- It is easy to determine a business’s profits.
- The system is simple to understand.
- A single entry accounting system is less expensive for a business to maintain than a double-entry accounting system.
- It is difficult to determine the actual profit or loss occurring in a business.
- Fraud and errors are more difficult to detect.
- A single entry accounting system does not keep a complete record of each transaction.
- It makes it difficult to determine the actual value of the business.
Advantages and Disadvantages of Double Entry Accounting
Double-entry accounting has many advantages and is best for most businesses.
However, it does have some disadvantages.
So, we are going to discuss both its advantages and disadvantages.
- Since transactions are recorded in two accounts, both effects of the transaction are shown.
- Taxes can be calculated more easily.
- Fraud can be more easily detected.
- A business can get a better picture of its financial position.
- It can be difficult for particularly small businesses to maintain the number of books required.
- A double-entry accounting system can be complicated.
- It is expensive to maintain a double-entry accounting system.
Example of Single Entry Accounting
A single entry accounting system is quite similar to using a checkbook.
You will enter a date, a description, the amount of the transaction, and the balance in your records.
This example will include a customer paying their bill, and the business paying its electric bill.
|12/10/2021||Customer paid their bill||$1,000||$41,000|
|12/15/2021||Paid electric bill||$100||$40,900|
The owner can see that the business made $1,000 from a customer, but it is unclear whether the customer was paying off their entire account or whether they still owe money to the business.
The business also paid its electric bill, but it is not clear whether the business still has a balance with the electric company or not.
This Lack of information is why most businesses do not use single entry accounting.
Example of Double Entry Accounting
The following journal entries will show what the above transactions would look like in a double-entry accounting system.
|Customer paid their bill|
|Paid electric bill|
A double-entry accounting system provides business owners with more information about their business.
They can see exactly where any money is coming from and going to.
What are Debits And Credits?
In a double-entry accounting system, with each transaction, one account will be debited, and another account will be credited.
These transactions record the money moving in and out of your business.
If a transaction occurred in which your assets increased, this would require a debit to the asset account involved.
Additionally, the same transaction would require a credit to the other account involved in the transaction.
Expense accounts and asset accounts will increase when they are debited. In contrast, liability, equity, and revenue accounts increase when they are credited.
Debits will be recorded on the left side of an entry, and credits will be recorded on the right side of an entry.
The debits and credits for each individual transaction should add up to zero.
|Type of Account||Debit||Credit|
The Accounting Equation
Double-entry bookkeeping is a system of accounting in which for every transaction, one account is debited, and one account is credited, and the accounting equation is a fundamental part of this system. The accounting equation is:
Assets = Liabilities + Equity
If there is a change on one side of this equation, it will affect the other side of the equation.
This is why you need to record two entries for each transaction instead of just one.
An example of this would be buying some inventory on credit.
Your liabilities increase because you will need to pay your creditor back.
However, your assets also increase because you have added to your inventory.
This also happens when you invest money in a business you have started.
You have put money into your business, so your business’s assets increase.
Simultaneously, your equity will increase since you are a stockholder.
Most companies today use accounting software, such as FreshBooks, Xero, or QuickBooks Online, and most accounting software uses a double-entry system.
It might look like a single entry system since you enter information into a single general ledger account.
However, the accounting program generally enters this information into another general ledger, thus making it a double-entry system.
One way to check if your accounting software is using a double-entry system is to see if you can generate a balance sheet.
If the accounting software can be used to generate a balance sheet without having to provide any information other than a date, it is a double-entry system.
Using accounting software does not mean your bookkeeping will not have errors.
You may still find that on occasion, your bookkeeping contains duplicate transactions or has missed transactions.
Therefore, to try to keep accurate accounting records, it is a good idea to reconcile your accounts regularly.
This can be done by comparing the transactions in the accounting software your business uses to your business’s bank statement.
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