Complete Guide to Double-Entry Bookkeeping
Double-entry bookkeeping is the practice where every business transaction is represented by at least two entries. Entries are described as a “debit” or a “credit,” that increases or decreases the balance of an account.
For example, if a business provides a service for $5,000 in cash, the cash (asset) account is
debited to $5,000 and the sales account is credited $5000. This means cash and sales are now
affected by the same amount.
Advantages of Double-Entry System of Bookkeeping
Every business needs to have a bookkeeping system. Though small companies might opt for a single-entry system of bookkeeping, it is necessary for the companies with more than one employee or that has debts, inventory or several accounts to have a double-entry bookkeeping system. The advantages of the double-entry system of bookkeeping are as follows:
Complete financial picture
The business whose transactions are huge should maintain a double-entry bookkeeping system. This
is because double-entry bookkeeping helps to prepare crucial financial reports like an income
statement and balance sheet. It gives complete information about all the transactions compared to
the single-entry system, as every transaction consists of a source and destination.
Better financial decisions
The double-entry system helps companies maintain their accounts in detail, which helps control the business. In addition, it shows how profitable and financially strong various parts of the business are and thus helps to make better financial decisions.
The detailed records of accounts maintained under the double-entry system can also be used for comparison purposes. The details of the previous year can be compared with the details of the current year, and any deviations found during comparison can be worked on.
Reduces bookkeeping errors
The assets and liabilities plus equity in the balance sheet of the double-entry bookkeeping system should be equal. If they are not equal, the entries in the books are wrong and indicate that the journal entries are wrong. Thus, the double-entry system ensures accuracy in the books of accounts and the final balance sheet. In addition, it helps accountants to reduce mistakes by being accurate.
Preferred by funders and banks
The double-entry system is more transparent and complete. It helps businesses to gain investors and obtain credit easily. The reports prepared by the double-entry system of bookkeeping allow banks and investors to get a complete and accurate picture of the business’s financial health.
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