What Is Double-Entry Bookkeeping?

Every business keeps track of its sales, expenses, and accounting. As a result, the accounting industry generated $110 billion in 2020.

It’s a large industry because most companies hire accountants to handle their bookwork. After all, accounting is a challenging task for most people.

One aspect of accounting is double-entry bookkeeping. Have you ever wondered what this is and what it means?

If so, keep reading to learn what double-entry bookkeeping is.

It Uses 5 Types of Accounts

Accounting, or bookkeeping, is the process of recording financial transactions. Through proper accounting methods, a business can track its income and expenses. They can also track other financial details.

Most businesses hire bookkeeping companies to do this for them, as it can be complicated. There are several key principles of double-entry bookkeeping to understand.

The first is the accounts. Most businesses track their accounting records with accounts. There are five primary types:

Assets

Assets are the things you own with value. Cash is an example of an asset, but there are many others. Other assets include buildings, vehicles, inventory, equipment, and office supplies.

Liabilities

Every business has debts, called liabilities, in a double-entry accounting system. Liabilities include all debts your business owes. Some examples include payroll, utilities, and equipment payments.

Equity

Equity is an accounting term referring to the value of the business. You find your equity by subtracting your liabilities from your assets.

Income

Every business is in the market of making money. Accounting systems use income accounts to record this money. Income can refer to money you earn from selling things or providing services.

Expenses

Expense accounts record the money you spend. For example, a utility expense account tells you how much you spend on utilities.

These are the five categories of accounts. Within each category, you might have many accounts. Each account is for a specific thing.

It Uses Debits and Credits

So what is double-entry booking? Additionally, what’s the difference between single and double-entry bookkeeping?

Single-entry systems only record one thing for each transaction. On the flip side, double-entry systems record two entries. These entries consist of debits and credits.

Each time a transaction occurs, a double-entry system involves debits and credits. Of course, you must follow the rules when using debits and credits. However, the rules work differently depending on the account type.

The rules for asset and expense accounts are:

Debits to these accounts increase their balances
Credits decrease their balances

The rules for liability, equity, and income accounts are:

Debits decrease the account balances
Credits increase the balances

Some accounts also carry their balances from year to year. These accounts are assets, liabilities, and equity accounts.

Other accounts start at $0 each year, and these accounts include expense and income accounts.

A company’s accounting record includes a list of all these accounts. The balances reflect a category’s total.

For example, you can learn the value of your company’s assets by adding the balances in each asset account. You can also learn how much your company earned by looking at the balances in your income accounts.

Every Transaction Requires Two Entries

So, how is double-entry booking used? The simplest way to understand is by looking at some double-entry bookkeeping examples:

Example 1: Asset Purchase

Suppose your company purchases $500 of office equipment with cash. Double-entry accounting requires an entry like this:

Debit to Office Equipment for $500
Credit cash for $500

When you debit office equipment, it increases the balance of this asset account. On the flip side, crediting cash reflects the decrease in cash for the expenditure.

Example 2:

Imagine your company buys a new vehicle with a loan for $25,000. The entry would look like this when you make the purchase:

Debit to Truck account for $25,000
Credit to Accounts Payable – Truck Loan for $25,000

This transaction reflects the increase in your assets through the debit to an asset account. It also reflects the amount you owe, which is accounts payable. This account is a liability account, which means it’s money you owe.

You will also make an entry in your accounting records each month when you make the truck payment. This entry would look like this:

Debit to Accounts Payable for the payment amount
Credit to cash for the payment amount

This entry reflects a decrease in the liability account (your truck loan). It also reflects a decrease in cash as you spent money to make the payment.

You can view your loan balance by looking at the accounts payable account. Of course, this account balance should decrease monthly as you make payments.

The Rules of Double-Entry Accounting

Double-entry accounting is logical and systematic. As a result, it might be helpful to know a few rules of the double entry system:

Debits Must Equal Credits

The first rule is that debits must always equal credits in transactions. A transaction might involve more than two accounts, but they must always stay in balance.

As a result, you must debit the same amount as you credit for every transaction.

The Accounting Equation Must Balance

Secondly, the double-entry system uses an equation: Assets = Liabilities + Owners Equity.

In fact, the best way to check your accounting records is to see if it balances. You can do this by adding up all your assets. Then, add up your liabilities and equity accounts.

Do these balances match? If so, you have balanced books.

One thing to note is that this equation doesn’t include your expense and income accounts. Those accounts are separate, as their primary purpose is to track amounts for a set period.

Learn More About Double-Entry Bookkeeping

Do you own a business? If so, do you want to start using the double-entry bookkeeping system? You can purchase accounting software to use it or hire an accounting firm.

Contact us if you need help. We offer accounting services in Charlotte, NC, and can help you with your business bookkeeping services.