This guide for beginners will break down the essentials of double-entry bookkeeping into simple, coherent steps. These steps will introduce you to bookkeeping terms in plain English, show you how records are kept in journals and ledgers, and show you some ways of keeping things organized.
What Is Double-Entry Bookkeeping?
A system where every transaction is recorded twice is called double-entry bookkeeping. This fundamental accounting concept has been applied by businesses over time to provide an accurate financial position summary.
How It Works
In double-entry bookkeeping, accounts are divided into two parts per transaction. For example, if a business borrows money from the bank, the cash account records this cash deposit as an increase, and the liability account increases as well. These behaviors are called debits and credits. Each debit must have an equal and opposite credit, keeping the books “balanced.”
Debits and Credits
In double-entry bookkeeping, a debit to an asset or expense account increases it and reduces liability, equity, or revenue accounts. The opposite is true for credits: they increase liability, equity, and revenue accounts while reducing assets and expenses.
The General Ledger
The general ledger is where all debit and credit transactions are posted. The general ledger contains detailed information on your assets, liabilities, equity, revenues, and expenses. In preparing financial statements such as income statements, balance sheets, and cash flow statements, entries made in general ledger accounts populate these statements to give you financial information on your business.
The Fundamental Principles of Double-Entry Bookkeeping
The double-entry bookkeeping system is built on two fundamental principles: assets = liabilities + equity, and debits = credits.
Assets = Liabilities + Equity
This formula represents the accounting equation which states that total assets equal total liabilities plus owners’ total equity. Assets show what the company owns; liabilities reflect what it owes, while equity demonstrates the difference between them both.
Debits = Credits
The books will remain balanced only if the total debits and total credits are equal. Debits increase asset and expense accounts while decreasing liability, equity, and revenue accounts. Conversely, credits increase liability, equity, and revenue accounts while decreasing asset and expense accounts.
Errors or fraud can be reduced because double-entry bookkeeping has checks and balances. You will know right away if a mistake has been made, if the debits don’t equal the credits, or if the accounting equation needs to be balanced. It also allows organization management to track where money goes to generate useful financial statements. After some time practicing these principles, you will find that double-entry bookkeeping becomes second nature.
Conclusion
So that’s a basic introduction to Double-Entry bookkeeping for you! Although it may appear initially confusing, with some practice, you will get used to it in no time. Just keep in mind that every debit must have a matching credit, and your books will always be balanced.
