Double-Entry Accounting: A Beginner’s Complete Overview

Accounting’s double-entry accounting system is widely regarded as one of the most essential aspects of accounting. It offers a systematic approach to accurately reflecting the financial transactions of an organisation. Double-entry accounting is necessary to begin learning how accounting works regardless of whether you are a business owner, student, or someone simply wanting to understand how accounting works.

This article explains double-entry accounting in layman’s terms and details the components of double-entry bookkeeping that allow you to accurately record your financial activities.

Double-Entry Accounting Defined

Double-entry accounting is an accounting framework that records each transaction against two accounts. Each debit has a matching credit and the sum of the debits is equal to the sum of the credits.

The double-entry method serves to ensure that all accounting records remain in balance (i.e., all accounts have equal debits and credits) while simplifying tracking of the financial position of the company and quickly identifying accounting errors.

Double-Entry Accounting’s History

Before the introduction of double-entry accounting, companies kept records of their transactions on a simple list of transactions. However, as the growth of business occurred and the need to maintain accurate records increased, the single-entry system was found to be unsatisfactory. 

Companies required the ability to:

• Keep accurate records of assets and liabilities

• Keep track of customers who owe them money (accounts receivable)

• Detect errors or fraudulent activity

• Create financial statements with detail and completeness

With the introduction of the double-entry bookkeeping system, companies were able to meet the aforementioned objectives. Get the best bookkeeping services in UAE with The Total CFO. 

Understanding how Double-entry Accounting Operates Entails Knowledge of Accounting Equation

Any financial transaction made by an individual will affect this equation in that for every entry that increases one of the accounts within the equation, there must be an equivalent credit entry elsewhere. 

When there is an increase in assets and expenses, they will be recorded as debit. When there is a greater charge (credit), they will be recorded as including an increase in liabilities and equity and/or an increase in revenue. The harder part about getting accustomed to the concepts within the double-entry accounting system is getting used to how the debits and credits are used. Through practice, one will become comfortable with these types of transactions.

A list of types of accounts can help categorise transactions within the double-entry bookkeeping system includes:

• Assets are Cash, equipment, products in stock or inventory, etc.
• Liabilities include loans from banks, vendor accounts payable, etc.
• Equity includes owner’s capital, retained earnings, etc.
• Income or revenue includes service rendered and/or products sold.
• Expenses include rent, salary/payroll, utilities, etc.
• Every transaction will operate within at least two of these accounts. 

In both examples of the double-entry system, the debit and credit entries balance out exactly.

Advantages of Double-Entry Bookkeeping

1. Accuracy of Financial Accounting

With the addition of paired entries, the chance of error in your financial records is greatly reduced; errors are easily discovered through matching debits with credits.

2. Better Understanding of Your Business

Double-entry bookkeeping services give you access to lots of detailed financial reports, e.g. balance sheets, income statements and cash flow statements and you can use these reports to make informed business decisions about your finances.

3. Increased Detection of Fraud

When your debit totals and your credit totals don’t match, there is a clear issue and will very likely expose potential fraud or misrepresentations.

4. Necessary for Business Growth

If you plan to procure outside investment, apply for bank loans or prepare your company for a financial audit, double-entry bookkeeping is generally expected.

Single Vs Double Entry Method Comparison

• Single entry method is more simple whereas double entry method is more structured. 

• Single entry method’s accuracy is somewhat limited while double entry method has more detailed accuracy. 

• The single entry method’s financial reports are somewhat limited whereas the double entry method’s financial reports are highly detailed. 

• Detecting errors in the single entry method is difficult but in double entry it is easy. 

Even though the single-entry method may work for a small company, double-entry bookkeeping enables the required high degree of accuracy and transparency as expected in the 21st-century. 

Who Can Benefit from Using Double Entry Bookkeeping

Double-entry bookkeeping is most beneficial to: 

• Small and Medium-Sized Businesses

• Big Companies

• Freelancers and Other Consultative Professionals

• Companies Planning to Expand

• All Companies Preparing for a Financial Audit

Although your current business might be small, there are many future opportunities for growth.

Software To Use for Double-Entry Bookkeeping

Though it is feasible to maintain ledgers manually, this often results in a laborious process and an increased chance of making mistakes. For this reason, many businesses have adopted accounting software such as:

• QuickBooks
• Xero
• Zoho Books
• Tally

These account tools will automatically calculate debit and credit in the background when transactions are logged into them.

Closing Remarks 

The establishment of double-entry bookkeeping services serves as the foundation for the correctness of a financial system. It keeps records accurate, decreases the possibility of error and enhances an understanding of the actual state of your business. As such, it provides an excellent basis for further advanced examples and methodologies when learning to handle your finances and make future operational decisions more effectively.