Double-entry accounts are the most popular way to manage financial ledgers and prepare financial reports. Single-entry accounting method becomes obsolete as your business upgrades to a higher level and operates on a larger scale.
The practice of double-entry accounts makes our bookkeeping free of error and keeps the financial records in good standing. For this, you can get professional help from accredited accountants or use accounting software.
In this blog, we will discuss the double-entry accounting system while comparing it with the single-entry accounting system. Moreover, we will discuss when and how you can use this accurate system of bookkeeping. So, let’s dive in!
Double Entry Accounting System
A double entry accounting system is the most authentic, transparent and convenient way to keep records of all your financial transactions seamlessly and accurately. The double entries of each transaction, debits and credit, allow the financial managers to follow the accounting principles. In this case, you need to maintain an accounting equation that is as follows:
Assets = Liabilities + Shareholder’s Equity
If this principle of equality is not maintained properly and assets and liabilities are not in equal numbers, it means there’s something wrong in the calculation of the assets, liabilities and shareholder’s equity. It helps you identify the mistakes and errors in the financial transactions in the ledger quickly and on time.
Double-Entry Vs Single-Entry Accounting System
A single-entry accounting method is used when you are managing your system on a small scale. It helps you keep a record of all transactions in one way only. The debits and credit records will be maintained separately.
On the other hand, a double-entry ledger system is helpful when your business is on track for growth with high prospects of expanding further. As a result, the best accounting principle must be followed to track all the expenses, and changes in the assets and liabilities. So, it’s essential you record each financial transaction as debit and credit.
Example of Double Entry Accounts
Let’s suppose you have purchased computer equipment for £2500, you will add this transaction as a debit because your assets have increased by £2500. On the contrary, you will add £2500 as credit because your cash has decreased by an equal amount.
On the other hand, if you have bought this computer equipment on credit, you will add this transaction as accounts payable and it will be counted as a liability in your ledger.
When Should You Use Double Entry Accounting System?
Double entry accounts are beneficial when you want to prepare the financial reports of your company. The income statement, balance sheet and statement of cash flow are developed from the bookkeeping. The single-entry accounts are useful only when you are managing your business on a smaller scale.
Additionally, it helps you develop a more transparent and immaculate record of transactions which you can use later to win more investors, creditors and clients. As a result, your business will expand further.
With the help of double-entry bookkeeping, you can track your expenses, liabilities, assets and equities. It helps you analyse where the cash is going and coming from. As a result, you can better manage your finances.
What is Included in the Double Entry Accounts?
Every ledger has two entries: One as a debit on the left side of the ledger and another one as a credit on the right side. The debit covers all those transactions in which the money is coming. On the other hand, credit denotes all the money going out.
Examples of Debit
- Increase in Assets
- Decrease in Liabilities
- Decrease in Equity
- Increase in Expenses
Examples of Credit
- Decrease in Assets
- Increase in Liabilities
- Increase in Equity
- Decrease in Expenses
In short, debit entries reflect an increase in the cash coming into it. On the contrary, a credit accepts all entries about the outgoing cash from the business. One thing to remember is that the accounting equation must be satisfied in any case. Otherwise, it means there’s an error in the calculation.
The Bottom Line
In conclusion, we wrap up by saying that double-entry accounts provide useful information about the company’s health and performance. Moreover, it provides data for preparing the financial reports of a business.
If you’re managing your business on a larger scale, a double-entry accounting system is best for you. So, you need to keep track of all your expenses, assets and liabilities in your accounts accurately and with transparency. It increases the credibility of your financial system and will help you in achieving loans, debt or equity in the future.
Bookkeeping becomes tricky at times when you have higher chances of making an error in your ledger. Worry not! Our professional and detail-oriented accountants can help you! Get in touch with us.
Disclaimer: All the information provided in this article on Double Entry Accounts, including all the texts and graphics, is general in nature. It does not intend to disregard any of the professional advice.