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A Beginner’s Guide to Double-Entry Accounting

expense accounts

Double-entry bookkeeping, also known as double-entry accounting, is a method of bookkeeping that relies on a two-sided accounting entry to maintain financial information. Every entry to an account requires a corresponding and opposite entry to a different account. The double-entry system has two equal and corresponding sides known as debit and credit.

  • In 2012, she started Pocket Protector Bookkeeping, a virtual bookkeeping and managerial accounting service for small businesses.
  • Double-entry accounting allows you to better manage business-related expenses.
  • DebitDebit represents either an increase in a company’s expenses or a decline in its revenue.
  • One way to determine whether the software you’re considering is capable of double-entry accounting is to see if it can produce a balance sheet.
  • By using double-entry accounting, you can be sure all of your transactions are following the rules of the accounting equation.
  • The credit side is to the right, and the debit side is to the left.

Hence, the tax authorities trust and accept the method for tax purposes. However, a single entry accounting method is less trusted and not acceptable for tax computation by the authorities. The double-entry system requires a chart of accounts, which consists of all of the balance sheet and income statement accounts in which accountants make entries. A given company can add accounts and tailor them to more specifically reflect the company’s operations, accounting, and reporting needs.

How to get started with double-entry accounting

The total of both, debit and credit, must be equal for a transaction to be considered “balanced”. An important point to remember is that a debit or credit does not mean increase and decrease, respectively. However, a simple method to use is to remember a debit entry is required to increase an asset account, while a credit entry is required to increase a liability account. Contra liability accounts and contra expense accounts—like their contra asset counterparts—also reverse the debit/credit “rules” from the table in the previous section.

How to do double-entry bookkeeping for beginners?

  1. Business transactions produce documents.
  2. The information from the documents is recorded into journals.
  3. The data is taken from the journals and entered (posted) into ledgers.
  4. Each ledger contains various accounts, listed in the chart of accounts.

Once your is set up and you have a basic understanding of debits and credits, you can start entering your transactions. Double entry refers to a system of bookkeeping that, while quite simple to understand, is one of the most important foundational concepts in accounting. Basically, double-entry bookkeeping means that for every entry into an account, there needs to be a corresponding and opposite entry into a different account.

How Does The Double Entry Accounting System Work?

Double-entry and single-entry bookkeeping are both practices used in accounting to record transactions and keep the company’s accounts up to date in the trial balance. Double-entry accounting refers to how business transactions are recorded in both debits and credits as separate accounts in the accounting ledger. In other words, double-entry accounting refers to a system where every transaction is recorded twice in the books of the company.

  • For example, when you take out a business loan, you increase your liabilities account because you’ll need to pay your lender back in the future.
  • The main purpose of a double-entry bookkeeping system is to ensure that a company’s accounts remain balanced and can be used to depict an accurate picture of the company’s current financial position.
  • Even if your knowledge of accounting doesn’t extend beyond Accounting 101, you’ll find most accounting software applications easy to use.
  • The double entry bookkeeping was introduced between the 13th and 14th centuries, and one of its first mentions is found in Luca Pacioli’s book, published in 1494.
  • Each of these two-line entries is known as a general journal entry.

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