What is double entry accounting?

Double-entry accounting is a bookkeeping method that records transactions in at least two accounts, one as a credit and another as a debit. While this might sound tedious, there are several benefits to employing this accounting practice.

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In this article, we’ll explore the basics of double-entry accounting, the benefits of using this method, and a few examples of how you might apply this to your business. 

Basic concepts: Double vs. single entry

Single-entry accounting is a process by which transactions are recorded once as either revenue or expense. Conversely, double-entry accounting tracks both sides of the transaction in two different accounts. It records each transaction as two separate entries, one as a debit and the other as a credit.

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In addition to revenue and expense accounts tracked in single-entry accounting, double-entry accounting also tracks liability, asset, and equity accounts. It is, therefore, suitable for small and medium enterprises.

How does double-entry bookkeeping work?

Double-entry bookkeeping allows dual recording of each transaction in the ledger. In double-entry bookkeeping, the debit entry decreases liabilities, or equity accounts, while increasing expense or asset accounts. A credit entry raises the revenue, equity, or liability accounts.

Types of accounts used in a double-entry system

The dual accounting method uses five types of accounts. These include assets, liabilities, equity, revenue, and expenses. Understanding these accounts helps understand the effect of a particular transaction. The accounting equation, Assets = Liabilities + Equity, must stay balanced.

• Assets: Assets are resources your business owns, such as cash, accounts receivable, inventory, equipment, and prepaid expenses.
• Liabilities: The financial obligations your business owes to another party, such as accounts payable and unearned revenue.
• Equity: Equity is the difference between assets and liabilities. It includes capital, retained earnings, and owner investments.
• Revenue: These are business earnings from sales of the company offerings.
• Expenses: The expense account records the cost of running a business, such as rent or payroll expenses.

Benefits of double-entry accounting

A double-entry accounting system provides many benefits for businesses. It provides an accurate view of your business finances. Here are the key benefits of the dual accounting method:

• Reduces accounting errors: Double-entry bookkeeping reduces errors compared to the single-entry method because transactions are recorded in two accounts, helping minimize accounting mistakes.
• Prevents fraud: This system also prevents fraud because each transaction has a visible record on both sides, which must balance.
• Improves reliability: The double entry is more reliable than a single entry because it provides a clear view of your business finances. It enables you to know the exact state of your accounts at any time.
• Boosts cash flow management: Double-entry bookkeeping provides an accurate view of your account receivable and payable. It lets you easily manage cash flow, identify slow-paying clients, and chase overdue payments.
• Simplifies financial reporting: The entry system simplifies financial reporting as it provides accurate records and helps identify and correct errors fast before they affect subsequent transactions.
• Helps in financial decision-making: The dual accounting method provides valuable insights into your business's financial operations. It helps make informed decisions in setting financial goals or taking advantage of business opportunities. It leverages technology to assess the financial health of your business through data-driven solutions.
• Enhances comparisons: This bookkeeping system lets you easily compare financial activities between two periods. It helps to identify areas that need improvement in the future and makes projections for budgeting.

Double-entry accounting examples

You might be anxious about how to conduct journal entries twice and what accounts to debit or credit. Below are examples of double entries with transactions recorded in two or more accounts for the balance.

Example 1

Depreciation expense of $50,000. You debit the depreciation expense and credit accumulated depreciation.

• Depreciation expense: $50,000 (Debit)
• Accumulated depreciation: $50,000 (Credit)

Example 2

If your business pays a utility bill of $3,500, the asset account decreases (cash) while the expense account increases. You will therefore debit utility expenses and credit cash.

• Utility bill: $3,500 (Debit)
• Cash: $3,500 (Credit)

Example 3

Assume that your company purchased an inventory worth $100,000. You paid $60,000 cash, and the balance was on the account. To journalize these entries, you calculate the amount on account ($100,000 - $60,000) = $40,000.  You credit the inventory at $100,000, credit cash at $60,000, and credit accounts payable at $40,000.

• Inventory: $100,000
• Cash: $60,000
• Accounts Payable: $40,000

Example 4

Towards the end of the last financial year, a particular company declared dividends of $43,000. This company should debit retained earnings and credit the dividend payable. If the company paid the dividends two months later, then the company debits dividends payable and credits cash.

• Retained earnings: $43,000 (Debit)
• Dividends payable: $43,000 (Credit

Ramp: Manage your company finances effectively

Are you looking for a finance automation platform that saves time and money? Ramp helps you manage expenses, pay bills, and automate accounting and reporting. We ensure you track business spending accurately with a dual-accounting method and seamless integration with your ERP system.

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The double-entry system provides a clear view of your finances and helps you make informed decisions. Transform your business accounting operations with Ramp today.

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