In this article
You might like
No items found.
Spending made smarter
Easy-to-use cards, spend limits, approval flows, vendor payments —plus an average savings of 5%.1
|
4.8 Rating 4.8 rating
Error Message
No personal credit checks or founder guarantee.
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
Get fresh finance insights, monthly
Time and money-saving tips,
straight to your inbox
|
4.8 Rating 4.8 rating
Thanks for signing up
Oops! Something went wrong while submitting the form.
Table of contents

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.

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.

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.

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.

Try Ramp for free
Error Message
No personal credit checks or founder guarantee.
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
Finance Writer, Ramp
Richard Moy has written extensively about procurement and vendor management topics for companies like BetterCloud, Stack Overflow, and Ramp. His writing has also appeared in The Muse, Business Insider, Fast Company, Mashable, Lifehacker, and more.
Ramp is dedicated to helping businesses of all sizes make informed decisions. We adhere to strict editorial guidelines to ensure that our content meets and maintains our high standards.

FAQs

How Dragonfly Pond Works leveled up expense management with Ramp

“Creating efficiency is an important part of an effective finance team. To scale you can’t only increase the size of the team. You have to complement with technology.”
Austin Mcilwain, CFO, Dragonfly Pond Works

How Girl Scouts of the Green & White Mountains saved 20+ hours per month with Ramp

"With the time we've saved with Ramp, we can do more of the analysis work and speed up essential processes like month-end close."
Stuart Rothberg, Finance Director, Girl Scouts, Green & White Mountains

How 8VC resolved accounting coding challenges, increased spend visibility, and cut time to close with Ramp

“With Ramp, we have complete control and governance over company-wide spend in real time...we can easily close expenses by the first week of the month versus the third or fourth week of the following month.”
Nichole Horton, Controller, 8VC

How Studs consolidated expense management, travel, and bill pay into Ramp’s single efficient platform

“Ramp Travel gives me the ability to set the controls I need, and employees the freedom and flexibility to book travel easily."
Andrew Clarke, VP Finance, Studs

How Mindbody & Classpass saved time, enhanced visibility, and improved usability with Ramp

“We were going to hold office hours, but it was so quiet that we never needed to. All the feedback was positive -- it was very easy to roll out.”
Heather Bruzus, Principal Accountant, Mindbody & Classpass

How Rarebreed Veterinary Partners prepared for scale with Ramp

“I can look in Ramp and see my spend for the month immediately. I don’t have to go on 14 different platforms. It’s all right there.”
Eric Chabot, VP of Accounting & Controller, Rarebreed Veterinary Partners

How Tomo drove efficiency and slashed time to close with Ramp

"Bringing our close timeline down by half has given us so much more time for projects and analysis.”
Eric Ho, SVP, Head of Finance, Tomo