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You can use double-entry bookkeeping to keep accurate accounting records.

The Basics of Double-entry Accounting

Keeping financial records is an essential part of owning a business. The double-entry system reinforces accuracy in your books. Learn how to use double-entry accounting to keep track of transactions.

What is double-entry accounting?

Double entry is the bookkeeping concept used for accrual accounting. It is based on the idea that every business transaction has equal and opposite effects on at least two accounts. Double-entry accounting helps you create statements, maintain accurate records, and catch accounting errors.

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The general ledger

In double-entry bookkeeping, you post journal entries to your general ledger. The general ledger reflects your financial activities. You can see where money is coming from and going, how much debt you have compared to assets, and the amount of cash you have on hand.

The general ledger organizes transactions into accounts. Separate categories give a clearer understanding of your business’s financial health. There are five major accounts in the general ledger:

  • Assets are items that your business owns
  • Liabilities are amounts you owe on credit
  • Equity is the value of your assets minus liabilities
  • Revenue is the money you earn from sales
  • Expenses are amounts you pay to operate your business

You can divide each of the major accounts into smaller subgroups. For example, you might have utility, inventory, and payroll expense accounts. This helps you further maintain organized records.

The general ledger reflects a two column journal entry accounting system. Assets and expenses appear on the left side of the ledger. Liabilities, equity, and revenue appear on the right side. Both sides of the ledger should have equal balances.

Debits and credits

To create balance in your books, use debits and credits. A debit or credit means an increase or decrease in an account.

The double-entry accounting system recognizes that every transaction has two effects. For example, when you spend cash, you also gain something of value. And when you make sales, you also lose something of value.

Each account is affected by debits and credits differently. Assets and expenses are increased by debits and decreased by credits. Liabilities, equity, and revenue are increased by credits and decreased by debits. Use this chart to help you:

Double-entry accounting

Debits and credits offset each other. The sum of the debits should be equal to the sum of the credits in your books.

The accounting equation

You can use the accounting equation to make sure transactions are always balanced. The accounting equation shows that the assets are equal to the liabilities plus equity. Here is the accounting equation:

Assets = Liabilities + Equity

The entries in your books need to maintain this relationship. If the two sides of the equation are unequal, there is an error in your books. You need to see if you missed an entry or entered a transaction incorrectly.

How to do double-entry bookkeeping

Dual entry accounting takes some practice. But once you understand how the double-entry system of accounting works, you can maintain your records accurately.

Each time your business makes a transaction, you need to record at least two entries.

First, determine which accounts are affected by the transaction. For example, if a customer makes a cash purchase, the inventory and cash accounts are affected. In other words, you now have less inventory and more cash, so you need to reflect those changes in your books.

After identifying the accounts, take a look at how each is affected. Does the account increase or decrease?

Then, use the debits and credits chart above to see whether you need to debit or credit each account.

  • If an asset or expense account increases, use a debit
  • If an asset or expense account decreases, use a credit
  • If liabilities, equity, or revenue increases, use a credit
  • If liabilities, equity, or revenue decreases, use a debit

Once you have made all the entries for the transaction, check that your books are balanced.

Double-entry bookkeeping examples

A good way to learn this bookkeeping method is to look at double-entry accounting examples. Take a look at the following scenarios to see how the double-entry bookkeeping system works.

Double entry example 1

You sell an item from your store to a customer who pays in cash.

Step 1: Which accounts are affected?

The inventory and cash accounts are affected. These are both assets.

Step 2: How is each account affected?

The inventory account decreases. The cash account increases.

Step 3: Should you use a debit or a credit for each account?

Since the inventory account decreases, use a credit to show a decrease in assets. Since the cash account increases, use a debit to show an increase in assets.

Account Debit Credit
Inventory X
Cash X

Double entry example 2

You buy a new machine on credit (the vendor invoices you).

Step 1: Which accounts are affected?

The machine accounts and accounts payable are affected. The machine account is an asset. Accounts payable is a liability.

Step 2: How is each account affected?

The machine account increases. Accounts payable also increases.

Step 3: Should you use a debit or a credit for each account?

Since the machine account increases, use a debit to show an increase in assets. Since accounts payable increases, use a credit to show an increase in liabilities.

Account Debit Credit
Machine X
Accounts Payable X

Double entry example 3

You receive a bank loan principal.

Step 1: Which accounts are affected?

The cash and bank loan accounts are affected. The cash account is an asset. The bank loan account is a liability.

Step 2: How is each account affected?

The cash account increases. The bank loan account also increases.

Step 3: Should you use a debit or a credit for each account?

Since the cash account increases, use a debit to show an increase in assets. Since the bank loan account increases, use a credit to show an increase in liabilities.

Account Debit Credit
Cash X
Bank Loan X

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