Double-Entry Accounting: What It Is and How It Works

Many companies, regardless of their size or industry, use double-entry accounting for their bookkeeping needs because it provides a more accurate depiction of their financial health. This bookkeeping method also complies with the US generally accepted accounting principles (GAAP), the official practice and rules for double-entry accounting. 

This guide will tell you more about double-entry accounting, how it works, and whether a career in accounting is right for you.

What is double-entry accounting?

Double-entry accounting is a system of bookkeeping where every financial transaction is recorded in at least two accounts. A double-entry system provides a check and balance for each transaction, which helps ensure accuracy and prevent fraud. This accounting system also allows you to track business finances more effectively, and make better decisions about where to allocate your resources.

Account types

The five main types of accounts used in double-entry bookkeeping are: 

• Asset accounts represent the resources of a business, such as cash, inventory, and equipment. 

• Liability accounts represent the debts of a business, such as loans and accounts payable. 

• Income accounts represent the revenue of a business, such as sales and interest income 

• Expense accounts represent the costs of a business, such as rent and utilities.

• Equity accounts represent the funds invested in a business and the amount of profit left after operation costs, also known as, retained income. 

Single-entry vs. double-entry accounting

Single-entry accounting is a system where transactions are only recorded once, either as a debit or credit in a single account. This method is simpler and can be used for smaller businesses. 

Double-entry accounting is a system where each transaction is recorded in at least two accounts. This method provides a more complete picture of a business’s finances, and is typically used by larger businesses.

Advantages of double-entry accounting

There are many advantages of double-entry accounting. Notable ones include: 

• Gaining a clear picture of a company’s financial position

• Detecting errors and fraud more easily

• Having useful knowledge for making decisions

• Knowing the financial health of a business

Double-entry accounting systems can be used to create financial statements (such as balance sheets and income statements), which can give insights into a company’s overall performance and health.

How double-entry accounting works

Double-entry accounting is the most common type of accounting used by businesses. It’s based on the concept that every financial transaction has two sides: a debit side and a credit side. The ledgers must have every transaction in a business with at least one debit entry and one credit entry. The accounting equation is the foundation of double-entry bookkeeping.

The accounting equation

The double-entry accounting system is based on the accounting equation: 

Assets = Liabilities + Equity 

This equation means that the total value of a company's assets must equal the sum of its liabilities and equity. This equation must always be in balance. In other words, if a company has $100 in assets and $50 in liabilities, then its equity must be $50. If a company has $100 in assets and $110 in liabilities, then its equity would be -$10. If the accounts are imbalanced, then there is a problem in the spreadsheet.

Double-entry accounting in action

To illustrate how double-entry accounting works, let's consider a simple transaction: a company buys a new piece of equipment for $1,000 on June 1, 2022. In this case, there are two accounts affected by the transaction: the asset account "Equipment" and the liability account "Accounts Payable".

The asset account "Equipment" increases by $1,000 (the cost of the new equipment), while the liability account "Accounts Payable" decreases by $1,000 (the amount owed to the supplier). You enter a debit (DR) of $1000 on the right-hand side of the "Equipment" account. To balance the accounts, you enter a credit (CR) of $1000 in the "Accounts Payable" account.

This is how the entries would look in the Equipment Account ledger and the Accounts Payable ledger.

Double-entry accounting software

Accounting software has become advanced and can make bookkeeping and accounting processes much easier. The software can reconcile data from different accounts and automate accounting processes. 

A double-entry accounting software program helps you keep track of your financial transactions and typically includes features like a general ledger, accounts receivable and payable, and a trial balance. This program can identify revenue and expenses, calculate profits and losses, and run automatic checks and balances to notify you if something needs your attention.

Here is some of the software commonly used in the market today:

• Quickbooks

• Freshbooks

• Xero

Read more: Your Guide to Small Business Accounting

Education requirements for accountants

Although it is possible to become an accountant without a degree, most employers will require at least a bachelor’s degree in accounting or business. According to Zippia, 71 percent of accountants hold a bachelor’s degree, and 12% have an associate degree [1].

A bachelor's degree in accounting can provide you with the necessary skills to start an entry-level role as an accountant.

Read more: What Is a Bachelor's in Accounting and What Can You Do with One?

Skills needed

To be an accountant, you'll need to be able to keep track of financial records and run reports. There is also some fundamental knowledge you need to do accounts for your own business or working in an accounts department. You'll need an understanding of:

• Accounting software

• Accounting practices

• Financial statements

• Basic bookkeeping

• Accounting legal requirements

It may be necessary to learn the skills and knowledge to do accounts correctly to avoid any miscalculations. You'll need at least the following competencies:

• Basic spreadsheet skills

• Analytical skills

• Attention to detail

• Organizational skills

Accounting for your career

Give your skills a boost with Intuit Academy Bookkeeping Professional Certificate. You'll learn bookkeeping basics like double-entry accounting, along with accounting for assets and financial statement analysis. With courses like these under your belt, you're well on your way to becoming a successful accountant.