Double-Entry Accounting: What Is It and Why Should You Use It

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Double-entry accounting can help improve accuracy in a business’s financial record keeping. In this guide discover the basics of double-entry bookkeeping, examples of double-entry accounting, and different double-entry accounting software.

[Featured image] Accounts look over ledgers on a library table

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 bookkeeping some notable ones include: 

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

  • Detecting errors and fraud more easily

  • Having useful knowledge in decision-making

  • 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 negative $10. If the accounts get out of balance then there is a problem somewhere.

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.

Debit sideEquipment accountCredit side
DateDetailsAmountDateDetailsAmount
6.22.2022Accounts payable$1,000

Debit sideEquipment accountCredit side
DateDetailsAmountDateDetailsAmount
6.22.2022Equipment$1,000

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 online

  • Freshbooks

  • Xero

Read more: Your Guide to Small Business Accounting

Accounting skills you need 

To do accounts, you 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

  • 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

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If you want to build competencies and learn the practical side of accounting at your own pace, you might like to take the Fundamentals of Accounting Specialization, offered by the University of Illinois. This specialization covers a wide range of accounting topics like balance sheets, income statements, and more.

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Written by Coursera • Updated on

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