What it is, what it’s for, and why you should use it.
The term ‘balancing the books’ is synonymous with accounting, but how many of us actually know its origins? Well, the term stems from the process of double-entry accounting. Double-entry accounting involves completing a separate entry for both debit (the left column of your account ledger) and credit (the right column). These two columns must balance each other out ― hence, balancing the books.
In this article, we’ll answer the question: what is double entry accounting? We’ll also explore some of the key benefits of double-entry accounting and examine what makes it preferable to single-entry accounting.
Understanding debits and credits
Before you can understand the process of double-entry accounting, you first need to understand the concept of debits and credits. In double-entry accounting, ‘debits’ represent increases in assets or expenses and decreases in liabilities or equity, while ‘credits’ represent the opposite.
What is double-entry accounting?
Newton’s Third Law states that “for every action in nature there is an equal and opposite reaction.” Double-entry accounting can be understood in the same way. For every financial transaction, there is an equal and opposite response in the credits or debits column. So, if your business were to make a $30,000 purchase of some manufacturing equipment, for example, you’d mark $30,000 cash in the credit column, but then add the equivalent $30,000 asset in the debit column. Every transaction you make must balance in this way.
The process can be expressed using this simple formula: Assets = Liability + Equity. This equation expresses how a company's assets are financed using a combination of debts (liabilities) and ownership (equity).
For finance departments, double-entry accounting is the cornerstone of accurate, transparent record-keeping. It ensures that every financial transaction is meticulously recorded ― enabling businesses to maintain financial integrity, make informed decisions, and remain compliant.
Why double-entry accounting?
For accountants, double-entry accounting represents a slightly increased workload as every transaction must be recorded twice. But a little short-term pain is worth it for significant long-term gain. Here are some of the benefits of double-entry accounting for finance teams.
1. Reduce and identify errors: Double-entry accounting makes it easier to identify errors and spot fraudulent activities. If the credit and debit totals don’t match, the accountant can immediately tell that a mistake has been made.
2. Gain detailed financial insights: By maintaining a detailed record of their transactions, businesses gain valuable insights into their financial health — allowing for informed decision-making and strategic planning.
3. Ensure legal and regulatory compliance: Double-entry accounting helps establish accurate financial reporting, allowing businesses to better meet legal and regulatory requirements.
4. Establish audit preparedness: Transparent and organized financial records streamline the audit process, making it easier to provide evidence of financial transactions.
How does it differ from single-entry accounting?
Double-entry accounting may be more complex and time-consuming than single-entry accounting, but it’s far more accurate, reliable, and robust.
As the name suggests, single-entry accounting involves recording transactions with one entry only, typically in a simple cash register or ledger. While single-entry systems might be suitable for small businesses or sole traders, they lack the accuracy, detail, and financial oversight provided by double-entry accounting.
Double-entry accounting remains the preferred method for businesses that want to maintain accurate, transparent, and comprehensive financial records ― enabling them to make informed decisions, comply with regulations, and demonstrate accountability to stakeholders.
How to implement double-entry accounting
Follow these simple steps to establish a double-entry accounting process for your business:
1. Set up your chart of accounts: Create a structured list of accounts that represents the different financial categories relevant to your business.
2. Record transactions: For every business transaction, ensure that you record both a debit and a credit entry ― maintaining the balance between the two sides.
3. Balance the books: Regularly review and reconcile your accounts using a trial balance to identify any discrepancies. Prepare financial statements — such as the income statement and balance sheet — to provide a snapshot of your company's financial position.
4. Invest in accounting software: Most modern accounting software is built on the principles of double-entry accounting. You’ll find that, by entering a transaction into the software, the system automatically completes the second transaction for you, making
the double-entry accounting process significantly quicker and easier. More on this in a moment.
Double-entry accounting software
Many of the most popular ERP systems, including QuickBooks, Sage and Xero, effectively automate the double-entry accounting process — balancing the books in the back end so accountants needn’t waste time completing the second entry themselves. Such tools help to save time, reduce human errors, and provide real-time insights into a business’ financial data.
In summary
Double-entry accounting serves as the bedrock of transparent and reliable financial record-keeping. By understanding its key concepts and implementing the process diligently, businesses can maintain accurate financial records, make informed decisions, and navigate the complex landscape of financial management with confidence. Whether you're a small startup or a large corporation, mastering double-entry accounting is essential for long-term success.
You can also combine your double-entry accounting software with an Accounts Payable automation solution like Quadient Accounts Payable Automation by Beanworks. Quadient AP automates the accounts payable process ― eliminating up to 83% of manual data entry so accountants can focus on high-value strategic tasks.
