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Contents

  1. 1. What is double-entry bookkeeping?
  2. 2. Who should use the double-entry bookkeeping system?
  3. 3. How to do double-entry bookkeeping
  4. 4. Why use double-entry bookkeeping?

What is double-entry bookkeeping?

November 28, 2022
One of the first milestones to celebrate as a small business owner is making your first sale and seeing the payment land in your business account.However, as your business grows it becomes increasingly important to keep track of all income and expenses. Bookkeeping is an essential part of the financial accounting process, so making sure the books are balanced can keep you out of trouble with HM Revenue and Customs (HMRC) further down the line.In this article, we’ll be explaining the double-entry bookkeeping system and how it enables you to keep on top of your transactions. Let’s dive into it.

What is double-entry bookkeeping?

Before diving into double-entry bookkeeping, we’ll first look at what exactly bookkeeping is.Bookkeeping is the process of recording, storing and tracking the financial information and transactions of a business on a day-to-day basis.As a business owner, your bookkeeping responsibilities include the following:
    Recording financial transactionsPosting debits and creditsIssuing invoices and recording payments madeConducting bank reconciliation to avoid mistakes, incorrect payments and fraudPreparing financial reports, such as balance sheets, cash flow statements and income statementsTracking how much money the business owes (accounts payable) and how much it’s owed (accounts receivable)Running payrollMaintainable and balancing subsidiaries, general ledgers and historical accounts
For more on what bookkeeping is, from what the differences between bookkeeping and accounting are to good bookkeeping practices to keep in mind, check out Ember’s ultimate guide to bookkeeping.

The double-entry bookkeeping system is an effective method of financial reporting, where every business transaction has at least two entries recorded — a credit entry and a debit entry — against it in at least two business accounts.For example, if an e-commerce brand sells a shirt for £15, the transaction would be recorded twice. £15 would be deducted in the inventory since the company has lost £15 in stock, and £15 would be accounted for in revenue. With double-entry bookkeeping, the amount debited and the amount credited must match.

What’s the difference between single-entry bookkeeping and double-entry bookkeeping?

Unlike double-entry bookkeeping, single-entry bookkeeping is where all debits and credits are recorded in a single cash book once. If we used the same example above but with single-entry bookkeeping, the financial transaction can be recorded as +£15 in revenue.

Who should use the double-entry bookkeeping system?

Very small businesses may find that a single-entry bookkeeping system is enough to manage their transactions, but as your business grows double-entry bookkeeping is advised.This is because as your business grows, so does the number of transactions you make, whether it’s because you’ve gained clients or have increased the amount that you sell.As such, keeping track of your total credit and total debit becomes harder to do with a single-entry bookkeeping system, making the switch to double-entry bookkeeping more attractive.

How to do double-entry bookkeeping

As outlined above, double-entry bookkeeping involves recording every financial transaction twice. In the above example, the shirt is an assets, with the money made from its sale being the revenue generated.Each transaction much be stored in a ledger account. A general ledger summarises your business’s financial information, which would historically be recorded by hand. Small businesses may still opt to write their financial transactions out by hand, but larger business’s may prefer to use spreadsheets or accounting software to do their bookkeeping.Assets and revenue are 2 of the 5 categories recorded in double-entry bookkeeping, with each category requiring its own type of account account. There are 5 different accounts for you to record your transactions:
    Asset account: Anything of monetary value that the business owns (part-ownership counts). Think equipment and property, but also the cash in your accounts. Revenue account: Any money coming in. This is most often due to sales, but elements like royalties or interest earned also count. Expense account: Any money going out. There are so many things businesses need to spend money on, from staff wages to office rent, to buying new inventory. Liabilities account: Anything owed by a business, from bank loans to accounts payable. Equity account: This refers to any investments made by an owner into a company. All shareholders are considered owners. Equity can be calculated using this equation: Assets - Liabilities = Equity
The key thing to keep in mind with double-entry bookkeeping is that ledgers must be balanced. This means that when both sides are tallied up and subtracted from the other, they should come to 0. If they don’t, you’ll know there’s been an error and can go through your credits and debits in detail.

Double-entry bookkeeping example

We’re aware that all these categories can seem daunting when starting out, so to help you to really get to grips with this system, here’s an example of double-entry bookkeeping. Your Head of Sales attends a sales convention, which costs £75 to attend. This means that your expense accounts have increased by £75, and your assets account has decreased by £75.When recording transactions, you’ll write +£75 in the column on the left side, indicating the expense account. On the right side, you’ll write -£75 to decrease in the asset account.
Expense accountAsset account
+£75-£75

Why use double-entry bookkeeping?

Here are a few benefits to the double-entry bookkeeping system:
    Accuracy. Double-entry bookkeeping makes it easy to spot any errors. If the figure on the left side of your book does not match the figure on the right side of the book, you can easily check and pinpoint the origin of the discrepancy.Helps with filing financial statements. When it’s time to file your profit & loss statement and balance sheet, you can breathe easy, as you can use a lot of the information in your books during your filing.Predict the future of your business. If you don’t keep track of the flow of cash in your business, you are more likely to run into financial difficulties. When you have a good overview of the financial health of your company, you can adjust your business strategy accordingly.
Blessing Lola A.
Blessing Lola A.Freelance Copywriter & CX Specialist

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