A Beginner’s Guide to Double-Entry Accounting

Double-entry bookkeeping’s financial statements tell small businesses how profitable they are and how financially strong different parts of their business are. You can see how you’ve spent money and how your business is doing. Small businesses with more than one employee or looking to apply for a loan should use double-entry accounting. This system is a more accurate and complete way to keep track of the company’s financial health and how fast it’s growing. The accounting equation defines a company’s total assets as the sum of its liabilities and shareholders’ equity. Essentially, the representation equates all uses of capital to all sources of capital (where debt capital leads to liabilities and equity capital leads to shareholders’ equity).

You would need to enter a $1,000 debit to increase your income statement “Technology” expense account and a $1,000 credit to decrease your balance sheet “Cash” account. The trial balance labels all of the accounts that have a normal debit balance and those with a normal credit balance. The total of the trial balance should always be zero, and the total debits should double entry accounting be exactly equal to the total credits. When you generate a balance sheet in double-entry bookkeeping, your liabilities and equity (net worth or “capital”) must equal assets. In double-entry bookkeeping, debits and credits are terms used to describe the 2 sides of every transaction. Debits are increases to an account, and credits are decreases to an account.

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For analysts, decision makers, planners, managers, project leaders—professionals aiming to master the art of “making the case” in real-world business today. The Chart of Accounts as the organizing basis of a double-entry accounting system. Apply for financing, use free bookkeeping tools, send invoices, and more with a single Lendio account. Financial insight tools customized for small business owners. Adapting to this system will give you a clear picture of your financial position, which will provide further direction to your business plans. Working with Fincent is the best way to ensure that all your bookkeeping needs are taken care of so that you can focus on growing your business.

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Examples of Double-Entry Accounting

All transactions are just recorded partially in the single entry system making it unscientific at times. The single-entry system gives a partial overview of the business. However, such an approach gives you enough time to take necessary corrective measures.

A commonly used report, called the “trial balance,” lists every account in the general ledger that has any activity. It can take some time to wrap your head around debits, credits, and how each kind of business transaction affects each account and financial statement. To make things a bit easier, here’s a cheat sheet for how debits and credits work under the double-entry bookkeeping system.