What Is Double-entry Accounting or Bookkeeping?

Accounting software provides controls to ensure your trial balance is accurate. The software will ensure that the total dollar amount of debits equals the credit balance and that each account balance is in your trial balance report. At any point in time, an accountant can produce a trial balance, which is a listing of each account and its current balance. The total debits and credits on the trial balance will be equal to one another. Accountants frequently review the trial balance to verify that they posted journal entries correctly, as well as to correct any errors. When using the double-entry accounting system, two things must always be balanced.

If your business is any more complex than that, most accountants will strongly recommend switching to double-entry accounting. When you send an invoice to a client after finishing a project, you would “debit” accounts receivable and “credit” the sales account. While double-entry accounting isn’t required through regulation, it is the usual accounting exercise for most businesses and is strongly recommended by means of accounting professionals. Examples include recording the purchase of inventory, the payment of salaries, or the receipt of cash from a customer. While it offers accuracy, financial reporting, internal controls, and an audit trail, it may also be expensive, rigid, complicated, and prone to human error. The double-entry system creates a clear and complete audit trail that can be easily traced back to the original transactions.

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The total amount credited has to equal the total amount debited, and vice versa. Recording multiple transactions that require both credit and debit entries can be time-consuming and lead to mistakes. It is recommended to use an accountant for your business or accounting software to ensure that all transactions are recorded correctly. Each entry has a “debit” side and a “credit” side, recorded in the general ledger. Conversely, liabilities and equity increase when credited and decrease when debited. The primary disadvantage of the double-entry accounting system is that it is more complex.

In other words, if only accounts are impacted (like in the case of the cash purchase of a building), the sum is debited from one account, Building, and credited to the other account, Cash. Receiving items and paying cash are the two transaction components that must be recorded using the double-entry system. Receiving things is one element of the debited transaction, and paying cash is the other. This practice ensures double entry accounting has two equal sides that the accounting equation always remains balanced; that is, the left side value of the equation will always match the right side value. Double-entry bookkeeping was developed in the mercantile period of Europe to help rationalize commercial transactions and make trade more efficient. Some thinkers have argued that double-entry accounting was a key calculative technology responsible for the birth of capitalism.

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As you can see, the entire accounting process starts with double-entry bookkeeping. Whether you do your own bookkeeping with small business bookkeeping software or hire a bookkeeper, understanding this critical accounting concept is essential for the success of your small business. When entering business transactions into books, accountants need to ensure they link and source the entry.

The fraud was exposed in 2002 when an internal auditor at WorldCom discovered irregularities in the company’s financial statements. The subsequent investigation revealed that the company had inflated its profits by nearly $4 billion. Because the accounts are set up to check each transaction to be sure it balances out, errors will be flagged to accountants quickly, before the error produces subsequent errors in a domino effect. Additionally, the nature of the account structure makes it easier to trace back through entries to find out where an error originated.

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It’s based on the principle that every transaction has two sides — an equal debit and credit. This system helps to increase accuracy and maintains the balance of a business’s financial records. The income statement portrays the impact of various transactions on the company’s revenue and expenses. The net result is the company’s net income or net loss, a testament to the double entry accounting’s impact on financial performance. This is a partial check that each and every transaction has been correctly recorded. The transaction is recorded as a “debit entry” (Dr) in one account, and a “credit entry” (Cr) in a second account.