Your business is growing, which is good for your bottom line. It may not be good for your limited accounting staff, however. Especially if they’re not keeping accurate, double-entry books. Thankfully there is a lot of help out there for medium-to-large businesses that need assistance scaling up while keeping their books straight.
Online bookkeepers can save the day when it comes to the fundamentals of business accounting, such as double-entry bookkeeping. This style of accounting is necessary for any growing company with both accounts payable and accounts receivable. Basically: every transaction is recorded twice. We’ll explain the principles of double-entry bookkeeping, how it differs from single-entry accounting, and why knowing more about double-entry matters for your business.
What is double-entry bookkeeping?
Double-entry bookkeeping is a system where you are recording transactions in terms of debits and credits. Need a simple double-entry bookkeeping system example? Glad you asked. Imagine a spreadsheet with two columns, one for expenses and one for credits. Each transaction is recorded twice, once in the expenses and once in the credits, hence the name “double-entry.” If the columns don’t balance, you can investigate why the error exists.
Let’s say you have a corporate credit card with a balance of $5,000 that you want to pay off. Your company’s cash account would be reduced by $5,000; this is a debit/expense. At the same time, you would subtract $5,000 from the current debt held by the company, which is considered a credit. The transaction is recorded once in subtraction and once in addition, balancing the line items.
When do accountants use double-entry bookkeeping? Medium to large businesses, and even some small businesses, require this method to keep an accurate balance sheet. This style of bookkeeping also keeps your general ledger clean — this is a book that categorizes your financial transactions by type. You can also use double-entry when you create a trial balance, which is a simple spreadsheet with credit/debit columns that covers a specific time period. This document is meant to detect accounting errors, and double-entry helps you find discrepancies.
Double-entry operates from the fundamental accounting equation: Assets = Liabilities + Equity. Once you add what you own against what you owe, you can understand whether you are in a surplus or deficit.
How is double-entry bookkeeping different than single-entry bookkeeping?
Single-entry bookkeeping only works for very small, very simple businesses. If you are bringing in cash with few expenses, such as with a sole proprietorship, this type of accounting may cover you.
Single-entry methods are like keeping a chequing account. You only keep track of deductions or credits, creating a single entry for each transaction. Even if you had a credit/debit double-column spreadsheet, there would not be an entry in both columns for each transaction — with double-entry, there is.
Should I use double-entry bookkeeping?
There are many advantages of a double-entry bookkeeping system. Here are some of the reasons we recommend switching to this type of accounting as a medium to large company:
- A more complete view of finances. Creating two entries for each transaction makes it easier to see where exactly the money that is going out as a payable ended up. A simple single-entry cash system isn’t complex enough for most businesses.
- Finding errors is faster. Doubling down on entries also makes faster work of locating where a credit came in that was not properly debited, and vice versa. You will thank yourself later if you detect missing money.
- There is total transparency. By expecting a double-entry system from your accounting staff or partners, you keep everyone clear on where the money is coming and going.
Bookkeeping can be a complicated business, and even double-entry bookkeeping isn’t foolproof. While double-entry accounting adds transparency and increased accuracy to the process — you may still need some help by way of a bookkeeping service.
Visory has a team of financial experts that can lend their expertise whenever you need help balancing the books or preparing a trial balance brief. We’re better than an in-house accountant for growing businesses because you get access to a whole team and you can check your records around the clock. If it’s time to upgrade from single-entry to double-entry bookkeeping techniques, it’s definitely time to give us a call or create an account online today.