Double-entry bookkeeping is an accounting technique that records each transaction as both a debit and a credit, thus making it easier to double-check your financial transactions. To illustrate:
You conduct a sale but do not collect the payment.
- Your receivables would increase.
- Your sales revenue would also increase.
You buy from a supplier on credit (you do not pay them right away).
- Your payables would increase.
- Your inventory would also increase.
Let’s say you buy an asset and pay immediately.
- Your assets would increase.
- Your cash would decrease.
These are just a few examples, there are many other types of transactions found in double-entry bookkeeping. Each change in one account must be balanced with a change in another account. You might have heard of bookkeepers trying to “balance the books”; this means that the bookkeeper is trying to find a change in one account that balances a change made in another.
The double-entry method is based on the following accounting logic: Assets = Liabilities + Equity
If there is a change in one side of the equation, there should be a change in the other side to balance the difference. Or, if there is a change in one side, there should be an opposite change on the same side. For example:
If assets increase (you buy equipment), there should be a decrease in assets (cash) or an increase on liability (you bought the equipment with borrowed money). If you enter a decrease in cash or an increased liability, you will balance out the increase in assets.
The double-entry method of bookkeeping can get confusing, especially if there are many transactions taking place in your company. If your company keeps inventory and does purchases and sales on credit, the books might get very hard to maintain. Luckily, thanks to accounting software, keeping accurate records is much easier, and, due to the limitations created into the software, it will not allow you to make an entry that is not “balanced.”