What is Double-Entry Bookkeeping in Accounting? Principles and examples for small businesses

As a small business owner, knowing which accounting practices you should use can be confusing. However, you must remember the fundamental accounting principles for your business’s finances. One crucial fundamental principle is double-entry bookkeeping.

Double-entry bookkeeping is an important concept that drives every accounting transaction in a company’s financial reporting. Business owners must understand this concept to manage their accounting process and to analyze financial results. Use this guide to learn about the double-entry bookkeeping system and how to post accounting transactions correctly.

While bookkeeping refers to the day-to-day journal entries of a business, and accounting uses the information in those journals to create reports, when used in relation to the double-entry system, it’s often called either double-entry bookkeeping, or double-entry accounting.

What is double-entry bookkeeping?

Double-entry accounting is the standardized method of recording every financial transaction in two different accounts. For each credit entered into a ledger there must also be a corresponding (and equal) debit.

The term “bookkeeping” refers to a business’s record-keeping process. A bookkeeper reviews source documents—like receipts, invoices, and bank statements—and uses those documents to post accounting transactions. If a business ships a product to a customer, for example, the bookkeeper will use the customer invoice to record revenue for the sale and to post an accounts receivable entry for the amount owed.

When entering business transactions into books, accountants need to ensure they link and source the entry. Linking each accounting entry to a source document is essential because the process helps the business owner justify each transaction.

Bookkeeping supports every other accounting process, including the production of financial statements and the generation of management reports for company decision-making. 

Why is double-entry bookkeeping important?

Double-entry bookkeeping is the standard method of accounting, and using it provides a number of important benefits:

• Provides a clear view of your company’s financial health
• Allows you to spot and resolve errors quickly
• Helps identify profitable and unprofitable aspects of business
• Snapshot of your business that banks and investors can easily understand

How does single-entry bookkeeping differ from double-entry?

Single-entry bookkeeping is much like the running total of a checking account. You see a list of deposits, a list of purchases, and the difference between the two equals the cash on hand. For very small businesses with only a handful of transactions, single-entry bookkeeping can be sufficient for their accounting needs.

Double-entry bookkeeping shows all of the money coming in, money going out, and, most importantly, the sources of each transaction. If you see in the debit column that you took in $1,000 in sales, but you only have $500 in cash, double-entry bookkeeping will show you that you also received $500 from some other source, like credit card transactions. 

Double-entry bookkeeping creates a “mirror image” of both sides of each financial transaction, allowing you to compare one column of credits against a column of debits and easily spot any discrepancies. Single-entry bookkeeping doesn’t allow for this type of verification. Although single-entry bookkeeping is simpler, it’s not as reliable as double-entry and isn’t a suitable accounting method for medium to large businesses.

What are the principles of double-entry bookkeeping?

• For every business transaction, both a debit and a credit entry must be recorded.
• The debits will be listed in a column on the left-hand side of the ledger sheet, and the credits listed in a column on the right-hand side of the page.
• When totaled up, these columns of debits and credits will be equal to each other.

How to record a journal entry

Accountants will use the general journal as part of their record-keeping system. The general journal is an initial record where accountants log basic information about a transaction, such as when and where it occurred, along with the total amount. Each of these recorded transactions are referred to as a journal entry.

A journal entry records debits and credits to post an accounting entry, along with a description of the transaction. You post journal entries into columns, and the left-hand column lists the account number and account title. To the right, you have two columns: one for debits and one for credits. A detailed explanation of the transaction is posted below each journal entry.

The double-entry bookkeeping system uses debits and credits to post accounting transactions and keep the balance sheet equation equal. This method is often misunderstood, so it’s essential to understand these ground rules:

• Debits are on the left side of the accounting entry, and credits are on the right side.
• Most asset and expense accounts are increased with a debit entry, while most liability and revenue accounts are increased with a credit entry.
• The total dollar amount of debits must always equal the total dollar amount of credits. If you attempt to post an entry into accounting software that is not balanced, you’ll get an error message.

What causes confusion is the difference between the balance sheet equation and the fact that debits must equal credits. Keep in mind that every account, whether it’s an asset, liability, or equity, will have both debit and credit entries.

When using the double-entry accounting system, two things must always be balanced. The general ledger, which tracks debit and credit accounts, must always be balanced. Additionally, the balance sheet, where assets minus liabilities equals equity, must also be balanced. The examples below will clarify the rules for double-entry bookkeeping.

A simple double-entry bookkeeping example

Assume that a furniture company purchases $5,000 of wood for inventory and pays cash for the purchase. Here is the journal entry, with account numbers included:

This is a simple journal entry because the entry posts one debit and one credit entry. The company should debit $5,000 from the wood – inventory account and credit $5,000 to the cash account.

Both of these accounts are asset accounts, and the balance sheet equation remains in balance:

The debit entry increases the wood account and cash decreases with a credit so that the total change in assets equals zero. Liabilities remain unchanged at $0, and equity remains unchanged at $0.

A more complex double-entry bookkeeping example

A complex journal entry means that the entry may have multiple debit entries, more than one credit entry, or both. Assume, for instance, that a furniture company purchases a $30,000 machine by paying $5,000 in cash and borrowing $25,000. Here is the complex journal entry:

In this example, the company would debit $30,000 for the machine, credit $5,000 in the cash account, and credit $25,000 in a bank loan accounts payable account. The total debit balance of $30,000 matches the total credit balance of $30,000.

This is a complex journal entry because the entry posts two credit entries. However, you can see that the balance sheet equation remains equal:

The company gains $30,000 in assets from the machine but loses $5,000 in assets from cash. This means assets are now $25,000. Liabilities are also worth $25,000, which, in this case, comes in the form of a bank loan. So, $25,000 minus $25,000 equals $0. The balance sheet equation is correct.

Verify your books with a trial balance

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.

At the end of each month and year, accountants post adjusting entries to the trial balance and use the adjusted trial balance to generate financial statements. 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.

Double-entry accounting FAQ

When a company is using double-entry accounting, what elements of a given ledger must be equal? 

The debit and credit sides of a ledger should always be equal in double-entry accounting. 

In double-entry accounting, what's the difference between debits and credits?

A debit means that cash or assets are entering an account, and credits mean that cash or assets are being removed from the account. 

If you debit a cash account for $100, it means you add the money to the account, and if you credit it for $100, it means you subtract that money from the account. 

What is the basic rule of double-entry bookkeeping?

The basic rule of double-entry bookkeeping is that every transaction must be entered twice: once in the debit column and once in the credit column.

When was double-entry bookkeeping invented?

The exact date that double-entry bookkeeping was invented is not known. There are recorded instances of double-entry bookkeeping from as far back as 70 A.D.

Who invented double-entry bookkeeping?

The inventor of double-entry bookkeeping is not known with certainty, and is frequently attributed to either Amatino Manucci, a Florentine merchant, or Luca Pacioli, a Venetian friar.

Is double-entry bookkeeping hard?

Double-entry bookkeeping can appear complicated at first, but it’s easy to understand and use once the basic concepts have been learned.

Using double-entry accounting to ensure accurate record-keeping

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.

If you’ve previously used a single-entry system, you may be wondering how to go about switching to a double-entry system. Most modern accounting software has double-entry concepts already built in.

Business owners who have previously operated on a single-entry system will want to make the switch to a double-entry system as soon as possible. As your business grows, so too will the complexity of your finances. Implementing a double-entry system of accounting will allow you to put your financial statements to better use so that you can measure your financial health and spot errors quickly.

Can accounting software make a difference?

For a sole proprietorship, single-entry accounting can be sufficient, but if you expect your business to keep growing, it’s a good idea to master double-entry accounting now. Double-entry accounting will allow you to have a deeper understanding of your company’s financial health, quickly catch accounting mistakes, and share a snapshot of your business with investors. With the help of accounting software, double-entry accounting becomes even simpler.