Table of contents
Table of contents
Double-entry bookkeeping may sound complicated, but it’s fortunately much easier than you think.
We’ll take a look at what double-entry bookkeeping is, how to distinguish the difference between a debit and a credit, and the benefits of using this method of bookkeeping.
The method of double-entry bookkeeping involves recording every transaction twice, with one or more accounts using debits, and one or more using credits. The total amount you record in both credits and debits will need to ‘equal’ or ‘balance’ one another.
You’re a photographer, and you’ve just purchased a new camera for your business for £2,000.
You’ll need to debit your expense account for £2,000 and credit your cash account for £2,000.
This is because your expense assets are now worth an added £2,000, but you have £2,000 less in cash.
You then use your new camera for a photo shoot. The customer pays you £300, so you’ll enter a cash debit of £300 into your account, as well as a revenue credit of £300.
A transaction refers to any exchange that impacts a business’s financial statement and status. Think of things like your inventory purchases, sales, and any costs that go out and come in to your business.
Debits and credits can be quite confusing, because they can both mean an increase or a decrease depending on the account they’re entered into. It’s easier to think of debits and credits as opposites. If debiting an account increases the total amount, then a credit will decrease it.
Remember though, they should always have equal value
Most bookkeeping software will automatically create a double entry each time you enter a transaction, so you won’t need to think about it. BUT, it’s useful to understand why applying a credit might mean an increase in one account but mean a decrease in another, because this can help you spot any mistakes. We’ll give you an example of what this might look like.
Let’s stick to the photographer scenario! You’re set to snap photos of a lovely couple on their wedding day, and they pay you £2,500 to confirm their place with you. When you’re logging this in your bookkeeping, you’ll increase your revenue account by crediting the amount received, as well as increasing your Accounts Receivable account with a debit.
Date
XX/XX/XXXX
Account
Accounts Receivable
Revenue
Notes
Chris and Rebecca -Wedding Day photography – full amount
Debit
2,500
Credit
2,500
Another example, you buy £500 in inventory via cash from one of your vendors. Here you’ll need to debit your inventory account while crediting your cash account.
Date
XX/XX/XXXX
Account
Inventory
Cash
Notes
Inventory for September restock
Debit
500
Credit
500
It all seems the same, we know! But with them both being asset accounts, your inventory will increase, and your cash account decreases.
You’re probably wondering if you really need to add more tedious admin tasks to your list. Or if you want to.
While it may feel like more work, double-entry accounting does have plenty of benefits that make it worthwhile. An obvious one is reducing errors, because having two entries for each transaction allows you to make use of a trial balance report. If something doesn’t balance (because the amounts are different), you’ll be able to identify the little rascal causing you problems more easily.
If you still need more convincing, it’s worth noting that double-entry bookkeeping has stood the test of time. It was even used by merchants in the Middle Ages!
If you use bookkeeping software like Pandle, you won’t even need to enter everything twice. It’s all done for you automatically to make life easier.
Yes! While it’s called a ‘double’ entry, there may be more entries which all relate to the same transaction. Stop yelling in horror, you’ll honestly get used to it. A good example of this is if you need to buy materials for a project you’re working on.
Money goes out the business, but you receive materials in return. The materials then leave the business, and in return you get paid by the customer.
Learn more about using Pandle to make business accounting easier. Create an account today and decide what to do with all the extra time you get back.
A creative content writer specialising across business, finance and software topics. I have a love for all things writing, and creating engaging, easy to understand content that helps everyday people!
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