Double-entry bookkeeping can help cover all of your business’s tracks with accuracy. While it may sound complicated, it’s 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, as well as the benefits of using this method.
What is double-entry 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’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, while you also have £2,000 less in cash.
If you then use that camera for a photo shoot and your client/customer pays you £300, you’ll enter a cash debit of £300 into your account, as well as a revenue credit of £300.
What is classed as a transaction?
In a nutshell, a transaction refers to any exchange of money that impacts a company’s financial statement and status. Think of things like your inventory purchases, sales, and any costs that go in and come out of your business.
What is the difference between debit and credit?
Grasping the difference between credits and debits can be hard at first, but crucial to learn to keep your bookkeeping as exact as possible – it’s also vital to know the difference when it comes to creating financial reports.
It’s easier to think of debits and credits as opposites. If debiting an account increases the amount, then a credit will decrease it.
- Debits increase asset and expense accounts, while credits decrease them
- Credits increase revenue costs, liability, and equity, while debits decrease these
How do I record my debits and credits in double-entry bookkeeping?
Most modern bookkeeping software will automatically create a double entry each time you enter a transaction, but it’s still useful to understand why applying a credit might mean an increase in one account, but mean a decrease in another. 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.
|Chris and Rebecca -Wedding Day photography – full amount
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.
|Inventory for September restock
It all seems the same, we know! But with them both being asset accounts, your inventory will increase, and your cash account decreases.
How would double-entry bookkeeping benefit me?
You’re probably wondering, do I really need to add more tedious admin tasks to my list? While it may feel like more work, it does have plenty of benefits that make it worthwhile. An obvious one is reducing bookkeeping errors, something easily done and overlooked when running a busy business.
On top of this, if done correctly, your financial reports are going to be highly accurate, so you can send them off to the likes of investors with the confidence they’re able to accurately view your company’s creditworthiness.
Not to mention, by leaving an audit trail you’re able to trace any transaction posted to your general ledger account, so the chance of fraud is drastically reduced.
As an example, let’s say your cash balance seems too high on your balance sheet. If you’ve used double-entry bookkeeping, you should be able to trace any transactions to find the problem 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!
Can double-entry bookkeeping have more than two records?
Yes! While it’s called a ‘double’ entry, there may be more entries if, for example, a sale increases revenue, or you need to create a tax liability on any VAT you’ve collected.
Some transactions may be complicated and require more entries. Don’t panic though, you can always speak with a bookkeeper if an entry gets a bit too tricky. And the good news is Pandle creates double-entries for you automatically, so you won’t need to worry so much!
If you want to ace double-entry bookkeeping, sign up to create your free Pandle account today.