Double-entry bookkeeping is a standard accounting practice, where transactions are recorded in at least two places in your accounts.
This practice dates back to the 15th century.
It’s used because it allows better insight into what a business owns, owes, buys, and sells. A third-party—such as a stakeholder, an accountant, or an auditor—can go over your accounts and see where the money came from and where it went.
It prevents money from vanishing without a trace or showing up unexpectedly.
An example of double-entry bookkeeping
When you record a transaction you use the terms debit and credit.
Debit means that an account’s balance goes up, and credit means it goes down. If you buy a work phone, you can bookkeep it like this:
- $500 in your equipment
- $500 in your bank account
It’s a plus—or debet—in your equipment since you have an equipment cost, and as minus—credit—in your bank account since you’ve spent money.
If you choose to pay via invoice, you would record it like this:
- $500 in your inventory
- $500 in accounts payable, since that is what you owe your supplier, until you’ve paid them
Once the payment has been made, you would record it like this:
- $500 in accounts payable, so that it works out to 0 since the debt has now been paid
- $500 in cash, since you’ve spent money
When you use double-entry bookkeeping it should always work out to 0. If it doesn’t there is a deviation in your bookkeeping.
Why use accounting software
Accounting software helps you with your bookkeeping—and gives you more to focus on running your business, rather than getting tangled up in accounting details. However, it’s still important to have a base-level understanding of accounting principles so that you can make good financial decisions.
If you’re unsure about how to do your accounting—or whether you’re required to do it at all—you should speak to an accountant.