This method tracks where your money comes from and where it goes. Without double-entry accounting, you won’t see a complete picture of your company’s financial statements. There are pros and cons to both single-entry and double-entry bookkeeping.įor those of you who freelance or own a sole proprietorship that never has debt and doesn’t purchase any inventory, you can probably get away with single-entry.īut for any other business, I’d recommend double-entry bookkeeping. Here is a quick bullet list that you can use as a reference for these terms and how they work with double-entry bookkeeping. Different transactions will affect the way debits and credits are recorded.
Both sides of the equation remain balanced.Īt first, it can be challenging to understand the distinction between debits and credits. Your inventory (asset) would have a $5,000 debit and your accounts payable (liability) would have a $5,000 credit. Let’s say you buy $5,000 worth of inventory from a vendor on credit. I’ll give you one more example, only this time it will impact both sides of the accounting equation. You would debit cash $2,000 and credit computers $2,000. This transaction would require two entries, both affecting your assets. Let’s say you purchase a new computer for $2,000. Here’s an example to show you what I mean. If the equation isn’t balanced, you know that there has been a bookkeeping mistake. This keeps the accounting equation in balance at all times. When you’re using the double-entry method, every debit will always have a corresponding credit that’s equal to the same amount. These two terms will be the foundation of your entire accounting system.įirst, you need to know the general accounting equation: When you’re using double-entry bookkeeping, you need to know the difference between debits and credits. This is crucial for making decisions daily, as well as decisions that impact the long-term position of your business. Single-entry alone doesn’t give you enough information to generate the essential financial reports for small business bookkeeping.Ĭreating these reports gives you the ability to learn more about your company’s overall financial situation. But those are really the only benefits of single-entry bookkeeping.Īs your company scales and begins to grow, you need to switch over to double-entry accounting. Lots of freelancers and sole proprietors use this method because it’s fast and easy. This includes everything from payroll to expenses, and revenue. Single-entry bookkeeping means that each transaction gets recorded in one ledger. Single-Entryįor those of you who aren’t currently using double-entry bookkeeping, you’re probably using a single-entry system. You won’t get this benefit if you’re using a system that’s more on the basic side of the spectrum, such as single-entry accounting. The purpose of the double-entry accounting method is to track where your money comes from and where it goes.Īs the name implies, each transaction will have two entries:įor those of you who aren’t familiar with debits and credits, I’ll give a more in-depth explanation of these terms as we continue through this guide.īy recording each transaction with two entries, it gives you a more comprehensive overview of your financial statements. You can use this information to determine if it’s the best choice for your company. In this guide, I’ll clarify exactly what double-entry bookkeeping means and how it works. While double-entry bookkeeping isn’t necessarily the best approach for every business, it’s going to be the most ideal option for most of you. Then they use that assumption to decide that they’re not going to use this method. It seems like when most people hear the words “double-entry” they just assume that it means double the work. In my experience, I’ve learned that there are lots of misconceptions about double-entry bookkeeping. But since you’ve landed on this page, I’m guessing you’re not sure what it means.ĭon’t worry you’re not alone. As a small business owner, I’m sure you’ve heard the term “double-entry bookkeeping” at one time or another.
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