Managing a business is not easy like eating a piece of cake. There are several tasks and responsibilities that need to be handled daily. Maintaining accounts is one such tasks that needs to be performed regularly with complete accuracy. Sometime it becomes difficult to manage everything solely which leads to neglecting crucial tasks. To avoid such circumstances, opt for outsourced bookkeeping services to save time and make your work easier.
The fundamental principle of accounting is double entry bookkeeping, which guarantees that each financial transaction is correct and balanced. Reliable financial records have been maintained for centuries using this technique. It’s crucial to comprehend double entry accounting whether you’re a small business owner, or just interested in keeping your funds organized. Further, in this blog we will understand how double-entry accounting works and why it should be used for business.
What is Double-Entry Accounting?
Double-entry accounting is the process of recording transactions in two or more accounts. In double-entry accounting, transactions frequently show up in the credit and debit entries.
Having two columns can help you identify issues early on because you can keep an eye on whether both sides are balanced. One of the best methods for keeping an eye on the development and financial health of your business is double-entry bookkeeping.
You should be aware of the many account categories that a transaction may fall under if you intend to use this accounting approach. These are the double-entry accounting system’s main account kinds.
Types of Accounts
There are 5 main types of accounts used in double-entry bookkeeping system:
Asset accounts: This account displays the funds associated with a company’s assets. This can be related to the amount of money in a company’s bank account or the funds utilized to purchase its space.
Expense accounts: Your company’s whole spending is displayed in this account. Rent, utilities, advertising expenses, and items you’ve bought for your inventory can all be included.
Income accounts: This account contains all of the money that the company has received. Sales that a company makes from its goods and services are often the source of transactions under this account.
Liability accounts: Everything that a company owes to other companies or people is shown in this account. This covers credit card bills, loans for machines, and mortgages.
Equity accounts: Reflects the money put into a company and the profit margin also referred to as retained income that remains after operating expenses.
When is Double-Entry appropriate to use?
You might be thinking whether using a double-entry good option for your company or not. Double-entry accounting is highly recommended since it can offer a more comprehensive picture of your company’s performance, even if it can be a more complicated way to manage your finances. You’ll be able to see how profitable you’ve been and where your money has gone, which may assist your business make better financial decisions. Furthermore, since your liabilities and equity must match your assets, it is simple to determine whether you have made a mistake. You can tell something is wrong if they don’t. Additionally, and this is frequently crucial, banks, investors, and buyers will want to see a more comprehensive picture of your financial situation if you wish to grow your company in the future.
How Double-Entry accounting works?
There are four main processes in establishing and operation of a double-entry accounting system. The process starts with creating the accounts that bookkeepers will use to keep track of transactions and concludes with creating financial statements utilizing the account data. The phases consist of:
Prepare chart of accounts: Here is a comprehensive list of every general ledger account that a business is able to record transactions using. Each of the five categories’ accounts assets, liabilities, equity, revenue, and expenses is included. While alternative accounting solutions allow for customized charts of accounts, the majority of accounting software comes with pre-made charts of accounts that can be changed.
Use debit credit for every transaction: The credit entry is on the right side of the ledger accounts and the debit entry is on the left. This helps determining whether your accounts are easily balanced.
The amount of expense accounts and assets will rise with a debit entry in the charts. A credit entry will result in an increase in the obligation, revenue, and equity accounts’ amounts. All of your accounts should balance at the end of the accounting month if you have managed your money well.
Every transaction should have two components: You can begin recording your financial activities as soon as your accounts are set up and you know how credit and debit operate. Let’s imagine, for instance, that you have $250 in rent that is due at the end of February. When the accounting period ends, if you just record the $250 in expenses. In your cash account, you will discover a $250 missing. Your book will be balanced if you are fortunate enough to recall where the money went; otherwise, your statistics will show disparities.
Run financial statements: Financial statements can be generated once all of the data in your accounts has been encoded. Examine your financial situation with these statements. Study and comprehend them to further plan how to reduce costs or increase income.
Financial statements can be used to apply for a bank loan as well. In addition, investors review your financial documents to determine whether your company is suitable for sponsor or large investments.
Advantages of Double-Entry Bookkeeping
Initially, double-entry may seem difficult as you have to make both left and right entries. But even experts recommend double-entry bookkeeping for businesses. Here’s why to choose double-entry:
Enhances Accounting Record Accuracy: Maintaining an accurate accounting of your business activities is essential to its success. Every aspect of your finances is documented when you use double-entry accounting. The crucial figures can be made sure of, and discrepancies are simple to identify.
Moreover, it facilitates the process of monitoring the companies and people you owe money to, as well as the payments your company still hasn’t received.
Make wiser business decisions: Business success will depend on how you manage your money. Making better-informed business decisions that support its expansion can be facilitated by double-entry accounting.
In double-entry bookkeeping, for instance, all of the costs are listed out. It could be for vacation, advertising, or even stock replenishment. You can examine the data and come up with ideas for cost-controlling tactics. It assists you in deciding whether to reduce your spending or allocate more funds to the expansion of your company.
Increases financial analysis scope: Double-entry accounting is far more detailed than single-entry accounting, enabling business owners to expand their financial analysis. Just picture yourself with a single-entry accounting system that simply displays your outgoings. Other than the available historical data, you are unable to compare it with anything. However, you can see the money pouring into your company when you use double-entry bookkeeping. This will reassure you that the money you spend on running your firm is also being turned a profit.
Conclusion:
Compared to the single-entry accounting system, the double-entry accounting approach offers numerous advantages. Above all, by indicating how a transaction impacts both credit and debit accounts, it gives a company a comprehensive picture of its financial profile. Additionally, it facilitates error detection because discrepancies between debits and credits indicate a problem. Finally, it simplifies the process of creating financial statements.
If you find tough handling bookkeeping tasks or any accounting tasks you can outsource them to Corient Business Solutions. Corient, your reliable partner to assist for all accounting related tasks. We have expert professionals as well as team for different accounting services. Our outsourced payroll services will take care of the intricacies of payroll administration so you can concentrate on expanding your company.
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