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What is double-entry bookkeeping? A simple guide for small business

  • Written by NewsServices.com

Keeping a detailed financial record is a necessary requirement for any business, but it can consume a lot of time and energy, especially if you get it wrong. It’s important to choose the bookkeeping system that will give your company an accurate read on its financial health as well as remain compliant with Australian standards. For just about every small business, the right system is double-entry bookkeeping.

What is double-entry bookkeeping?

Double-entry bookkeeping is an accounting method that records financial transactions in two accounts: debits and credits. This double system gives a more accurate account of where a company sits financially, making reconciliation and reporting easier and more straightforward.

Account types

There are five different account types that are mandatory to cover as part of the double-entry accounting system:

  • Assets - money/equipment owned

  • Liability - money owing such as loans

  • Equity accounts - Assets total minus liability

  • Revenue accounts - Money made from sales and income

  • Expense accounts - money spent to run the business


Who uses double-entry bookkeeping?

Double-entry bookkeeping is best suited to small businesses and public companies. It is particularly important for smaller businesses applying for loans as it will provide a detailed account that shows a company’s true performance.


What are the rules of double-entry bookkeeping?

In order to be handled accurately double-entry bookkeeping comes with compliance rules. The three main ones are:

  • Every entry is recorded in two accounts (as a minimum)

  • The recorded debits total must be equal to the recorded credits total

  • Total business assets must equal total liabilities (plus equity)

In double-entry bookkeeping, every transaction has two sides: debits and credits. These rules ensure that at the end of the day, both sides of this equation are the same i.e. they balance out.


What are debits?

Debits are the money out. These payments increase asset and expense accounts and decrease equity, revenue and liability accounts. These are recorded on the left side of the ledger sheet.


What are credits?

Credits are money in. These payments decrease asset and expense accounts and increase equity, revenue and liability accounts. They are recorded on the right side of the ledger.


Why is double-entry bookkeeping important?

Single-entry bookkeeping is less complex but leaves large margins for error and doesn't provide a true overview of company value. The benefits of double-entry bookkeeping far outweigh the cost of administration and data management.


Delivers a complete financial picture

The accuracy of double-entry bookkeeping can be used to generate financial reports such as income statements and balance sheets as well as protect against fraud and embezzlement.


Helps companies make better financial decisions

Double-entry bookkeeping helps business owners tap into different aspects of their business to see where their financial strengths and weaknesses are. This helps with decision-making, budgets, marketing and asset allocation and provides data that helps with smarter purchasing decisions.


Reduces bookkeeping errors

Because records must balance with every entry it means any errors can be identified and fixed straight away. Rather than getting to tax lodgment and finding costly errors that are hard to trace, steps can be taken immediately to rectify accounts and solve difficulties.


Preferred by investors, banks and buyers

The transparent nature of double-entry bookkeeping makes it a preferred option for anyone who is going to back your business. They want to know that you are handling your business finances well and well kept accounts and the reports they produce are the best way to prove this.

In order to know how double-entry bookkeeping or bookkeeping services will benefit your business it’s best to contact a fully certified bookkeeper for a tailor-made solution.

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