Double-entry bookkeeping is a concept in which all the accounting transactions influence the finances of the company in two ways. Basically, the general ledger records two sides of every transaction:
* Double-entry bookkeeping implies that every accounting transaction has two sides.
* The general ledger records two sides of the transaction is a debit and a credit.
The revenue of the company increases if it sells a product and its cash also increases by an equal amount. The cash balance of the company increases when a company borrows funds from the creditor; however, the balance of the debts of the company increases by the same amount.
The double-entry system creates a balance sheet made up of liabilities, assets, and equity. A sheet is balanced as the assets of the company equal the equity and liability. All the items that a company owns like inventory, machinery, cash, buildings, and intangible items like patents. The liabilities represent everything that the company owns to someone else like the short-term accounts that are payable owned to suppliers or long-term notes payable owned to the bank.
Importance of Double-Entry
The system of double-entry assists accountants to eliminate risks and it also assists by providing a good check and balance benefit. This method provides you complete information about a transaction in comparison to a single-entry method since every transaction contains a source and a designation.
There must have been an argument for using single-entry and a cash book for small and simple businesses before computer software made double-entry bookkeeping easier for small companies. All modern accounting software makes use of double-entry and it is a recommendation for most businesses due to enhanced efficiency and accuracy while recording transactions.
Types of Accounts in a Double Entry Accounting
Various accounts are used to record the entries by using a double-entry system. Below are major accounts on which the financial transactions are categorized:
It records all the assets owned by a company. Its examples are account receivables, cash, equipment, and inventory accounts. The asset account gets increased when there is an influx of assets and it decreases when the assets are reduced.
The liabilities account shows the accounts owned by a company to any other organization. Its examples are Notes Payable, Accounts Payable. As a company borrows cash and purchases goods and services on the credit, the liabilities get increased. On the contrary, the liabilities are paid back; the balance on the account gets lowered.
The equity account shows the owner’s capital and makes a record of further investments and profits into the business. The equity accounts get decreased when an organization faces any losses and if the owner takes out the cash for their personal usage that is known as drawing.
Expenses and Revenue
The account of expenses shows that are incurred by a business-like payment of salaries, rent, and electricity bill. If the expenses get more, lesser will be the net profits. The revenue account shows the sales made by the businesses. The higher the revenue, the higher will be the gross profit of the company.
Gains and Losses
The financial results of the company’s non-primary operations and the production processes are depicted in Gains and Losses. The enhancement in the value of the company is known as its gains. On the contrary, the losses get recorded when the company loses money through secondary activity.
TAKE OUR ASSISTANCE
Since the Double-Entry Bookkeeping system is much transparent, anyone who considers giving your business money will be likely to do so if you make use of this system. At Reliable Bookkeeping Services, our bookkeepers and Accountants can do double-entry bookkeeping and they have simple online accounting solutions that let you keep the books easier. Call us now 1300 049 534