Accounting is the language of finance. As a beginner, double entry bookkeeping may seem difficult to understand; however, it’s something that every company should completely understand. To put it plainly, this term means that you must enter the values of every business transaction into the system – twice.
It may seem like something unnecessary: why should you add it twice when you can add it just once? Still, this process will provide a better understanding of the journals. This way, you will know how and when to make the necessary adjustments, without affecting the balance of your account.
Once you learn the principles and necessary steps of double-entry bookkeeping, your confidence in the business will grow. All you have to do is organize your process, and everything should run smoothly.
The Process of Double Entry Bookkeeping
Double-entry bookkeeping can be described in many steps and fancy terms; however, at the end of the line, it will all boil down to the following:
- Every business transaction will result in a document. It will act as proof that a certain action actually happened.
- Every piece of information that was taken from that document will be checked into journals. This will allow for a better understanding of the account.
- The data from the journal is analyzed and checked in the ledger book. This ledger book will contain all of your accounts, and will be listed as the “chart of accounts.”
- The accounts are then balanced and totalled by using the accounting equation.
- All accounts are once more balanced using credits and debits – which is actually the core foundation for your double entry bookkeeping.
You may produce a trial balance to ensure that all the balances are correct in the book and that the credits and debits have been added correctly.
Single Entry vs. Double Entry
Business can go for two types of bookkeeping – namely, single entry and double entry. A single entry bookkeeping is simply a cashbook. It is not as detailed as the double entry one, but it’s a great place to start if you own a small business.
At the same time, it has certain limitations you must keep in mind. For example, the easy platform of a single entry bookkeeping will not be able to dive into important financial reports. Still, you may use it as a start before moving to double-entry bookkeeping.
Regardless of the entry method, all of them will work using a mathematical formula. This equation will help maintain the structure of the ledgers, producing various business reports that will help clear up the balance.
To make sure that the ledgers do the balance correctly, a bookkeeper may want to learn the equation by heart and run a trial balance.