Because it is named as such, double-entry is a conventional accounting system that entails entering each transaction into at least two accounts, with a debit being made to one or even more accounts and a credit being made to one or even more accounts in response. In each situation, the total value of the transactions must balance out, ensuring that all dollars are properly accounted for and recorded. Debits are often recorded on the left-hand side of ledger, while credits are generally recorded on the right-hand side. Public corporations must follow accounting standards and techniques prescribed by generally accepted accounting principles. These rules and practices are governed by a nonprofit organization known as the Financial Accounting Standards Board. Double-entry accounting is also the most efficient method for a firm to track its financial progress, which is particularly important as its size develops. So, what is double-entry accounting, find more in this guide.
Accounting System
Double-entry bookkeeping was created during the mercantile era of European history to aid in the rationalization of commercial transactions and the efficiency of commerce. Moreover, it aided merchants and bankers in determining their expenses and profit margins. Some theorists have suggested that double-entry accounting was a crucial calculative technique that facilitated the emergence of capitalism in the first place. Known as the accounting equation, it is the fundamental notion of double-entry accounting. It is an abbreviated depiction of a concept that eventually evolves into a more complicated, enlarged multi-item display known as a balance sheet. Based on the double-entry accounting method, the balance sheet shows that the total assets match the entire liabilities and shareholder ownership of the company.
On the surface, the representation tries to reconcile all uses of capital (assets) with all sources of capital (where loan capital leads to liabilities and equity capital leads to shareholder's equity). Every business transaction will be reflected in at least one of the two accounts maintained by a corporation that maintains reliable financial records. Consider the following scenario: A firm obtains a loan from a financial institution such as a bank. The borrowed money will increase the company's assets, but the loan obligation will also climb in proportion to the increase in assets. If a company purchases raw materials using cash, it will increase inventory (asset) while decreasing cash capital (another asset). Because every transaction carried out by a corporation impacts two or more accounts, the accounting method is referred to as double-entry accounting.
Who Is a User of Double-Entry Accounting?
By law, public corporations are required to employ the double-entry accounting method. The Financial Accounting Standards Board, a non-governmental organization, makes decisions (GAAP) by generally accepted accounting standards. GAAP requires public firms to adhere to all regulations and procedures defined in the standard. Small firms with more than one employee and those seeking to get a loan should implement double-entry accounting practices. This technique provides a more accurate and comprehensive way to keep track of its financial status and how quickly it is expanding.
Maintaining Accurate Records
The increased business volume raises the chance of clerical mistakes occurring inside a company's commercial operations. Although double-entry accounting does not eliminate mistakes, it can help mitigate the impact that errors have on the total balance sheet. In addition, since the accounts are configured to examine each transaction to ensure that it balances out, any faults will be alerted to accountants immediately before the error causes a domino effect of other mistakes to be made. It is also easy to track back through the account structure to determine where a mistake occurred because of its structure.
Instructions on How to Perform Double-Entry Bookkeeping
Double-entry bookkeeping is often performed via the use of accounting software. The program enables a company to establish custom accounts, such as a "technology cost" account, which may be used to record computers, printers, mobile phones, and other such items. Connecting your company bank account will simplify documenting transactions and save you time. Aside from that, accounting software makes it easy to create reports, which makes getting ready for tax season and year-end much easier. You may outsource this task to a professional accountant. On the other hand, FreshBooks is a straightforward accounting solution for small company owners with no prior accounting experience.
