What is double entry accounting, and more importantly, why does it matter for your business? It can seem unnecessarily complicated to create two entries for every single transaction that happens in your books, but there’s actually a lot of sense to it. Read on below to find out some of the basics on why this matters for your business.
How does it work?
Double Entry Accounting is a two-sided system that helps to prevent your financial reports, and your books, from becoming unbalanced. Anytime you enter an expense, an invoice, pay employees, pay a bill or a loan, the double entry accounting system creates two balancing entries. It all ties back to the core accounting equation:
Assets = Liabilities + Equity
That means, your assets can never be more or less than the total of everything you owe and everything you’ve invested and earned. Double entry accounting keeps you balanced so that at any point in time you know exactly what your assets, liabilities and equity really are.
How does it help me?
Keeping your books balanced, means accuracy. Accuracy means smart decisions. Whether you’re running a small family business steady and long term, or you’re a growth startup looking to build to a strong valuation and sale, you need balanced financials.
Double entry accounting is a foundational system that keeps your books level and reliable. When you need insight into your business to be approved for an equipment loan, to get a valuation for a potential sale, or just to understand your profitability month over month, you need balanced books. The double entry system is what does that for you.
What do I have to do?
Most accounting programs like QuickBooks Online, Xero, Sage, are going to have the double-entry system build into their structure. It is important to understand the basic premise so that you know what’s happening in the background.
For every transaction you enter, you can literally picture a set of scales that have to balance two sides of your books.
- When you enter an expense for some office supplies, you’re impacting the actually office supply expense account in your books, as well as your bank account where the funds came from
- When you make a payment against a loan or a credit card, you impact the loan or credit card account (liability) by decreasing it’s balance, and you impact your bank account (asset) by decreasing it’s balance equally. See… balance!
How it boils down..
It can definitely get confusing when you get into the concepts of your chart of accounts, general ledger, debits and credits, but you don’t necessarily need to know all of that. There are lots of resources on specific scenarios and how to make entries yourself, and I’ve included links to a few of those below.
For our purposes, you just need to have an idea that there is balancing happening. That balancing is what gives you accurate financial data on your business. The balance is important because while consistency and timeliness are essential for good bookkeeping, the core structure and surety that you’re balanced in accurate are non-negotiable.
If you’re reaching a point where you need to know more, you can check out a couple of these articles for some more in depth accounting examples from QuickBooks Online and Xero. If you need some help getting your core structure right, or getting clarity on where you’re at and what you need right now, then get in touch! We’re actually here to help.