What is double-entry bookkeeping?

If you’ve landed on this blog, chances are it’s because you’re looking for some answers. Maybe you’re a small-business newbie trying to work out how to manage your financial records. Or a future bookkeeping student looking to pick up some basics before you start. Maybe you’re a junior accountant looking for a client-friendly way to explain what you do (don’t worry, we’ve got you).

Here’s the short story:

Double-entry bookkeeping is a method based on the idea that every financial transaction has an equal and opposite effect on at least two different accounts. Think of it like transferring money from your pay into a savings account. You get a minus in your main account, but a plus in your savings. This method helps capture the knock-on effects of a transaction, so you have a better picture of what’s going on overall.

In this quick guide, we’ll look at how double-entry bookkeeping works, and why people use this method over the alternative.

How does double-entry bookkeeping work?

Double-entry bookkeeping is a system of accounting on which all modern accounting systems are built. It ensures that every financial transaction is recorded in at least two accounts: one as a debit and the other as a credit. This ensures that the accounting equation assets = liabilities + equity always remains balanced.

Here’s how it works:

• Debits and credits:
  • A debit (DR) increases assets or expenses and decreases liabilities, equity, or income.
  • A credit (CR) increases liabilities, equity, or income and decreases assets or expenses.
• Equal entries: For every transaction, the total amount of debits must equal the total amount of credits. This maintains balance in the accounts.
• Accounts affected: Each transaction affects at least two accounts. For example:
  • If a business purchases equipment for cash, the Equipment account (asset) is debited, and the Cash account (asset) is credited.
  • If a business takes out a loan, the Bank account (asset) is debited, and the Loan Payable account (liability) is credited.
• General ledger: Transactions are recorded in the general ledger, where individual accounts track their respective debits and credits.

By consistently applying double-entry bookkeeping, businesses can produce accurate financial statements and identify errors more easily since any imbalance signals a mistake.

Here’s a simple example of how this might look in real life.

Jane Doe runs a small home-based microbakery called “Jane’s Sweet Treats.” As a sole trader, Jane handles all aspects of the business, from baking to bookkeeping. To keep her finances in order, she uses the double-entry bookkeeping method. Below is an example of how she records two common transactions: a sale, and the purchase of equipment.

By using double-entry bookkeeping, Jane ensures her accounts remain balanced and she has an accurate financial record of her business transactions.

Single-entry vs double-entry bookkeeping

Single-entry bookkeeping is a simpler method of recording financial transactions, where each transaction is recorded only once, typically in a single column focusing on cash inflows or outflows. It does not track the impact on other accounts like assets, liabilities, or equity and is best suited for very small businesses, freelancers, or sole traders with straightforward financial activities. For example, a $100 sale would simply be recorded as an increase in cash without noting the corresponding income account.

In contrast, double-entry bookkeeping records each transaction in at least two accounts: one as a debit and the other as a credit. This system ensures that the accounting equation (assets = liabilities + equity) remains balanced and provides a detailed view of how transactions affect different parts of the business. It is essential for businesses with more complex financial activities and those required to produce accurate financial statements. For instance, a $100 sale would be recorded by debiting cash (an asset) and crediting sales revenue (income).

Advantages of double-entry bookkeeping

Double-entry bookkeeping offers several advantages:

1. Accuracy and balance: By recording every transaction in at least two accounts (debit and credit), double-entry bookkeeping ensures the accounting equation (assets = liabilities + equity) remains balanced. This reduces errors and provides a clear view of financial health.
2. Comprehensive financial tracking: It records the impact of each transaction on assets, liabilities, equity, income, and expenses, offering a complete picture of a business’s financial position.
3. Error detection: Since debits must equal credits, any imbalance in the accounts can signal errors, making it easier to identify and correct mistakes.
4. Supports financial statements: Double-entry bookkeeping provides the detailed data needed to prepare key financial reports such as the balance sheet, income statement, and cash flow statement.
5. Facilitates decision-making: With detailed and accurate records, business owners and stakeholders can make better-informed decisions regarding budgeting, investments, and growth.
6. Compliance and professional standards: It meets the requirements of most accounting standards and regulations, making it essential for businesses that need to provide financial reports to banks, investors, or tax authorities.

These benefits make double-entry bookkeeping a robust and reliable system for managing financial records.

Disadvantages of double entry bookkeeping

While double-entry bookkeeping offers many advantages, it does have some disadvantages:

1. Complexity: It is more complicated than single-entry bookkeeping, requiring knowledge of accounting principles and careful recording of debits and credits.
2. Time-consuming: Recording each transaction in at least two accounts takes more time, especially for small businesses with limited resources.
3. Cost: Hiring skilled bookkeepers or using accounting software can add expenses for small businesses.
4. Resource-intensive: Maintaining detailed records requires consistent effort and organisation, which can be challenging for sole traders or small operations.

Despite these drawbacks, its accuracy and reliability often outweigh the disadvantages for growing businesses.

Learn more about double-entry bookkeeping

Want to learn how to do double-entry bookkeeping (and more) for your business – or for others? The Certificate IV in Accounting and Bookkeeping is a nationally recognised qualification that will get you job-ready for every aspect of the role, including this important task.

Not ready for a full-on qualification, but want to get a head start anyway? The Accounting Principles Skill Set could be right for you. In this shorter seven-unit course, you’ll pick up the essentials you need to start using the double-entry method. In fact, the very first unit covers double-entry bookkeeping, with plenty of examples and practice opportunities along the way.

If you’re not sure which opportunity fits your needs, make a time to chat to one of our friendly Course Consultants. They’ll help you understand your options and take the first steps in your learning journey.