This formula also reminds us that debits do not always refer to decreases in an account, just as credits do not always refer to increases. If your assets do not equal your liabilities and equity, then you know you have made a mistake in your bookkeeping. The double-entry process follows this accounting equation: Related: 80 Common Accounting Terms How double-entry accounting works This system also allows you to assign profits to specific items, which can inform you about high-performing products and allow you to alter future business activities. Some of those include:Ī double-entry system gives accountants a comprehensive view of a company's financial situation, allowing them to create statements of retained earnings, income statements, statements of cash flow and balance sheets. However simple, single-entry does have many drawbacks. An income statement can be generated from a single-entry system, but records for assets and liabilities necessary to create a balance sheet are not maintained. The most common single-entry system is a checkbook with income and expenses being added or deducted to a running cash balance. Freelancers and sole proprietors use this system by recording business transactions in a single ledger. The main benefit of single-entry accounting is its simplicity. Double-entry accounting is the preferred method for more complex business accounting scenarios because it provides a comprehensive view of your company's finances. In these situations, there are a limited number of transactions to track. Single-entry accounting is used primarily by sole practitioners, contractors and small businesses to track income and expenses. What is the difference between double-entry and single-entry accounting?

Liability accounts: Record an increase with a credit and a decrease with a debit.Įquity accounts: Record an increase to equity (revenues) with a credit and a decrease to equity (expenses) with a debit. General ledger entries to these accounts are recorded like this:Īsset accounts: Record an increase with a debit and a decrease with a credit. The Accounting Equation, which will be discussed later, recognizes three main categories of accounts: assets, liabilities, and equity. The ledger entry would be: Debit utilities expense Credit cash The debits and credits must be equal in order for the system to remain balanced.įor example, if a business pays its electricity bill for $1,200, then it will record an increase to “utilities expense” and a decrease to “cash”. In a double-entry accounting system, transactions are composed of debits and credits. Related: Learn About Being an Accountant What is double-entry accounting? In this article, we'll explain what double-entry accounting is, how it differs from single-entry accounting, list benefits and give examples of double-accounting. While a single-entry accounting system may be appropriate for some small businesses, a double-entry accounting system may be required to ensure you’re getting a complete picture. Accurate bookkeeping is essential for tracking where and when a company spends and earns its money.

Double entry bookkeeping