Double entry accounting might sound fancy, but it’s just a way to keep your money records neat and balanced. It helps you see where your money is coming from and where it’s going. Let’s break it down so it’s super simple.
What is Double Entry Accounting?
Double-entry accounting means every time you record a money transaction, you make two entries. One entry shows where the money is coming from, and the other shows where it’s going. This keeps everything balanced.
Imagine you buy a notebook for your business. Your cash account goes down (credit), but your supplies account goes up (debit).
Why is it Called “Double Entry”?
It’s called double-entry because you write each transaction in two places: once as a debit and once as a credit. This helps your records stay accurate.
The Accounting Equation
This equation is the base of the modern day double-entry accounting system:
Assets = Liabilities + Equity
Here’s what it means:
- Assets: What your business owns (like money, tools, or stock).
- Liabilities: What your business owes (like loans or unpaid bills).
- Equity: What’s left for the owner after paying debts.
Every transaction keeps this equation balanced. If it doesn’t, there’s a mistake. We will study it further in the next article.
How Double Entry Works
Here’s an example:
Example: Buying Supplies with Cash
- You spend $500 on supplies for your business.
- This affects two accounts:
- Supplies (an asset): Goes up by $500 (debit).
- Cash (also an asset): Goes down by $500 (credit).
See how the total amount stays the same on both sides? That’s the magic of double-entry accounting. This means that any transaction leaves behind two footprints, if they don’t match then you know that there’s something wrong.
Debits and Credits
You have probably heard of Debit or credit if you’ve used a bank account. In double-entry accounting:
- Debits: A Debit transaction is anything that increases the value of the business Assets or reduces its Liabilities.
- Credits: A credit transaction is anything the Increases the liabilities of the business or revenue decrease the assets.
A simple trick to remember:
- Debit what comes in.
- Credit what goes out.
We will naturally go in to more details later on but for now, this is enough.
Why Use Double-Entry Accounting?
- It’s Accurate: Mistakes are easier to spot because the books must balance.
- It’s Clear: Gives a complete picture of your money.
- It’s Required: Most laws and rules say you have to use it, especially Public companies since it makes things more foolproof.
- It’s Helpful: Shows you exactly how your business is doing.
Common Misunderstandings
- It’s Not Just for Big Companies: Small businesses can use it too. It’s useful for everyone!
- Debits Aren’t Always Good: Some people think “debit” means good and “credit” means bad. In accounting, they’re just ways to record transactions.
Conclusion
Double-entry accounting might seem confusing at first, but it’s really a smart way to keep track of your money. It makes sure your records are balanced and helps you understand your business better.
Now that you’ve learned the basics, you’re ready to learn more about recording transactions. Stay tuned for the next article, where we’ll dive deeper into the accounting process!
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