Why Businesses Prefer the Double-Entry Bookkeeping Method
Double-entry bookkeeping can be confusing if you are just starting with accounting. However, it is the most reliable and accurate method, and it is also the most popular. Small businesses shouldn’t ignore this accounting technique because it can significantly help boost efficiency.
If you want to learn more about double-entry bookkeeping and its advantages, read on.
Understanding Double-Entry Bookkeeping: What Is It?
Double-entry bookkeeping is a method of tracking the financial activities of a company by using debits and credits.
Debits and Credits
The basic concept of double-entry bookkeeping is that every accounting transaction impacts a company’s finances in two ways. On one side of the transaction is the debit, and on the other side is the credit. For example, if you pay rent to a landlord, you have a debit of rent expense and a credit to your landlord’s bank account.
How Does Double-Entry Bookkeeping Fit In General Ledgers?
The double-entry bookkeeping method is the most widely used form of bookkeeping globally.
Double-entry bookkeeping means that every accounting transaction is recorded on the company’s balance sheet and income statement. It is done in two ways:
Every debit has a corresponding credit.
Every debit represents an increase in an asset or a decrease in an expense or liability.
Using the example above, the bookkeeper would record the rent payment as a debit to Rent Expense. The rent payment would be a credit to the landlord’s bank account in the general ledger.
Why Consider Using Double-Entry Bookkeeping?
It is easier to reconcile a general ledger when using the double-entry method instead of a simple journal. A general ledger is based on the double-entry method and promotes better transparency and organization.
If you keep your books in a simple journal, you will have to transfer the debits and credits from the simple journal to the general ledger account. The double-entry system simplifies that process.
If you use the double-entry system, you do not transfer the debits and credits. Instead, all you have to do is record the transactions directly in the appropriate general ledger accounts.
Another reason to consider the double-entry accounting method is that it is much more accurate than the simple journal entry method. Keeping track of all the debits and credits is tedious and time-consuming.
If the debits and credits are not properly recorded, the books will not reflect the actual financial position of the business accurately. That can lead to high-risk, inaccurate financial reporting.
Double-Entry Bookkeeping for Small Businesses
The double-entry bookkeeping method has been the backbone of accounting for hundreds of years because it works. It is a tried and true accounting system commonly used in small and medium-sized businesses.
There are advantages to using the double-entry bookkeeping method – even as a small or startup business. The benefits of the double-entry accounting method are:
Accuracy
Ease of recording the transactions
Rules are clearly established
Hard to manipulate
Accounting is more transparent
There are no disputes between parties and the company
It helps maintain consistent standards and rules
Conclusion
Double-entry bookkeeping is a powerful tool to track a company’s financial activities. It is the most widely used accounting method because it is easy to use and accurate, making it the go-to way for accounting for small and medium-sized businesses. More importantly, it gives small business owners the ability to focus on running their businesses without worrying about bookkeeping.
If bookkeeping still sounds confusing for you, consider hiring bookkeeping services in New York. Totally Booked can provide one-time QuickBooks setup and training so that business owners can better understand their business finances. We can also do everything else accounting-related for you. Check out our service packages and tell us what you think is best for your business.