Who Uses a Double Accounting System

A double entry accounting method involves making two entries at the same time. Public companies are required by law to record costs using the accounting system. Companies have to follow the Generally Accepted Accounting Principles (GAAP) when preparing accounting records using the method.

Small businesses can also use the double accounting method. In this blog post, you will learn about the benefit of using a double entry accounting system for small businesses.

Why Adopt Double Entry Accounting System?

The double accounting method has several advantages over the single accounting method.  Here are some of the reasons why small businesses should consider adopting the method.

Detecting Errors

The double accounting method will help in identifying data entry mistakes. Outsourced bookkeeping service providers make debit and credit entries for each transaction. The debit and credit entries must always match.

It is easy to find out errors just by looking at the debit and credit entries in the accounting journal. The error identification and correction are difficult with a single-entry accounting system.

Accurate Financial Position

Another benefit of the double entry accounting method is that it gives an accurate picture of the financial position of the company. The changes are recorded in two different accounts in the register. It helps in better understanding the financial performance of the company. The bookkeeping method will help in convincing banks and individual investors about the stable operations of the company.

Standard Accounting Principles

Double entry accounting helps in standardizing the accounting process. It helps company management to compare the performance of the company during a period with other firms. The standardized accounting principles also streamline the accounting task that helps in efficient bookkeeping.

The information from double-entry accounts can be used to prepare financial statements. It can be used to prepare profit and loss, trial accounts, and balance sheets. Company management can use the information captured through a double entry accounting system to make a strategic business decision.

Basics of Double Account Entry

The double accounting entry method is based on the accounting principle that assets equal liabilities and owner’s equity. The principle can be stated as a formula.

Assets = Liabilities + Owner’s Equity

Suppose that Austin takes a loan from the bank. There will be two accounting entries in the double accounting system whereby the assets and liabilities of the company will increase. When Austin repays the loan, the assets and liabilities will decrease.  

The debits and credit entries are the foundation of the double entry accounting method. The accounting entries affect the company’s account in different ways.

As per the GAAP, debit entries are written on the left of the account, and credit entries are written on the right side. The debit and credit entries must be equal for a ‘balanced transaction’. Every transaction will involve one or more debit and credit entries.

Rule of Making Debit and Credit Entries

You must be aware of certain rules when making debit and credit entries under the double entry accounting system. Here is the list of rules that must be followed when making bookkeeping entries.

Increase in Asset Recorded as a Debit Entry

A debit entry is made with an increase in the asset account.

Let’s suppose that an ice cream company owner buys a new van (an asset) for $35,000 for selling ice creams. The following entry is made in the ledger when the transaction occurs.

Van  $10,000 (Debit)

Cash $10,000 (Credit)

Decrease in Asset Recorded as a Credit Entry

A credit entry is made when the asset account decreases.

Suppose that an ice cream company owner sells the van for $25,000. The following entry is made in the ledger when the transaction occurs.

Cash $10,000 (Debit)

Van $10,000 (Credit)

Note: In the previous example, the cash balance had decreased so it was recorded as a credit. The cash increased when the van was sold. So, the cash balance is recorded as a debit.  

Increase in Liability Recorded as a Credit Entry

A debit entry is made with an increase in the liability account.

Suppose that a company takes a loan of $35,000 from the bank. The following entry is made in the ledger when the transaction occurs.

Cash  $35,000 (Debit)

A/C payable $35,000 (Credit)

Decrease in Liability Recorded as a Debit Entry

A credit entry is made when the liability account decreases.

Let’s suppose that a company repays the loan of $35,000 from the bank. The following entry is made in the ledger when the transaction occurs.

A/C payable $35,000 (Credit)

Cash  $35,000 (Debit)

Increase in Owner’s Equity Recorded as a Credit Entry

A credit entry is made when the owner’s equity increases.

Suppose that an owner invested cash of $40,000 in the company. In this situation, the following double entry is made.

Cash $40,000 (Credit)

Owner’s Equity  $40,000 (Debit)

Decrease in Owner’s Equity Recorded as a Debit Entry

A debit entry is made when the owner’s equity decreases.

Suppose that an owner takes out $20,000 from the company. In this situation, the following double entry is made.

Owner’s Equity $20,000 (Credit)

Cash  $20,000 (Debit)

Expenses Recorded as a Debit Entry

An expense is recorded as a debit bookkeeping entry.

If your company incurs a rent expense of $5000, the following double entry will be made in the accounts by the bookkeeper.

Rent Expertness $5,000 (Credit)

Cash  $5,000 (Debit)

Income Recorded as a Credit Entry

Income earned by a company is recorded as a credit entry.

Suppose that your company earns a dividend income of $4,000 on investment. A bookkeeper will make the following entry as per the double accounting method.

Cash $4,000 (Credit)

Dividend Income $5,000 (Debit)

Conclusion

The double accounting method can be used by a company of any size for recording financial information. The method helps business owners, investors, and creditors to know about the exact financial position of a company.

Make sure that you hire experienced bookkeepers for recording transactions as per the double entry accounting system.

Maxim Liberty Inc offers professional outsourced bookkeeping services. Our professional chartered public accountants (CPAs) can make double entry bookkeeping entries as per the accounting standards. Contact us today by dialing (703) 957-6938.