Comprehending the Value of Double-Entry Bookkeeping

Sound bookkeeping is a harbinger of financial success because it builds a foundation for knowledge about the practices that best serve a business. The practicality of accounting software allows small operations to enjoy the bookkeeping standards utilized by large organizations. This presents a model for reform by small enterprises still using spreadsheets to track revenue and expenses. Although learning about new software is often daunting, understanding the root of how accounting software functions eclipses this challenge.

Data available from a sophisticated accounting system is especially important if your business is a corporation. Tax reporting for a corporate entity necessitates substantial details. Moreover, satisfactory business management – even by a solo operator – requires informed decisions about profit utilization. Judgments are crucial about when profits may be distributed to owners as dividends rather than needed for expansion.

Single Entry

A simple listing of revenue and expenses – such as on a spreadsheet – entails making a single entry for each transaction. Single-entry bookkeeping might work for someone with a low volume sideline. But entrepreneurs committed to their businesses for the long run as primary income sources soon discover that small imperfections embodied by the single-entry method have enormous unintended consequences.

As the name implies, single-entry bookkeeping is characterized by having only one number recorded for each event. But every business transaction truly has two impacts. For instance, an expenditure of cash is a simultaneous decrease of business funds and increase in something else – such as an expense category. Consequently, single-entry bookkeeping can only reveal cash flow. It does not trace accounts on the Balance Sheet like inventory, accounts receivable, accounts payable, and debts – all vital elements for a growing business venture to accurately comprehend.

Double Entry

The value rendered by accounting software is that it automatically accomplishes the heavy lifting of double-entry bookkeeping. You make one entry but the system is really recording two. Both sides of every transaction occur in the background. You can find a single transaction in two places – either of the accounts that were affected.

Some examples enlighten entrepreneurs learning about accounting software. When a check is recorded in the software, this appears to only reduce the bank account. But in the software entry, you select how the funds were used — and that selected account increases. Correct account selection depends on the purpose of the check – whether you increased an expense, inventory, or equipment. Increasing the amount you’ve repaid on a loan results in lowering the liability balance owed. All of these are debits; the bank account has a credit.

Similarly, entering a bank deposit involves selecting an account representing the source of money received – company revenue, sales tax collected for future remittance to the government, proceeds from a loan, or personal cash contributed by the business owner. These sources are, respectively, credits to accounts for income, sales tax payable liability, note payable liability, or paid-in capital. A debit is recorded to the bank account for the cash increase. Comprehending the double elements affected in every transaction transforms you into a superior entrepreneur.

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