Double Entry Bookkeeping System Explained

Every business should focus on managing finances for smooth and efficient functioning in the long run. A successful entrepreneur should always focus on a strategic financial system to stay streamlined while preventing common accounting blunders.

Believe it or not! It will help you make well informed decisions for continued growth and higher profit margins. That’s where the double entry bookkeeping system comes in. It is the best accounting method that helps record each transaction twice to track both financial inflows and outflows.

The process can be time consuming but delivers accurate results. It brings clarity to financial records while preventing risks that may affect the growth of your business. In this guide, you’ll discover everything about double entry bookkeeping system, and its importance for business. Let’s understand the concept of what comes and what goes out for effective bookkeeping.

1. What is Double Entry Bookkeeping?

Double entry bookkeeping is the basic method of recording business transactions in two different accounts, i.e a debit (what comes into the business) and a credit (what goes out). This proven system plays a pivotal role in maintaining the balance in your accounting books while giving you a clear picture of financial statements, including total revenue, savings, expenses and liabilities.

For instance, when $ 1,000 worth of stock is purchased with cash, the inventory account is debited, and the cash account is credited by $ 1,000. This method reflects both the expense and the corresponding decrease in your available cash, maintaining a balanced account. In simple words, it keeps the accounting equation balanced:

Assets = Liabilities + Equity

It is always good to hire professional bookkeepers in Melbourne for maintaining double entry bookkeeping resources.

2. Understanding the Principles of Double Entry Accounting

You should follow these principles for effective business records using double entry bookkeeping system:

• Debit is recorded to the left, and credit is on the right
• Every debit must have the same and a corresponding credit
• Debit means receiving benefits, while credit means giving the benefit

For other types of accounts, keep these principles in mind:

• In a personal account, debit the receiver and credit the giver
• In a nominal account, debit all expenses and credit all the incomes
• Real Account: Debit what comes in, and credit what goes out

3. How is Double Entry Different from Single Entry Bookkeeping?

There is no denying that single entry accounting is a simple method that records business transactions only once in a cash book or log expenses. It can save you time, but it lacks accuracy. You may find it difficult to manage assets and liabilities efficiently.

Double entry, on the other hand, is a more detailed, reliable and proven method to manage your financial records in the long run. Even experienced bookkeepers in Melbourne choose double entry over single entry accounting because of its accuracy.

4. The Importance of Double Entry For Small Businesses

It can help small businesses manage finances, assets, and liabilities without a hint of stress. Here are some of the key reasons:

Increased Accuracy and Efficient Auditing

In accounting, every transaction affects minimum two accounts, and thus double entry bookkeeping makes it easy to detect errors. If there is a discrepancy in the books, you can easily identify and correct it before things get out of hand. This makes financial auditing super efficient.

Hassle Free Tax Reporting

Believe it or not! Double entry records are more detailed and structured. It can help reduce tax reporting hassles. Since you already have complete details in place, it becomes super easy to lodge returns and respond to ATO queries.

Supports Financial Decision Making

Many professionals suggest using double entry accounting system, especially if you have a small business. The best part is that it can fix messy books while helping you make informed decisions easily without any stress.

Boosts Business Growth

There is no denying that financial responsibilities increase as a business grows. Moreover, well structured data entry accounting system can help you provide an accurate method to handle complex transactions, contributing to continued success in the competitive business world.

5. How to Get Started with a Double Entry Bookkeeping System

Fret not! You can use technology driven accounting software platforms like QuickBooks, for double entry bookkeeping systems. These tools make it easy to manage the debit and credit entries on the go.

On the other hand, you can hire a professional bookkeeper in Melbourne to manage your business finances. The best part is that these professionals can audit reports while mitigating financial risks to make informed business decisions, related to GST and other financial aspects without giving you a hint of stress.  

Wrapping Up

You can leverage the benefits of double entry bookkeeping system to bring transparency in your business records. This guide will help you make informed financial decisions for the growth of your business.