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What is Double-Entry Bookkeeping in Accounting?

Welcome back to part two of this Accounting Crunch series. This series is about debits and credits, double-entry accounting and T-accounts. I recommend reading What is the difference between debits and credits in accounting? – Accounting crunch part 1/3 if you haven’t already.      

Here is a quick summary of the last article:

Debits and credits are two terms used in accountancy to record transactions between accounts. They refer to the movement of value between accounts and are recorded on the balance sheet and profit & loss statement.

When you debit an asset or expense account, you increase its value. However, when you debit a liability, equity or revenue account, you decrease its value.

When you credit an asset or expense account, you reduce its value. When you credit a liability, equity or revenue account, you increase its value.

What is double-entry accounting?

When a company records a transaction, at least one account will always be debited, whilst at least one other will always be credited, hence the name “double-entry”. 

There will always be at least two entries to any transaction.

These entries show the movement of value around the business. So, essentially, every action has a reaction. Much like in physics where energy can never be created or destroyed, value can only ever be transferred.

Double-entry accounting is used to ensure that there are no errors in a company’s accounts and that everything is accounted for. If one side of the double-entry were missing, the company’s accounts would be incomplete – the company would not have fully explained the transaction.

The accounts every company has are revenue and expense accounts (which can be found on the profit and loss report) and asset, liabilities and equity accounts (which can be found on the balance sheet). 

When performing double-entry accounting, the value gained or lost in one account must be equal to that of another account. 

This may sound confusing, so let’s break it down. 

Debit
Credit
Asset
+
Expense
+
Equity
+
Revenue
+
Liability
+

You may remember this table from part 1. This table displays how each account is affected by either being debited or credited.

So what does this all have to do with double-entry bookkeeping?

When you perform a transaction, the total amount must be equal with both a credit and a debit. If the total amount is not equal, then there is an error. They must always be equal or balanced. 

This is similar to the balance sheet, where one half must always be equal to the other. The double-entry method keeps account entries accurate, enabling the financial health of a company to be monitored in a standardised way. I suggest taking a look at our article called why does a balance sheet need to balance? to find out about how the double-entry method is used on the balance sheet.

How is double-entry accounting used in business?

In this section, we’re going to be going through a couple of examples of how the double-entry method is used in real-life scenarios.

Example 1

Your company purchases a computer for £500. However, you sign an agreement to pay for the computer next month. So what happens to the accounts?

  • Your fixed asset account (an asset account) is debited £500.
  • Your accounts payable account (a liability account) is credited £500.

A month passes and you pay for the computer with cash.

  • Your cash account (an asset account) is credited £500.
  • Your accounts payable (a liability account) is debited £500. 

As you can see, with both transactions, one account will always be debited, whilst another will always be credited. 

Example 2

Your company pays £1000 of rent for a unit space. You pay the rent on time, on the day that it is due. So what happens to the accounts?

  • Your operating costs account (an expense account) is debited £1000.
  • Your cash account (an asset account) is credited £1000.

Next month when the rent is due you can’t afford it. You agree with the landlord that you will pay it the following month in addition to that month’s rent. So for this month:

  • Your accounts payable (a liability account)  is credited by £1000.
  • Your operating costs (an expense account) is debited by £1000.

A month passes and you pay your dues.

  • Your accounts payable (a liability account) is debited by £1000.
  • Your operating costs account (an expense account) is debited £1000.
  • Your cash account (an asset account) is credited £2000.

Double-entry accounting in Brixx

Double-entry accounting is important for accurately recording all transactions a company makes. However, it can get arduous when you want to forecast your business to make strategic decisions; the more transactions you enter, the more likely you are to make mistakes.

Brixx is a simple, flexible tool that helps make finance easy for everyone, regardless of financial experience. The software handles all the accounting work, automating the double-entry for you, giving you confidence in your numbers. 

A free, no-obligation trial, means that you can try out Brixx and see for yourself how easy financial forecasting software should be… Try it out for free today!

Debits & credits, double-entry accounting and T-accounts

To sum up, in the last article we covered debits & credits. In this article, we’ve covered double-entry accounting. In part 3 of this series, we are going to be covering T-accounts!

T-accounts are tables which visually represent the method of double-entry accounting and the movement of value around a company with debits and credits. They show which accounts are being debited, and which are being credited. 

Cal Corcoran 24th June 2020 By
 

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