As a new business owner, you learn new skills as you learn about each area of your business. When it comes to accounting, if you don't want to be an accountant, you want to have enough accounting skills to run your business successfully. Find out how double accounting works.
Double-entry bookkeeping will allow you to overcome all kinds of business challenges. You'll know how to read your financial statements, so you can make informed financial decisions.
What is Double-Entry Bookkeeping?
There are two styles of accounting: single entry and double entry. The majority of businesses use the double entry system.
If you are running a new business or a very small business, you can use one-off accounting. However, if your business finances have complexities such as accounts receivable or accounts payable, you will likely use double-entry bookkeeping. And if you are using accounting software it will automatically run on the dual entry system.
When talking about accounting management techniques, people often think of cash accounting and accrual accounting.
Cash accounting records income and expenses in your books as soon as the transaction is made.
Accrual accounting recognizes income and expenses when invoices are issued and they are incurred.
If you follow the rules of cash or accrual accounting, you will use double entry bookkeping. Single-entry accounting is really only for companies whose bookkeeping is so simple that they can handle everything in a simple Excel spreadsheet.
Single or double entry: what's the difference?
The overall complexity of your business will help you determine whether you are using the single entry or double entry method of accounting.
What is really different between these two methods?
The biggest difference is that one-time accounting can be done in a simple spreadsheet, one column for date, one column for income, and one for expense.
The lack of a complex ledger and chart of accounts can also look appealing. The downside, however, is that little information is gained with this system. If you want to know your breakeven point or what your future cash flow is, you have no way of knowing it. Likewise, if you've paid off a loan, you have no way of seeing how much you still owe by looking at your books.
The double entry system gives you a much more detailed view of your finances through debits and credits. Each transaction must be recorded at least twice, once as a debit and once as a credit. Each debit amount must have a corresponding credit amount. These two amounts must be equal.
This not only allows you to see the bottom line of the money you have won or lost, but also other areas of your business that have been affected by this transaction. Every financial transaction has an impact. If you spend the money, you get something back. If you win it, you have some cash in your account, but you've probably lost some inventory.
Double-entry bookkeeping is push-and-pull. If you use it you may need to hire an accountant for your business.