Double-entry bookkeeping is an accounting method that keeps track of how your money moves in and out of your business. Accountants and business owners have been using this tried-and-true method for hundreds of years, and it offers significant advantages when compared to single-entry bookkeeping.
But how does double-entry bookkeeping work, and why is it so important?
The basics
Essentially, double-entry bookkeeping records each side of every transaction in your business ledger. This method acknowledges that each financial transaction has equal and opposite effects in at least two different accounts, known as debits and credits.
Debits represent value coming into the business, whereas credits represent value leaving the business. Debits are recorded on the left while credits are recorded on the right, and they need to be equal to keep your books balanced.
For example, let’s say you buy a piece of machinery for your business for £3,000. If you’re using the double-entry bookkeeping method, you’ll not only need to record that money leaving your cash account in your ledger – you’ll also need to record the same value coming into your asset account.
This will enable you to put together a financial report based on all the balances in your ledger – also known as a trial balance.
Furthermore, double-entry bookkeeping is also often known as multiple-entry bookkeeping, and can refer to any bookkeeping method that uses more than one record for each transaction.
Benefits of double-entry bookkeeping
Truer reflection of your business
One major disadvantage of single-entry bookkeeping is that it only tells half the story when it comes to your finances. Double-entry bookkeeping, on the other hand, makes it easier to understand how money flows in and out of your business.
This method more accurately records profit and loss by recording how expenses relate to revenue, offering a truer reflection of your business’s performance. With a greater understanding of the bigger picture, you’ll be able to make more informed decisions about your finances.
Less room for error
Recording all the sides of each financial transaction introduces a system of checks and balances that leaves less room for human error.
This safety net makes it much easier to spot mistakes. That said, it’s still worth being careful and double-checking your records. Your ledger can still appear balanced even if the wrong accounts have been debited or credited.
Leaves an audit trail
Double-entry bookkeeping helps prevent fraud by leaving an audit trail of all your transactions.
If you notice the sums don’t add up in your ledger, you’ll know something has gone wrong and you’ll be able to trace back your transaction records. An audit trail will help you flag any financial inconsistencies in the business and ensure you stay in line with legislation.
Easier to prepare financial statements
If you use double-entry bookkeeping, you’ll be able to gather all the information for your financial statements from the transactions recorded in your ledger. It makes it quicker and easier to pool all the right data and produce accurate statements.
This is not just useful for producing budgets and submitting your annual accounts – it can also come in handy if you want to draw up financial reports to attract investors.
Balancing the books
While there are a lot of benefits to double-entry bookkeeping, maintaining all the right records throughout the year can take up a lot of time you can’t afford to lose as a small business owner. At Smith Butler, we know how valuable your time is, which is why we offer comprehensive bookkeeping services to take that task off your plate.
We can manage your books on your behalf, freeing up the time you need to focus on other parts of your business. Or if you prefer to handle everything by yourself, we can provide specialist training to help you maintain good bookkeeping practices.
Need help getting on top of your books? Get in touch with us today.