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What Is Double-Entry Accounting (And Do You Need It)?

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Chelsea Krause

Chelsea Krause

Content Strategist - Accounting & eCommerce
Chelsea Krause is a writer who has specialized in accounting for over three years and is a QuickBooks Certified User. She has a BA in English & Creative Writing from George Fox University and studied at the University of Oxford as well. She has been quoted in Forbes and her work appears in Startup Nation, Small Business Bonfire, and Women on Business.
Chelsea Krause

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12 Comments

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    Will

    Thanks for this post Chelsea. I’m an an engineer (not an accountant) who is stepping into the position of helping with finances for a small startup, so your primer here is very helpful.
    In your description of “Account,” I think there is a tweak needed?
    >> “Since cash is some you owe, it is considered an asset.”
    I think you mean
    >> “Since cash is someTHING you owN, it is considered an asset.”
    Correct?

      Jessica Dinsmore

      Thanks, Will 🙂 Error corrected!

        Doane

        Hi there,

        i’m having trouble understanding how:
        “A debit is a transaction that increases assets and expenses and decreases liabilities. Debits are always on the left side of the T-Account.”
        I don’t understand the difference between an expense and a liability. If an expense increases, how does a liability decrease?
        If a liability is money owed, and an expense is.. money going out? Are they not on the same side of the equation?
        Or is an expense past tense, so if it’s paid I have less of a liability in the future so it goes down?

        Thanks for your help!

          Jessica Dinsmore

          Hi Doane!

          An expense is money that has been spent, while a liability is money that is owed. For example, going to the office supply store and purchasing supplies is an expense. Purchasing inventory from a supplier that sends a bill due next month is a liability – the money is owed but hasn’t been spent.

          Remember, in double-entry accounting total debits and total credits must be equal. If office supplies are purchased with cash, your supplies (the expense) is recorded as a debit on the left side of the T-account. Since the supplies were purchased with cash, your assets will decrease, so the same transaction is posted as a credit on the right side of the T-account.

          Let’s look at how an entry would work with a liability. If you purchase inventory from a supplier and will pay at a later time, you have the inventory on hand. This is an asset that has increased and will be recorded as a debit on the left side of the T-account. Since you owe money to the supplier, your liabilities have increased, so the transaction will be posted as a credit on the right side of the T-account. See how everything must balance out?

          Double-entry accounting can certainly get confusing. I recommend that you check out the post Accounting 101, which really helps break down difficult accounting concepts. And of course, feel free to post your questions and we’ll answer them as quickly as possible!

            Chinae18@gmail.com

            Hello Chelsea. Thank you for the explanation of double entry. I have a question about entries in Quick books premier desktop pro. What do you recommend as the way to record professional fees earned as a lawyer where the partial retainer fee initially paid by client upon signing a contract has to be put into a trust account and is not actually earned income until services rendered is invoiced with the balance of agreed fee still to be paid later by the client? It is at time of invoicing the client that the amount in trust account will then be transferred to company operating account as earned income. Thanks for your help in advance.
            George

              Chelsea Krause

              Hi George,

              I recommend speaking with an accountant. They are going to know the best way to handle this.

              Best wishes,

              -Chelsea Krause

                Ami

                Please give opinion and suggestions for double entry book keeping system

                  This comment refers to an earlier version of this post and may be outdated.

                  Chelsea Krause

                  Hi Ami,

                  Thanks for reaching out! Almost all of the accounting software reviews on our site feature double-entry accounting. The only software options that don’t have double-entry accounting are FreshBooks, GoDaddy Online Bookkeeping, and any of the tax software (QuickBooks Self-Employed, Xero Tax Touch, and AND CO) as they aren’t full accounting packages.

                  Xero and QuickBooks Online are definitely the most popular double-entry accounting programs, but I also love Zoho Books and Wave. Which software is best for your company will depend on your company’s needs and size, but you can’t go wrong with any of these options.

                  You can learn more about my opinion on each option by reading my review of each program. If you need help deciding, check out The Complete Guide to Choosing Online Accounting Software.
                  I hope this helps! Let me know if you have any more questions!

                  Best wishes,
                  -Chelsea Krause

                    This comment refers to an earlier version of this post and may be outdated.

                    Columbo

                    this is a very good article; thank you for posting it
                    one question:
                    what will a single-entry income/expense sheet lack in the case of a service freelancer with no business location, no business mortgage, no rental agreements, no employees, no loans, no inventory, with income once a month always from same source and about 40 expense transactions a year?
                    thank you

                      This comment refers to an earlier version of this post and may be outdated.

                      Katherine Miller

                      Hi there,

                      Good question! The situation you’re describing is one where a business may be able to get by with single-entry. Here are the things you might end up missing:

                      Accounts Payable: This is the account used in a double-entry model to show money you’re going to have to spend which you haven’t yet spent. I don’t know what your 40 expenses a year are, so I can’t say whether this would ever be an issue for you. One example would be a phone bill: you might receive the bill 20-30 days before it’s due, and you might wait until the end of that time to pay it. Accounts Payable gives you a way of keeping track of that money.

                      Accounts Receivable: The counterpart to Accounts Payable. When you’ve invoiced a client and they haven’t paid yet, the money qualifies as Accounts Receivable. If you bill with terms like net 15 or net 30, it becomes really important to keep track of what’s been paid and what’s due to be paid. If you bill everything as due on receipt (and if your client always pays on time – lucky you!), then this becomes less important.

                      Fixed Assets: You mentioned that you have no inventory – but do you have fixed assets you buy for (or use in) your business? Computer, car, etc.? If so, keeping track of those (and depreciation) is something you’ll need to do. You can do this in single-entry, but it makes a little more sense in double.

                      Double-entry will better reflect the reality of the business. But supposing that you have no fixed assets, that you pay every bill the day you receive it, and that you get paid for all work the day you invoice it, then single-entry should do you just fine. The one thing to keep in mind is that if you ever scale your business up, you’ll want to shift to a new accounting model along with it.

                      Best,
                      Katherine

                        This comment refers to an earlier version of this post and may be outdated.

                        Columbo

                        Now I understand these concepts better.

                        It then seems safe in my case to do single-entry cash system accounting, since I pay things when they are billed for or due, I get paid religiously on the 15th of every month for the prior month’s work, I have no assets I buy regularly and I do not foresee growing the business (as I do not want to have employees nor offices of my own).

                        Thank you for helping me understand so that I can make a decision.

                          This comment refers to an earlier version of this post and may be outdated.

                          Katherine Miller

                          You’re welcome. It wouldn’t be a bad idea to go over the specifics with an accountant to make sure (disclaimer: I’m not a CPA), but from what you’re said, if you’re using Excel or pen-and-paper to do your accounting, single entry would probably be fine for your needs.

                          If you’re looking into software, on the other hand, it usually costs you nothing extra to get a double-entry system, and since there’s no more data entry than with a single-entry system, there’s really no reason not to do it.

                          Best of luck to you in any case!

                            This comment refers to an earlier version of this post and may be outdated.

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