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

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double entry bookkeeping

If you’re just beginning your search for accounting software (or have read any of our reviews), you’ve probably come across the term double-entry accounting. But what is double-entry accounting?

Good question!

Double-entry accounting is a way of recording bookkeeping transactions, where each transaction affects two accounts. This method of accounting helps ensure accuracy, as the debits must always equal the credits (don’t worry, these terms will make more sense in just a minute).

Do you need to use double-entry accounting to properly balance your business’s books? How do you find double-entry accounting software?

Read on! We’ll answer these questions, provide a comprehensive double-entry accounting definition, and more.

The History Of Double-Entry Accounting

Bookkeeping has been a part of human history for centuries, though the first appearance of double-entry accounting was in 13th century Italy. As business and trade began to flourish, merchants needed a way to keep accurate financial records and record more complex transactions — and so double-entry accounting was born.

In 1494, Friar and mathematician, Luca Pacioli, wrote the first book on double-entry accounting: the Summa de Arithmetica, Geometria, Proportioni et Proportionalita (Summary of Arithmetic, Geometry, Proportions, and Proportionality). To this day, many people refer to Pacioli as the “father of accounting.” Although Pacioli did not create double-entry accounting, he was the first to record the double-entry accounting principles used by Italian merchants during the Renaissance. If you’re not impressed by Pacioli yet, he also taught mathematics to Leonardo da Vinci.

Double-entry accounting has been used by bookkeepers and accountants ever since. (Triple-entry accounting is a whole other beast and one we won’t tackle in this article.)

The Principles Behind Double-Entry Accounting

Before you can truly understand double-entry accounting, there are some important accounting principles you need to know. These principles are the foundation for double-entry accounting and for balancing the books.

Key Accounting Terms

In order to understand how accounting works, you’ll need to know these key terms:

  • Assets: Anything owned by a business.
  • Liabilities: Anything a business owes.
  • Owner’s Equity: The owner’s investment in a company. This represents the business’s capital or worth.
  • Income: Money a business earns by selling products or services.
  • Expense: Money a business spends on items or services.
  • Account: A place to record specific transactions in accounting. Accounts can be categorized as an asset, liability, equity, income, or expense.
    • Example: Most companies have a Cash account, where you’ll find a list of all transactions involving cash. Since cash is some you owe, it is considered an asset. Read our post How To Set Up A Chart Of Accounts to learn more.

The Basic Accounting Equation

The basic accounting equation is the foundation for double-entry accounting. The equation states:

Assets=Liabilities+Owner’s Equity

The most important thing to remember about the accounting equation is that each side of the equation must always balance out. This is where we get the term “balance the books.”

For example, say a company pulls out a $3,000 business loan. How would we apply the basic accounting equation to this scenario?

The company would gain $3,000 in cash. We already said cash is an asset, so we must put +$3,000 underneath Assets (see chart below). But, the company then owes $3,000 in debt, which is recorded in a Notes Payable account. Since Notes Payable is a something you owe, it’s a liability account. So we’ll have to write -$3,000 underneath liabilities.

Assets=Liabilities+Owner’s Equity
+$3,000=-$3,000
0=0 ✓

As you can see, the asset account and liability account cancel out, leaving a balanced equation.

Make sense so far?

Debits & Credits

In double-entry accounting, each transaction affects at least two accounts. As you can imagine, if you have a transaction that affects a dozen accounts, it can be really hard to keep track of it all in a long algebra equation. That’s where debits and credits come in.

Debits and credits play an important role in accounting. It’s easy to confuse accounting debits and credits with debit or credit cards (or debiting/crediting a savings account), but forget everything you thought you knew about debits and credits.

In accounting, all transactions are recorded using debits and credits in a T-Account (pictured below).

DebitCredit
00
00

A debit is a transaction that increases assets and expenses and decreases liabilities. Debits are always on the left side of the T-Account.

A credit is a transaction that increases liabilities and decreases assets and expenses. Credits are always on the right side of the T-Account.

Just as the accounting equation must always balance, total debits must always equal total credits.

Let’s go back to our example from earlier (where a company borrowed $3000). We’ll need to create a T-Account for each account:

Cash
DebitCredit
3,000
Notes Payable
DebitCredit
3,000

 

 

 

 

As you can see, we have a debit entry and a credit entry in each T-Account. Hold on just a bit longer, and we’ll pull all of this together in the next section.

How Double-Entry Accounting Works

As we mentioned earlier, double-entry accounting is a system of accounting where each recorded transaction affects at least two accounts. For each account, there are two columns: debits and credits. The debits and credits always balance out (that’s why they call it a balance sheet!).

Now, let’s see some double-entry accounting in action.

Here’s a journal entry I created based on the T-Accounts we made in the last section (a journal entry is just a way to organize the debits and credits of each T-Account in a single location):

AccountDebitCredit
Cash3,000
Notes Payable3,000
Total Debits = 3,000 Total Credits = 3,000 ✓

The total debits equal the total credits, so the books are balanced!

Going forward, let’s imagine that the company has paid $500 of their loan. Their Cash Account would lose $500, but their Notes Payable Account would also go down by $500, creating this journal entry:

AccountDebitCredit
Cash2,500
Notes Payable2,500
Total Debits = 2,500 Total Credits = 2,500 ✓

Again, the total debits equal total credits That’s double-entry accounting in action!

Reasons To Use Double-Entry Accounting

Hopefully, you’re starting to understand how double-entry accounting works. But you may still be wondering why double-entry accounting is so important.

Double-entry accounting is the only way to get an accurate view of your company’s finances. Single-entry accounting records income and expenses alone, whereas double-entry accounting takes assets and liabilities into account, giving you a more complete balance sheet.

If you opt to use single-entry accounting, you’ll receive a very limited view of your business. Freelancers and some micro businesses can make it work, but why hobble along with single-entry accounting when you could use double-entry accounting to excel? Capterra puts it this way in their post Why Your Small Business Needs Double-Entry Accounting:

Single-entry accounting gives you as much insight into your business as your checkbooks ledger.

A list of income and expense only goes so far in helping you understand your business — especially because a company’s finances involve more than just income and expense. Assets like property, equipment, and machinery may not bring in “income” like cash, but these assets are integral to your owner’s equity and to understanding your business’s overall net worth. That’s why double-entry accounting is the only way to go.

Other benefits of double-entry accounting are that it:

  • Helps catch errors
  • Makes for strong accounting records
  • Is used by accountants (which makes things easier on your accountant and your wallet)
  • Makes it easier to prepare proper financial statements

Finding Double-Entry Accounting Software

The good news is that almost every modern accounting software solution offers double entry accounting. The even better news? Almost all accounting software does double-entry accounting behind the scenes so you don’t have to worry about the basic accounting equation or recording debits and credits at all. You’ll get accurate financial statements automatically.

All you have to do is enter transactions and categorize those transactions into the right accounts, and the software takes care of the rest!

The biggest names in the accounting software industry, including Xero, QuickBooks, QuickBooks Online, Zoho Books, and Wave, all use double-entry accounting. FreshBooks is one of the few programs that only uses single-entry accounting.

Read our comprehensive accounting reviews to learn more about these programs and find other great double-entry options.

Final Thoughts

Hopefully, you now have a grasp on how double-entry accounting works and understand why it is integral to proper bookkeeping. When it comes to keeping financial records, you can never be too careful. Double-entry accounting is the only way to go if you want to keep strong records and understand the overall financial performance of your business.

If you’d like to learn more about double-entry booking and other basic accounting principles, download our free Beginner’s Guide To Accounting. Happy (double-entry) accounting!

Chelsea Krause

Chelsea Krause

Head Accounting and Invoicing Writer
Chelsea Krause is a writer, avid reader, and researcher. She became interested in accounting software because of her constant desire to learn something new and understand how things work. When she's not working, she can be found drinking obscene amounts of coffee, daydreaming about her newest story, reading anything written by C.S. Lewis or Ray Bradbury, kayaking and hiking, or watching The X-Files with her husband.
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6 Comments

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    Ami

    Please give opinion and suggestions for double entry book keeping system

      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

        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

          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

            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.

              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!

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