What is Double Entry Accounting And How It's Used?

Double entry system of accounting is the gold standard in bookkeeping, providing a systematic approach to recording financial transactions. In this article by Viindoo Business Management Software, we will learn the basics of double accounting, common transactions and the benefits of using this system.

What is double entry accounting?

Double entry accounting is a system of bookkeeping that requires every financial transaction to be recorded in at least two different accounts: a debit entry in one account and a corresponding credit entry in another account. This system ensures that the accounting equation (Assets = Liabilities + Equity) is always in balance and provides a complete and accurate record of a company's financial activity.

In double entry accounting, each transaction affects at least two accounts. One account is debited, meaning that an entry is made on the left-hand side of the account, while the other account is credited, meaning that an entry is made on the right-hand side of the account. The amount of the debit must always equal the amount of the credit, so that the overall balance of the accounts remains in balance.

What is double entry accounting?

For example, when a business sells goods on credit, the revenue account is credited with the sale amount, and the accounts receivable account is debited with the same amount. This ensures that the total amount of assets (accounts receivable) and equity (revenue) increases by the same amount, which maintains the balance of the accounting equation.

>>>> See more: What is a Journal Entry in Accounting? Guide with Examples

Double entry accounting practices

Principle of double entry

• Identify accounts debit first, credit later
• The total amount credited to the debit side must be equal to the total amount credited to the accounts in the same item.
• A complex clause can be broken down into simple clauses, but simple terms cannot be combined into a complex clause.
   

5-steps-process of double entry accounting

The principle of double entry bookkeeping requires that economic transactions be recorded by journal entries and processed through the following steps:

• Identify the transaction: The first step in the double entry accounting process is to identify the transaction that has taken place. This could be a sale, a purchase, an expense, or any other financial transaction.
• Determine the accounts affected: Once the transaction has been identified, the next step is to determine which accounts will be affected. For example, if a sale has taken place, the accounts that will be affected may include revenue, accounts receivable, and cost of goods sold.
• Determine the debits and credits: Each transaction must have at least one debit and one credit. The debit is recorded on the left side of the account, while the credit is recorded on the right side. The amounts of the debit and credit must be equal in value to ensure that the accounting equation remains balanced.
• Record the transaction: The transaction is then recorded in the general ledger, which is a record of all the accounts used in double entry accounting. The debit and credit entries are recorded in their respective accounts, and the transaction is given a unique identification number for future reference.
• Post the transaction: After the transaction has been recorded in the general ledger, it is then posted to the relevant subsidiary ledgers and journals. This helps to keep track of specific transactions and provides a more detailed view of the financial activity.
  

Double entry accounting process

Example of double entry accounting

A business sells $1,000 worth of goods to a customer on credit. The double entry accounting transaction for this sale would look like this:

• Debit: Accounts Receivable $1,000
• Credit: Sales Revenue $1,000

The debit to the accounts receivable account represents the amount owed to the business by the customer. The credit to the sales revenue account represents the revenue earned by the business from the sale. This transaction increases both the accounts receivable and sales revenue accounts by $1,000.

When the customer pays the $1,000, the double entry accounting transaction to record the payment would look like this:

• Debit: Cash $1,000
• Credit: Accounts Receivable $1,000

The debit to the cash account represents the amount of cash received by the business from the customer. The credit to the accounts receivable account represents the reduction in the amount owed to the business by the customer. This transaction reduces the accounts receivable account by $1,000 and increases the cash account by $1,000.

This example illustrates how double entry accounting ensures that every transaction affects at least two accounts, with the debits always equaling the credits, so that the accounting equation (Assets = Liabilities + Equity) remains in balance.

Example of double entry accounting

Double entry accounting system

In recent years, the use of double entry accounting software has become increasingly popular among businesses of all sizes. These software programs automate the double entry accounting process, making it easier for businesses to manage their finances and generate accurate financial reports.

There are several popular double entry accounting software programs. One relatively new player in the market is Viindoo  accounting systems software . Viindoo is an all-in-one business management software that includes a powerful double entry accounting module. It is designed to help businesses automate their financial processes, reduce errors, and gain better insights into their financial performance.

Double entry system of accounting

Key features and benefits of using Viindoo Accounting software:

• Easy-to-use interface: Viindoo has a user-friendly interface that makes it easy for users to navigate and use the software.
• Customizable dashboard: The software provides a customizable dashboard that allows users to view key financial information at a glance, such as revenue, expenses, and cash flow.
• Automated invoicing: Viindoo allows users to automate their invoicing process, which can save time and reduce errors.
• Bank reconciliation: The software provides an automated bank reconciliation feature, which helps users to identify and resolve discrepancies between their bank statements and accounting records.
• Financial reporting: Viindoo offers a range of financial reports, including profit and loss statements, balance sheets, and cash flow statements, which can help businesses gain insights into their financial performance.
• Multi-currency support: Viindoo supports multiple currencies, making it ideal for businesses that operate in multiple countries.

FAQs

Double entry accounting is a fundamental concept that all business owners and accountants should understand. By following the principles of double entry accounting and using reliable accounting software like Viindoo, businesses can maintain accurate financial records and make informed decisions.

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