How to Use the Double Entry System in Your Businesses

using calculator in double entry bookkeeping

In business, bookkeeping is key to staying organized and tracking progress. Recording all financial transactions helps keep track of cash flow, assess profits and losses, and make better business decisions. While there are different bookkeeping methods, the double entry system is most commonly used in business settings. In this guide, we’ll walk you through the steps of using double-entry bookkeeping to process your company’s accounts, and you will learn some tips. Keep reading!

What is Double Entry Bookkeeping?

Double-entry bookkeeping is a system of recording financial transactions in which each transaction is recorded in at least two accounts. The most common use of double-entry bookkeeping is in business settings, where it helps track cash flow, assess profits and losses, and make better business decisions.

While there are different bookkeeping methods, the double-entry system is most commonly used in business settings. In this guide, we’ll walk you through the steps of using double-entry bookkeeping to process your company’s accounts.

Benefits of Using Double Entry Bookkeeping

There are several benefits of using double-entry bookkeeping for businesses, including:

More Accurate Picture of Financial Health:

To have a more accurate picture of their financial health, double entry system is a great way, since all transactions are recorded in at least two accounts, providing a better overview of where money is coming in and going out.

Improved Cash Flow Management:

Double-entry bookkeeping can also help improve cash flow management. It is because it provides a clear record of all transactions, making it easier to track and manage cash flow.

Better Decision Making:

Double-entry bookkeeping can also help businesses make better decisions. The system provides a clear picture of all financial transactions, making it easier to identify trends and make informed decisions about where to invest money.

How to Use Double Entry Bookkeeping

Now let’s see how the system works.

Double-entry bookkeeping is based on the following equation:

Assets = Liabilities + Equity

This equation shows that assets are equal to the sum of liabilities and equity. In other words, assets are financed by either debt or shareholders’ equity.

On the other hand, It can rewrite the equation as:

Assets – Liabilities = Equity

This equation shows that equity equals the difference between assets and liabilities. In other words, equity is what is left over after liabilities are paid.

Now that we know the basics of double-entry bookkeeping let’s look at how to use the system to process business accounts.

Double Entry Bookkeeping Basic Steps

Here are the basic steps to using double-entry bookkeeping:

Step 1: Identify the Transaction

The first step is to identify the transaction. It includes identifying the date, type of transaction, and amount of money involved.

Step 2: Identify the Accounts for Debit and Credits

The second step is to identify the accounts affected by the transaction. For example, if you are recording a purchase acquired on an account, you will need to remember the asset and liability accounts that will be affected.

Debit: Purchases xx

Credit: Accounts Payable xx

Step 3: Enter the Debit and Credit Amounts in the Journal

The third step is to enter the debit and credit amounts. For example, if you are recording a purchase of $100 on account

Debit: Purchases 100

Credit: Accounts Payable 100

Some transactions involve more than one debit and credit. You will need to enter the debit and credit amounts in the appropriate accounts in these cases.

For example, if you purchased with a downpayment and the balance is on account, it involves one debit and two credits. Here’s how you will record it in the journal:

Debit: Purchases 150

Credit: Cash 50

Credit: Accounts Payable. 100

The journal is a record of all financial transactions. Each transaction is typically recorded in two accounts, with a debit entered in one account and credit entered in the other.

The following information is needed in recording a journal entry:

  • Date of the transaction
  • Name of the account being debited
  • Account being credited
  • Amount

Step 4: Post the Transaction to the Ledger

The ledger is a record of all financial transactions that have been recorded in the journal. Posting the transaction to the ledger helps businesses keep track of their financial progress.

These steps will help you monitor each account title’s flow in your business.

There are two types of ledgers: the general ledger and the subsidiary ledger.

The general ledger records all financial transactions that affect the company as a whole. The subsidiary ledger records all financial transactions that involve only a specific account. These subsidiary ledgers are used to determine the customers and suppliers.

Step 5: Prepare Trial Balance

The trial balance is a report that lists all the ledger accounts and their balances. The purpose of the trial balance is to verify that the total debits equal the total credits.

If the total debits do not equal the total credits, there is an error in the journal entries or the posting to the ledger. You must correct this error before you can prepare the financial statements.

Step 6: Make Adjusting Entries

Adjusting entries are made at the end of the accounting period. 

Here are the different types of Adjusting Entries:

Accruals:

An accrual is a transaction that has been incurred but has not yet been paid or recorded. For example, suppose you incur a utility bill on December 31 but don’t receive the invoice until January 3. In that case, you must make an accrual entry to record the utility expense in December.

Deferrals:

A deferral is a transaction that has been paid or recorded but has not yet been incurred. For example, if you pay rent on December 31 for the following month, you would need to make a deferral entry to record the rent expense in January.

Prepayments:

A prepayment is a transaction that has been paid or recorded but has not yet been incurred. For example, if you pay insurance on December 31 for the following year, you must make a prepayment entry to record the insurance expense in December.

Depreciations:

Depreciation is an accounting method used to allocate the cost of a long-term asset over its useful life. For example, if you purchase a new car for $20,000, you would need to make a depreciation entry to spread the cost of the vehicle over its useful life.

Amortizations:

Amortization is an accounting method used to allocate the cost of an intangible asset over its useful life. For example, if you purchase a patent for $5,000, you would need to make an amortization entry to spread the cost of the patent over its useful life.

For example, if you purchase supplies on account and the bill has not yet been paid, you will need to make an adjusting entry.

The following information is needed to make an adjusting entry:

  • Date of the transaction
  • Name of the account being debited
  • Account being credited
  • Amount

Step 7: Prepare Worksheets

A worksheet is a tool used by accountants to prepare financial statements. It is similar to a trial balance, but it includes adjusting entries. The worksheet’s purpose is to verify that the total debits equal the total credits after the adjusting entries have been made.

Make sure the total debits and credits are equal.

Step 8: Prepare Financial Statements

After the trial balance is prepared and all errors are corrected, you can prepare financial statements. The three most common financial statements are the income statement, balance sheet, and statement of cash flows.

Income Statements:

An income statement shows a company’s revenues and expenses for a while. The income statement can be prepared for any timeframe but is most commonly prepared monthly or yearly.

Balance Sheets:

A balance sheet shows a company’s assets, liabilities, and equity at a specific time. The balance sheet is prepared at the end of the accounting period.

Statement of Cash Flows:

A statement of cash flows shows a company’s cash inflows and outflows for a while. The statement of cash flows can be prepared for any timeframe but is most commonly prepared monthly or yearly.

Step 10: Prepare Closing Entries

Closing entries are made at the end of the accounting period to close temporary accounts. Temporary accounts include revenue, expense, and dividends account.

After the closing entries are made, the balance in this account will be zero. This allows the accountant to start fresh in the new accounting period with a clean slate.

Step 11: Post Closing Entries to Ledger Accounts

After the closing entries have been prepared, they need to be posted to ledger accounts.

To post a closing entry, debit the account being closed and credit the appropriate income or equity account.

For example, if you are closing the revenue account, you would debit revenue and credit income.

If you close the dividends account, you will debit dividends and credit equity.

Step 12: Prepare a Post-Closing Trial Balance

A list of all ledger accounts and their balances after the closing entries have been made is called as post closing trial balance. In this trial balance, there should be no more temporary accounts like incomes and expenses.

Step 13: Create Reversing Entries (Optional)

Reversing entries are optional journal entries made at the beginning of the accounting period to reverse certain accruals. These entries are typically made for accounts receivable and account payable.

The purpose of reversing entries is to make the bookkeeping process easier. Without reversing entries, the accountant must make two separate journal entries for each transaction.

For example, if you purchase supplies on account, you would need to make two journal entries: one when the supplies are received and one when the bill is paid.

If you make a reversing entry, you would only need to make one journal entry when the bill is paid. The supplies would be recorded when they are received, and the payment would be recorded when the invoice is paid.

To make a reversing entry, reverse the debit and credit from the original journal entry.

For example, if you made a journal entry to record the purchase of supplies on account, you would debit supplies and credit accounts payable. To reverse this entry, you would credit supplies and debit accounts payable.

Reversing entries is not required, but they can save time when recording transactions.

Related: Common Double Entry Accounting Mistakes-And How to Avoid Them!

Tips in Using Double-Entry Bookkeeping

Keep good records:

This may seem like a no-brainer, but keeping accurate and up-to-date records is essential. Double-entry bookkeeping can be time-consuming, so staying on top of your transactions is important.

Use a ledger:

To keep track of your transactions you need to use ledgers. Ledgers can be paper or electronic, but you should organize them in a way that makes sense to you.

Related: 10 Tips To Make Your Business More Profitable With Proper Bookkeeping

Use accounting software:

Double-entry bookkeeping process can be easier thru the use of accounting softwares. Many different accounting software programs are available, so find one that fits your needs.

Hire a bookkeeper:

If you don’t have the time or knowledge to do double-entry bookkeeping, consider hiring a bookkeeper. A bookkeeper can care for your finances and free up your time to focus on other aspects of your business.

Conclusion

So there you have it, your complete guide to double entry bookkeeping. We hope that this tutorial was helpful and provided you with the necessary information to get started using this system in your own business. Our team is here to assist you if you have any questions or need help getting started. Contact us today for more information about our services and how we can help you manage your company’s finances. Thanks for reading!

Recommended: 15 Common Bookkeeping Mistakes Filipino Business Owners Make – And How to Avoid

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