If it’s not making a lot of sense yet, follow the chart below for a quick and easy reference. To understand what to debit and credit, remember the three key rules:Ī debit is always recorded on the left side of a transaction and a credit is always recorded on the right side.įor asset and expense accounts, you debit to increase them and credit to decrease.įor liability, equity, and income accounts, you credit to increase and debit to decrease them. One example is accounts receivable under assets.

Revenue to record income earned by business through sales, services, or interest.Įxpenses to record costs incurred to generate revenue, such as rent and salary.īeyond this, you can have other types of accounts (or sub-accounts) within this overall chart of accounts, depending on the number of transactions or your business needs. Liabilities to record anything owed by you to other individuals or institutions, such as loans.Įquity to record ownership interest in the business, such as shares sold to investors and proportion of profits reinvested in the business. They include:Īssets to record anything owned by the business, such as cash, machinery, property, and outstanding payments owed to you. They cover all aspects of business activities and make using the double-entry accounting method easier. Most small businesses use five basic accounts to record financial transactions. It ties back to a simple balance sheet formula or accounting equation as you may know: Double-entry bookkeeping not only tracks an increase or decrease in money but also where it came from and what it converts into.

To do that, it’s recorded into two accounts. In double-entry accounting, you present complete information for a transaction. In this case, the transaction will be entered into the cash account and loan payable account as follows: Turns out you received $1000 cash as a loan from James. But a few months later when the memory of the transaction fades, you may ask where the money came from, whether you borrowed it, or sold something for cash. That would be called single-entry bookkeeping, which only records cash transactions. One way to record this transaction is by saying you received $1000. Before we get into the technicalities, let’s look at an example. To put it more accurately, each transaction has a corresponding and equal reaction. It is so called because in this system each business transaction is entered twice in the financial records. What is double-entry accounting?ĭouble-entry accounting is a bookkeeping method. Pascal Ambrosino, a CPA and CFO at a private equity firm that invests in SMBs, says, “Without double-entry bookkeeping, you cannot have the information you need to make actionable business decisions.” Leveraging Pascal’s experience and insights, this article will help you understand why double-entry bookkeeping is important and when to best use this system for your business. Double-entry accounting gives a clear view of the profit or loss of your company, simplifies doing your taxes, and records information needed to impress investors and lenders. Whether you are planning to serve as your own bookkeeper or hire someone on payroll or get an accountant on a self-employed basis, it’s important that you follow the double-entry accounting method to enter daily business transactions into your financial records. This means that a significant majority of these business owners must manage their own financial records, which can be incredibly challenging without the right knowledge and tools. Final notes on using double-entry bookkeepingĪlmost all small businesses (90%) choose to keep their bookkeeping in-house rather than outsourcing it *.

Double entry bookkeeping accounts