Double entry bookkeeping is a fundamental accounting concept that requires each financial transaction to have equal and opposite effects in two different accounts. The accounting concept is quite integral in satisfying the accounting equation.
The credits will offset the debits in a T-account or a general ledger by incorporating the double-entry bookkeeping equation.
What is Double Entry Bookkeeping?
By following the double-entry system, you should ensure you record items in the debit and credit sections. Remember that debit in one account will offset credit in another account. Primarily the sums of all the debts will be equal to the sum of the credits. This system is entirely intrinsic in standardizing your accounting process and reduces errors in the accounting process. Find out more here.
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The Financial Accounting Standards Board (FASB) plays a very crucial in governing the generally accepted accounting principles (GAAP). According to FASB, there are various rules and methods every business should comply with within the double-entry accounting process. Some of the important rules include:
Debits
- All debits should be recorded on the left side of the ledger sheet
- Debits will increase the asset account and decrease the liability or equity account
- Debits decrease revenue and increase expenses account
Credits
- All credits should be recorded on the right side of the ledger account
- Credits will decrease the asset account and increase the liability or equity account
- Credits increase the revenue and reduce the expenses account
What are the Various Rules of Accounting?
– Primarily the asset accounts will include the monetary value of what your business owns. It can contain information such as money in your bank, vehicles owned, or buildings owned.
– The liability account is used to record the amount of money your business owes. It can include information such as credits or mortgages.
– The expense account will contain information about the money you have spent, such as advertising or payroll.
– The income accounts will record money coming into the business, such as revenue.
What are the Uses of Double Entry Bookkeeping Process?
The double entry accounting process allows your business to record all financial transactions in a more structured format accurately. The accounting system will provide you and your accountants with the correct information about the financial and tax requirements of the business.
It also allows your business to track your finances regularly, enabling you to analyze how your business is performing and track various financial transactions. Primarily the bookkeeping process provides your business with a detailed and comprehensive analysis of the financial affairs of your business.
Who are the Users of the Double Entry Accounting?
All businesses require having a sound and updated double-entry accounting system. It is the best way to ensure that your financial information is correct and complete and adequately support your business’s reporting functions. It is an integral business tool that all small and large businesses should have to ensure they are compliant with the law.
The bookkeeping information is quite helpful for business owners and accountants to help track the financial progress of the business. This information is also beneficial for various investors who want to evaluate the company’s financial performance and determine profitability. Creditors will also require access to the accounting information of your business before extending a loan.
Also, the information will be helpful to the government in determining the tax obligations of your business. Ideally, the law stipulates that every business should maintain accurate accounting records. Ideally, all public companies should have a standard bookkeeping accounting system. The FABS specifies GAAP, which are rules that all public companies must adhere to.
Why is Double Entry Accounting Useful for your Business?
Delivers an Accurate Financial Picture of your Business
Your business can use the bookkeeping accounting process as an efficient method to monitor the financial health of your business. Primarily, the double entry accounting process is essential for a company with several employees to help keep track of the business’s finances. Also, if your business has various debts, inventories, or multiple accounts, it is imperative to have a double entry bookkeeping process.
A good double entry accounting process helps to deliver a complete picture of the financial situation of your business. The bookkeeping process can help generate various financial reports such as the income statement or balance sheet.
Helps your Business Make more Informed Financial Decisions
The double-entry bookkeeping process gives an accurate picture of your financial situation. It gives you comprehensive details about the profitability of your business and how financially strong your business is. You can track the expenditure of your money and how your business is doing financially. The information helps your company to make more informed financial decisions.
Minimizes Bookkeeping Errors
Your equity and liabilities must equal the assets after generating a balance sheet in the double entry bookkeeping process. If the balance sheet is not matching, it means that you have made an error in the recording process. This system is a more transparent method of keeping your books and helping your business be more accountable.
Ensures your Business is Trustworthy
The double-entry bookkeeping accounting process is transparent and complete. If you have an updated strategy, anyone will be willing to work with your business. The report allows banks, buyers, or investors to access financial history and get a complete picture of your company’s financial health. Thus to maintain the financial integrity of your business it is important to have a good bookkeeping process.
If you accurately maintain your books, various stakeholders will have confidence in dealing with your business. However, if you have not maintained accurate records of your financial situation, lenders, investors, or buyers will not have confidence in your business.
Key Takeaway
The double-entry bookkeeping process is immensely imperative for all businesses. It helps maintain accurate records of the financial history of a business. The FASB has stipulated various accounting rules and requires that all public companies have an accurate and updated bookkeeping system.
The double-entry accounting process is quite helpful for various stakeholders in your business. Importantly, investors, creditors, the government, and buyers can gauge the financial position of your business. Also, you can use the information to measure the financial situation of your business.
