Double-entry bookkeeping is a concept in which allaccounting transactions influence the finances of the business in two ways.Basically the general ledger records both sides of every transaction:
* Double-entry bookkeeping implies that every accountingtransaction has two sides.
* The general ledger records both sides of the transaction:a debit and a credit.
The company's turnover increases if it sells a product andits cash flow also increases by an equal amount. The company's cash balanceincreases when a company borrows funds from the creditor; however, thecompany's debt balance increases by the same amount.
The double entry system creates a balance sheet made up ofliabilities, assets and equity. A leaf is balanced because the company's assetsare equal to equity and liabilities. All the items a business owns likeinventory, machinery, cash, buildings, and intangible items like patents.Liabilities are anything the business owns with someone else, such as short-termaccounts payable owned by vendors or long-term notes payable owned by the bank.
Importance of double entry
The double entry system helps accountants eliminate risk andit also helps in providing good check and balance benefit. This method givesyou complete information about a transaction compared to a single entry method,because each transaction contains a source and a designation.
There must have been a case for using a single entry andcash book for small and simple businesses before computer software madedouble-entry bookkeeping easier for small businesses. All modern accountingsoftware uses double entry and this is a recommendation for most businesses dueto the improved efficiency and accuracy in recording transactions.
Types of accounts in double-entry accounting
Different accounts are used to record postings using adouble entry system. Below are the main accounts on which financialtransactions are classified:
Asset account
It records all the assets owned by a business. Its examplesare accounts receivable, cash, equipment, and inventory accounts. The assetaccount increases when there is an influx of assets and decreases when assetsare reduced.
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Count of Liabilities
The liability account shows the accounts held bya company for any other organization. His examples are notes payable, accountspayable. When a business borrows money and purchases goods and services oncredit, liabilities increase. On the contrary, debts are repaid; the accountbalance decreases.
Count of Equity
The equity account shows the owner's capital andrecords subsequent investments and profits in the business. Equity accountsdecrease when an organization faces losses and the owner takes money forpersonal use, which is called drawing.
Expenses and income
The expense account shows that the expenses are incurred bya professional type payment of wages, rent and electricity bill. If theexpenses increase, the net profits will be lower. The income account shows thesales made by the companies. The higher the turnover, the higher the grossprofit of the business.
Gains and losses
The financial results of the company's non-core activitiesand production processes are described in Gains and Losses. Improving the valueof the business is known as its earnings. On the contrary, losses are recordedwhen the business loses money through a secondary activity.
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Since a double-entry bookkeeping system is very transparent,anyone considering donating money to your business is likely to do so if youuse this system. our bookkeepers and accountants can do double-entrybookkeeping and they have simple online bookkeeping solutions that make keepingthe books easier.
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