Principles of double-entry bookkeeping-Explained by the best experts

Are you looking for the answer to what are the principles of double-entry bookkeeping? Then this article will be really helpful for your clear understanding. Please read the article carefully you will get clear idea about the confusion of your understanding so far.

Bookkeeping is the method of keeping records of financial entries of daily financial activities in a systematized way. This bookkeeping can be done in two ways.

• Single entry method and
• Double-entry method.

A small business where the owner keeps records of every penny uses single entry bookkeeping for their convenience, but when the business is bigger or more complex, double-entry bookkeeping is a must.

The Financial Accounting Standard Board (FASB) uses the Generally Accepted Accounting Principle (GAAP) to make accounting entries of the globe uniform. According to them, the business entity must use the double-entry bookkeeping method. Double Entry Bookkeeping allows preparing financial statements in a more constructive way which is easier for its stakeholders to understand.

The Accounting Equation and Definition of Double Entry Bookkeeping:

Assets = Liabilities + Equity.

All the principles of accounting revolve around the above equation. All the assets of any business must be balanced by all the liabilities and equity of that business. If you analyze the equation more thoroughly, you will find that the equal sign used in the middle indicates double-entry bookkeeping. How? Double-entry bookkeeping refers to a system where transactions are recorded in terms of debit and credit.

Recording financial transactions using two contras in form of debit and credit involving two or more than two general ledger accounts is termed as Double Entry Bookkeeping. In this method, debit sums must be equal to credit sums. This procedure is complex to understand but once learned, is easy to implement.

The features of Double Entry Bookkeeping:

According to the accounting principle, double-entry bookkeeping must be balanced. This balance comes from following some methodical procedure. You can identify a Double Entry Bookkeeping by looking at the subsequent features:

• There should be two equal reflections for such transaction recording. One is the debit entry and the other is credit entry. Only a debit entry can be offset by a credit entry or vice versa.
• There should be involvement of at least two parties, one receiver, and one giver. Assent and Liabilities of these two parties must shift from one to another.
• Transaction from both parties is obliged to be equal. The sum of the party who is giving must be equal to that of the party who is receiving.
• The business entity must be separate from its owner. If both the entities are the same, then the transaction does not happen.
• While recording on books, the debit part of the transaction will be recorded in the left part of the general ledger accounts, whereas the credit part should be recorded on the right side.
• The entry on both sides must not imbalance the accounting equation. If the sides are not balanced, then double-entry bookkeeping will lose its principle.

If you observe the above-mentioned characteristics while recording any financial transaction, you can easily term them as Double Entry Bookkeeping. This method is a scientific one and completes the accounting system.

How to record an entry?

Recording any financial transaction using double-entry bookkeeping requires a basic understanding of debit and credit. Debit is the left side of T-accounts whereas Credit is the right side, and they are respectively represented as Dr. and Cr. The entries recorded as debit and credit are based on what type of accounts you are dealing with.

There are three types of accounts, namely,

• Personal accounts
• Real accounts
• Nominal accounts.

Personal account refers to those accounts which are owned by individuals like a debtor, creditor, any namely person, etc. When we make payment to any party, the receiver account is debited. On the other hand, if we receive any payment, the giver account is credited to adjust the sums.

Real accounts are the accounts of asset accounts like machinery, building, furniture, etc. For real accounts, any purchase of an asset will debit the asset account. Likewise, if we sell any asset, the asset account will be credited.

The nominal account includes accounts recording income, expense, profit, and loss. Expenses and losses are recorded as debits, whereas income and profits are recorded as credits. This is how any entry in double-entry bookkeeping works.

Real Case Example:

Now we will have a look at some real case examples of double-entry bookkeeping. These cases will often come to you if you are a bookkeeper. There are two categories of examples that we will be citing here.

Simple:

Simple double-entry bookkeeping refers to transactions including one debit and one credit portion and affects one account at a time. Suppose you have bought a machine for your company with $5500 in cash. Then the bookkeeping entries will be as follows:

Account Title	Debit	Credit
Machinery	$5500
Cash		$5500

Here debit and credit are the same, hence the transaction is balanced.

Multipart:

Multipart double-entry bookkeeping refers to those entries where any part of the transaction has got more than one account involved. Think about the transaction done in the previous example, but instead of paying full cash the transaction was done by providing $3000 cash and the others from a bank loan. The multipart bookkeeping entries will be as follows:

Account Title	Debit	Credit
Machinery	$5500
Cash		$3000
Bank Loan		$2500

Here the credit part of the transaction consists of two accounts namely Cash and Bank loans. Such entries are also balanced entries as the sums of debit and credit part same.

Pros and Cons of Double-Entry Bookkeeping:

Like both sides of a coin, everything has got pros and cons. In the case of Double-Entry bookkeeping, the pros edge past cons. However, we are jolting down the pros and cons below:

Pros:

Double-Entry bookkeeping ensures the balance of the accounting equation. As there are two parts of this system, it is easier to maintain the balance. Another important aspect is this method is scientific and structural. Hence, the inputs done are organized and help its stakeholders.

This method helps the bookkeeper to do fewer errors. As both sides are supposed to be equal, the chance of blunder reduces drastically. This also helps to reduce fraud as it is easier to identify.

The best facet of following double-entry bookkeeping is it helps the stakeholders to take precise decisions. Accountants can have a look at the data and instantly find their required amounts. An auditor can easily identify the imbalanced accounts and query for them. The shareholders get a clear picture of the company situation.

Cons:

This bookkeeping method is a complex one. To become a worthy bookkeeper, one is required to learn the principles of accounting to sharpen the craft. So this is not everyone’s job.

This method is not suitable for small businesses as this is costly too. Most small business prefers single entry over double entry for their ease. For the person, who is running its business and keeping a record of every detail, it is difficult to adapt to such a complex and costly system.

Conclusion:

Double-entry bookkeeping is the best of all methods. This gives you universal accreditation as well as easier financial statement development. The bookkeeping software is also made using this method to meticulously follow the accounting equation. Recording accurate data using this method will provide accuracy across all the financial statements.