The principles of double-entry accounting

If you’re new to accounting, learning the principles of double-entry accounting can be intimidating.

However, it’s an essential skill for anyone who wants to understand how businesses keep track of their financial transactions.

In this guide, we’ll go over the basics of double-entry accounting and provide you with some best practices and real-world examples.

Getting Started

Double-entry accounting is a system that requires each financial transaction to be recorded in at least two accounts.

This system ensures that the accounting equation (Assets = Liabilities + Equity) is always balanced.

Double-entry accounting is used by businesses of all sizes and is a fundamental concept in accounting.

If you’re a business owner, accountant, or aspiring accountant, learning double-entry accounting is a must.

How To

1. Identify the Accounts: Before recording a transaction, you need to identify the accounts that will be affected. For example, if you purchase inventory, you’ll need to record the transaction in both the Inventory account and the Cash account.
2. Determine the Type of Account: Each account is classified as an asset, liability, or equity account. You’ll need to determine the type of account before recording the transaction.
3. Record the Debit and Credit: For each transaction, you’ll need to record a debit and a credit. Debits increase asset accounts and decrease liability and equity accounts. Credits increase liability and equity accounts and decrease asset accounts.
4. Balance the Accounts: After recording the transaction, you’ll need to ensure that the accounting equation (Assets = Liabilities + Equity) is balanced. If the equation isn’t balanced, you’ll need to make adjustments.

Best Practices

• Always record transactions in two accounts.
• Ensure that the accounting equation is balanced after each transaction.
• Keep accurate records and reconcile accounts regularly.
• Use accounting software to streamline the process and reduce errors.

Examples

Let’s say that you own a small business that sells handmade crafts.

You purchase $500 worth of supplies with cash.

Here’s how you would record the transaction using double-entry accounting:

Role-Play Conversation:

You: I just purchased $500 worth of supplies with cash.

How should I record this transaction?

Accountant: You’ll need to record the transaction in both the Supplies account and the Cash account.

You: Okay, what type of account is Supplies?

Accountant: Supplies is an asset account.

You: Got it.

So, I’ll need to record a debit to the Supplies account and a credit to the Cash account?

Accountant: That’s correct.

The Supplies account will increase by $500, and the Cash account will decrease by $500.

You: And I need to make sure that the accounting equation is balanced?

Accountant: Yes, you’ll need to ensure that your assets ($500 in Supplies) equal your liabilities and equity (in this case, there are none).

You: Okay, I think I understand.

Thanks for your help!

Originally published at Smart Accounting Kit.
This publication may contain affiliate links to external websites.