What causes confusion is the difference between the balance sheet equation and the fact that debits must equal credits. Keep in mind that every account, whether an asset, liability or equity, will have both debit and credit entries.
When using a double-entry system, two things must always be balanced. The general ledger, which tracks debit and credit accounts, must always be balanced. The examples below will clarify the rules for double-entry bookkeeping. Wood is a raw material used to make furniture.
Here is the journal entry, with account numbers included:. This is a simple journal entry because the entry posts one debit and one credit entry. Both of these accounts are asset accounts, and the balance sheet equation remains in balance:. The debit entry increases the wood account, and cash decreases with a credit so that the total change in assets equals zero. A complex journal entry means that the entry may have multiple debit entries, more than one credit entry, or both. Here is the complex journal entry:.
This is a complex journal entry because the entry posts two credit entries. However, you can see that the balance sheet equation remains equal:.
The balance sheet equation is correct. At any point in time, a bookkeeper can produce a trial balance, which is a listing of each account and its current balance. The total debits and credits on the trial balance will equal one another. Bookkeepers frequently review the trial balance to verify that they posted journal entries correctly, as well as to correct any errors.
At the end of each month and year, bookkeepers and accountants may post adjusting entries to the trial balance and use the adjusted trial balance to generate financial statements. Accounting software provides controls to ensure your trial balance is accurate. The software will ensure that the total dollar amount of debits equals the credit balance and that each account balance is in your trial balance report.
As you can see, the entire accounting process starts with double-entry bookkeeping. Whether you do your own bookkeeping with small business bookkeeping software or hire a bookkeeper for that task, understanding this critical accounting concept is essential for the success of your small business.
The best modern accounting software has double-entry concepts already built-in. When you get started with accounting software, you can connect your various business accounts, and transactions will import automatically. From here, you can adjust and add different accounts to portray your business transactions more accurately. Business owners who have previously operated on a single-entry system will want to make the switch to a double-entry system as soon as possible. As your business grows, so too will the complexity of your financials.
Implementing a double-entry system of accounting will allow you to put your financial statements to better use so that you can measure your financial health and spot errors quickly. This article currently has 1 ratings with an average of 1. I like the idea of double entry as it is more likely to keep things straight. Comment by Salene on Jan. I think this list is not updated? I am using openmiracle which is very good one with percentage FREE source code.
I think its the best one I ever seen. Comment by Hafiz Saqib on Nov. Comment by ZipBooks! How do we get included on this list? We are new but we meet all the criteria. Thanks for letting us know in advance! Helping businesses choose better software since Software Categories. Who We Are. For Vendors Write a Review. Accounting software is essential for tracking your business finances, but expensive software can drain your finances.
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Your privacy is important to us. Check out our Privacy Policy. YES NO. Follow Us. Related Reading. GnuCash gets consistently good reviews for being easy to use. The user interface is straightforward, clearly designed for function over form. GnuCash is a solid option for small businesses using double-entry accounting.
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This helps explain why a single business transaction affects two accounts and requires two entries as opposed to just one. You simultaneously increase debit your cash assets because you have more cash to spend in the present.
The same goes if you invest your own money into your startup business. Your assets increase are debited because now your business has cash. Most modern accounting software, like QuickBooks Online , Xero and FreshBooks , is based on the double-entry accounting system.
If you can produce a balance sheet from your accounting software without having to input anything other than the date for the report, you are using a double-entry accounting system. Even if you use accounting software, there could be errors recorded in your bookkeeping.
Sometimes, automated bank feeds either miss transactions or duplicate them. To prevent this from happening, you should complete a process called account reconciliation on a regular basis to keep your books accurate. That means you match every transaction in your accounting software to its corresponding bank statement.
Single-entry vs. Tracks revenue and expenses only. One entry per transaction. Two entries per transaction. Prone to mistakes. Reduces accounting errors. Single-entry accounting example.
Starting balance. Received bank loan.
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