what is double a entry accounting

what is double a entry accounting

The Importance of Double Entry Accounting

1. Introduction to Double Entry Accounting

Accounting is not just the processing of economic events. It is instead the consequence of the processing of these events, which forms the basis of The Trader’s Bookkeeping, known as the Parent Book, made with the purpose of grouping all transactions according to their effect on the company. Bookkeeping is carried out employing the logic of double-entry accounting, where each economic transaction is represented using two separate parts, each of which relates to a different set of items. Double-entry bookkeeping has its roots in the fifteenth and sixteenth centuries, and the first publication on the subject appeared in 1494 in Venice. Since “commercial arithmetic” performs double-entry bookkeeping (DEB) and is used to prepare financial statements, the title of this book can be considered the first appearance of the word “accounting.”

In a world where businesses increasingly outsource their accounting responsibilities, an accountant’s work appears to have become simpler, provided that they are able to interpret the outcomes as shown in financial statements. Nonetheless, many fail to understand the logic behind some of these specific keys, examples of which include the form and content of financial statements and the manner in which bookkeeping transactions shown in the ledgers are transformed. For most such people, accounting currently represents nothing more than financial statements, and they therefore neglect the bookkeeping, which in this way becomes the accountant’s exclusive domain. Bookkeeping has become a sort of tool that no longer needs to be fully understood, with a logical method that requires no justification.

2. Benefits of Double Entry Accounting

A major benefit of using double entry in accounting is that it allows for the annual adjustments needed to close permanently open accounts and keep them in balance. All accounts that are debited in one year can be credited in the next. Therefore, out of each pair of transactions, one transaction can be included in the prior year’s accounting cycle and the other recorded in the following year’s cycle. This will show how smoothly the double-entry accounting process can cohesively merge last period transactions with transactions made in the current period.

Now, many entrepreneurs believe they can run small businesses without double-entry accounting. Though their businesses may, in fact, be relatively smaller, it is a mistake to assume that single-entry accounting will continue to suffice. As a business grows in complexity, double-entry accounting becomes not only desired but necessary.

Before the double-entry system was created, both businesses and accountants had a hard time keeping track of financial transactions. The double-entry accounting system made it possible for specific categories to break down specific transactions and other financial data for comprehensive analysis and follow-up. A business that doesn’t use any type of accounting method has no hope of tracking profit or working with complex decisions involving multiple revenue sources and expenses.

Before the advent of computerized accounting systems, all accounting procedures were done by hand in paper ledgers using pen, pencil, and eraser. Double-entry accounting was just as common then as it is now. The double-entry system has two major requirements. First, each process that is being ledgered needs to continuously involve at least two accounts. Second, the sums of each process must continuously have a debit and a credit worth that are equal in values.

3. Key Principles of Double Entry Accounting

The double-entry accounting process is based on accounting statements. The accounting process is a revolutionary process. The double-entry accounting document uses accounting procedures and all the business people involved at different levels of the process in drawing up the financial report. The double-record accounting statement is one of the verification methods for determining the correctness of the record and summarizing the process of generating estimates and reporting company performance. Every transaction affects two different accounts, so it is always necessary to choose debit and credit revenue rules. If the debit equals the credit when all the transactions are summarized, it gives evidence that the process is based on accounting records and calculations. That’s the beauty of double-entry accounting. In a summarized form, double-entry accounting represents the application of the equation: Total tangible assets equal total liabilities plus shareholder equity, the formula that explains how assets are funded.

While the concept of double-entry accounting has been around for several centuries, it is still the most powerful accounting tool in use today. As any course in double-entry accounting will emphasize, double-entry accounting is capable of generating the most comprehensive financial statistics. This is almost exclusively the reason that, on balance, every business combines their initial and extended methods in their accounting system. Business organizations have a responsibility to protect and efficiently deploy their resources to achieve the highest possible return.

4. Common Mistakes to Avoid in Double Entry Accounting

Never prepare financial statements based on those ending balances. The fact that increasing assets corresponds to a credit and an increase in equity or liabilities to a debit may be your business rule, but never base your record or financial statements on it. Do not allow the initial balance of an account to dictate which manner of increase or decrease in account order. In the example, if the allowance at the bank has a debit balance of $13,600, but you have made a $20 deposit from your bank, it is not a credit balance of $20,000 if you follow this rule; instead, it will be $13,580. Then a related account is created to reflect the asset’s financial transactions. You must follow the appropriate rules, regardless of the initial balance of a particular account when entering business transactions.

Understand that debits and credits affect the same quality in different ways. You must recognize that any transaction affects two accounts and that there are always two entries in your books for each transaction. For example, when your company borrows $50,000 from the bank, the transaction affects two accounts. First, it increases the amount of cash in your business (an asset account). Then it increases long-term debt on the liability side of the business accounting equation. Two columns hubs and bankers involved in the transaction become $50,000 transactions. Remember that a financial transaction always involves receiving something and giving something, such as receiving cash from a bank and bringing the bank a promissory note for reimbursement, or receiving goods bought and paying the seller by creating a business promissory note.

5. Conclusion: Implementing Double Entry Accounting for Success

The primary historical tenets of accounting consist of the T account, which is the most basic form of recording transactions. The T account is a ledger account and the basis of Double Entry accounting, which establishes a relationship of debit and credit. The Debit side lists a transaction that increases the assets, and the credit side lists how it was financed. A post was the bookkeeping entry made to one of the columns of the accounting accounts that describe the transaction. For example, during the time that money was drawn out of the business bank account for business use on other transactions, which occurs regularly.

There are additional functions provided by an accounting system that will improve its operations, including having training and experience in its operations. If your accounting data is correct, timely, and meets management’s needs, you will have taken a giant step in providing your company/government with the financial success it seeks. You should stay away from these other systems or plan to change systems shortly after you have purchased them. They are a source of equipment failures if the associated systems are connected to a computer network. That could be very expensive indeed.