Double Entry Bookkeeping: A Comprehensive Guide

As your business grows, your bookkeeping responsibilities become more complex. Painting a complete picture of your financial health now means accounting for transactions single-entry accounting systems cannot accommodate, such as assets, liabilities, and equity.

A system like double-entry bookkeeping will help you track where money flows, ensuring enhanced bookkeeping accuracy and tighter fraud prevention. In this article, we take a closer look at:

• What double-entry bookkeeping is
• The differences between double-entry and single-entry bookkeeping
• The different types of business accounts and how debits and credits impact them
• Double-entry bookkeeping steps

What is Double Entry Bookkeeping?

Double-entry bookkeeping, also known as double-entry accounting, is a bookkeeping system that records two journal entries per financial transaction: one each for debits and credits. For every debit, there is an equal and opposite credit.

Debits and credits represent the flow of economic benefit. Debits indicate economic benefit flowing into your business from a useable source, while credits indicate economic benefit flowing from your business into a useable source.

Double-entry bookkeeping is also characterized by its use of accounts. Instead of just tracking revenue and expenses in a cash account, it also monitors assets, liabilities, and equity. At the end of the accounting period, you transfer journal entries to corresponding accounts on your general ledger to calculate their ending balances.

What is The Difference Between Single Entry and Double Entry Bookkeeping?

The best way to illustrate the double-entry system is to contrast it with single-entry accounting. While single-entry accounting is a valid system for recording transactions, it fails to accommodate more complex types of accounts, such as assets, liabilities, and equity.

Single-Entry System

Traditionally, businesses only needed to track income and expenses. The single-entry accounting system reflects this simplicity. The system, which uses cash books to track transactions, requires only four balance columns: date, description, income, expenses, and bank balance.

Each transaction would be categorized as either income or expense and then take up one line of the sheet. You would then add or subtract the transaction amount to the bank balance at the end of the line. Naturally, you add income and subtract expenses.

Below is an example of a simple single-entry cash book.

Date	Description	Income	Expense	Bank Balance
XX-XX-XXXX	Starting Balance	$5,000		$5,000
XX-XX-XXXX	25 Items Purchased		$2,000	$3,000
XX-XX-XXXX	10 Items Sold	$1,500		$4,500
XX-XX-XXXX	Rent		$600	$3,900
XX-XX-XXXX	Electricity		$50	$3,850
XX-XX-XXXX	Ending balance	$6,500	$2,650	$3,850

Double-Entry System

The trouble with single-entry accounting is that keeping track of transactions like debt and investments gets confusing. It also doesn’t account for the value of your assets, such as property, equipment, and inventory.

Double-entry bookkeeping remedies the limitations of single-entry bookkeeping by using five primary account types: assets, expenses, liabilities, equity, and revenue.

Instead of representing each transaction as either income or expense, double-entry bookkeeping splits transactions into two parts: a debit to one type of account and a credit to a different account. This shows how value flows through the business.

Let’s represent the previous example using double-entry bookkeeping journal entries.

Date	Ref	Description	Debit	Credit
XX-XX-XXXX	001	Cash (Asset)	$2,000
XX-XX-XXXX	001	Loan Account (Liabilities)		$2,000
XX-XX-XXXX	002	Cash (Asset)	$3,000
XX-XX-XXXX	002	Owner’s Equity (Equity)		$3,000
XX-XX-XXXX	003	Inventory – 25 Items (Asset)	$2,000
XX-XX-XXXX	003	Accounts Payable (Liability)		$2,000
XX-XX-XXXX	004	Accounts Receivable (Asset)	$1,500
XX-XX-XXXX	004	Sales Revenue – 10 Items (Revenue)		$1,500
XX-XX-XXXX	005	Cost of Goods Sold – 10 Items (Expense)	$800
XX-XX-XXXX	005	Inventory Sold – 10 Items (Asset)		$800
XX-XX-XXXX	006	Rent Expense (Expense)	$600
XX-XX-XXXX	006	Cash (Asset)		$600
XX-XX-XXXX	007	Electricity Expense (Expense)	$50
XX-XX-XXXX	007	Cash (Asset)		$50

As shown above, the system gives you more flexibility to account for amounts you’ve yet to pay for and amounts you’ve yet to receive. It also lets you account for the value of your inventory.

Unlike single-entry systems, double-entry systems don’t aim to provide updated ending bank balances in real time. Instead, they aim to eventually calculate balances for all types of accounts.

Types of Accounts in Double Entry Bookkeeping

The main feature that sets double-entry accounting apart from single-entry bookkeeping is the use of different accounts. Where single-entry accounting only shows income, double-entry bookkeeping shows your business’ value in assets, equity, and revenue while also reflecting money spent on liabilities and expenses.

Assets

Assets refer to resources that your business owns or controls. These resources are characterized by the ability to provide future or current financial benefits through activities like revenue generation, sales optimization, or expense reduction. Examples include cash, inventory, property, equipment, and even copyrighted materials.

You can classify assets by convertibility (current or fixed), tangibility (tangible or intangible), or usage (operating or non-operating).

• Current assets are resources the company expects to consume or liquidate in the short term. Examples include cash, accounts receivable, inventory, and office supplies.
• Fixed assets are assets acquired for long-term use. They are typically difficult to liquidate. Examples include land, machinery, and trademarks.
• Tangible assets physically exist and provide economic value. Examples include inventory, supplies, and equipment.
• Intangible assets have no physical form but contribute to the company’s economic benefit. Examples include copyrights, trademarks, licenses, and patents.
• Operating assets directly contribute to the business’ core activities. Examples include cash, inventory, and equipment.
• Non-operating assets generate revenue without being related to core business activities. Examples include short-term investments, unused land, and interest from deposit accounts.

Expenses

Expenses are costs incurred to operate the business. Expenses differ from assets because the business does not fully own or control the resources contributing to economic activity.

There are two main categories of expenses: operating and non-operating.

• Like operating assets, operating expenses directly contribute to core business activities. Examples include rent, employee salaries, and cost of goods sold.
• Non-operating expenses come from sources outside the business’s day-to-day activities. This includes depreciation, inventory write-offs, and loan interest payments.

Liabilities

Liabilities track everything the business owes to third parties. They represent financial obligations that the business has yet to pay, including accounts payable, credit card debt, and loans.

Liabilities are typically classified by temporality. Current liabilities are due in the short term, while non-current liabilities are due in the long term.

• Current liabilities are short-term debts the business expects to pay within the year. Examples include accounts payable, interest payable, wages payable, and unearned revenue.
• Non-current liabilities are withstanding debts the business expects to pay in more than a year. Examples include loans, lines of credit, and post-employment benefits.

Equity

Equity is the total amount of money owners and/or shareholders invest in a business. It represents the cash value of the business after liquidating all assets and paying off all debt. Examples of equity include the following:

• Owner’s capital
• Common stock
• Preferred stock
• Treasury stock
• Retained earnings
• Contributed surplus

Revenue

Revenue is the value the business generates from its core and non-core activities.

It’s easy to confuse revenue with cash or assets. However, revenue accounts don’t represent the money your business actually has. Instead, it reflects earnings that have yet to be liquidated or used.

Like expenses, revenue can be classified as operating or non-operating depending on the transaction’s relation to core business activities.

• Operating revenue comes from the business’ main activities. Examples include sales revenue for sales-based businesses, service revenue for service-based business, and rental revenue for landlords.
• Non-operating revenue comes from sources unrelated to the business’ core activities. Examples include deposit account interest, dividend income, and currency fluctuations.

Permanent vs. Temporary Accounts

Account types fall under two categories: permanent and temporary. The former represents ongoing financial performance, while the latter represents financial activity within a given time period (usually an accounting period).

• Permanent accounts have cumulative balances that add up indefinitely. Asset, liability, and equity accounts are permanent accounts.
• Temporary accounts have temporary balances that must be reset to zero after a designated period. Revenue and expense accounts are temporary accounts.

Permanent Accounts	Temporary Accounts
Represent ongoing progress	Represent activity within a designated period
Cumulative balance	Balances reset to zero
Consist of assets, liabilities, and equity	Consist of revenue and expense
Reported in the balance sheet	Reported in the income statement

Debits and Credits in Double Entry Bookkeeping

As mentioned above, the rule of recording transactions in double-entry accounting is that each transaction should have an equal and opposite amount in a different account. These transactions are called debits and credits. We refer to transactions that place money into the business as debits and transactions that place money outside the business as credits.

Debits

Debits represent transactions that place money into the business’ resources and activities. You record debits on the left side of a journal entry.

As a rule, debit transactions increase asset and expense balances. In turn, they decrease liability, equity, and revenue balances.

Credits

Credits represent transactions that move money from the business to a source of economic benefit. You record credits on the right side of a journal entry.

In the reverse of debits, credit transactions increase liability, equity, and revenue balances while decreasing liability, revenue, and equity balances.

The Accounting Equation in Double Entry Bookkeeping

The principle underlying double-entry accounting is that assets are equal to liabilities plus equity. This is the basis of the accounting equation, which we’ve written below.

To put it in more concrete terms, the value of everything your business owns comes from your debt to third parties and investments from shareholders.

You can also expand the equation to include dividends, expenses, and revenue.

This means that the value of everything your business owns comes from the value it generates, plus the value shareholders have invested, plus debts to third parties, minus expenses and dividends. Note that dividends are not typically included in the primary account types and instead recorded under liabilities or reductions in equity.

Modifying the equation to make all variables positive gives you this result.

This explains why assets and expenses increase with debits, and liabilities, equity, and revenue increase with credits. One side represents value flowing into the business, while its opposite represents value flowing to outside sources.

Double Entry Bookkeeping Steps

Double-entry bookkeeping is more than just recording entries on a ledger. Follow the steps below to ensure the accuracy of your documents, books, and financial statements.

Save Accounting Source Documents

Double-entry bookkeeping is difficult without a system for tracking transactions. While your bank account or credit card will typically track expenses and income automatically, it’s best practice to save any accounting source documents that come your way. These include:

• Receipts
• Sales and purchase invoices
• Orders
• Quotes
• Credit and debit notes
• Cheques
• Deposit slips

Not all accounting source documents need to be physical. Many modern businesses provide electronic invoices, receipts, and even cheques. However, you need to ensure that your documents contain the following information:

• Transaction date
• Transaction amount
• Transaction description
• Authorizing signatures

Saving your transactions’ paper trail helps you quickly locate all critical information for the journal entries you record on your ledger. It ensures accuracy and ease of recording.

Record Transactions on Journal Entries

Record each financial event as a journal entry on your general ledger. Refer to your receipts and chart of accounts to determine which two account types will be affected and which account will account as a debit or credit. Let’s draw general journal examples from What is The Difference Between Single-Entry and Double-Entry Bookkeeping?

1. Owner’s Equity

You deposit $3,000 into your business bank account. You record this as a debit to your cash account, which is an asset. Since the money came from an investor (you), you would record the same amount as a credit to equity.

Date	Description	Debit	Credit
XX-XX-XXXX	Cash (Asset)	$3,000
XX-XX-XXXX	Owner’s Equity (Equity)		$3,000

2. Purchasing Inventory

You purchase 25 items worth $80 each on credit. The total inventory is worth $2,000 and counts as an asset. Since you have yet to pay the amount, you will add the Accounts Payable as liability credit.

Date	Description	Debit	Credit
XX-XX-XXXX	Purchase Inventory – 25 Items (Asset)	$2,000
XX-XX-XXXX	Accounts Payable (Liability)		$2,000

3. Selling Inventory

You sell your inventory for $150 per item. A customer orders 10 of the same item, earning you $1,500 in revenue. You record revenue in the credit column and accounts receivable in the debit column.

However, you would also need to account for the cost of goods sold and the loss in inventory. Since each item cost $80, and you sold 10, you would record the cost of goods sold as a $800 expense debit and inventory as an equivalent asset credit.

Date	Description	Debit	Credit
XX-XX-XXXX	Accounts Receivable (Asset)	$1,500
XX-XX-XXXX	Sales Revenue – 10 Items (Revenue)		$1,500
XX-XX-XXXX	Cost of Goods Sold – 10 Items (Expense)	$800
XX-XX-XXXX	Inventory Sold – 10 Items (Asset)		$800

Transfer Entries to a General Ledger

Because journals have you log transactions as they occur, they naturally display entries in chronological order. You’ll want to segregate these transactions by account to get a clear snapshot of account activity. To organize your journal entries, post them into your general ledger.

General ledgers consist of tables, each representing an account. These accounts are organized according to their account type, which follow the following order:

1. Assets
2. Liabilities
3. Equity
4. Revenue
5. Expenses

Each account table contain the following columns: Date, Description, Reference number, Debit, and Credit. We generated a sample general ledger using the journal entries provided in What Is the Difference Between Single-Entry and Double-Entry Bookkeeping.

1. Asset Accounts

Date	Description	Ref	Debit	Credit
Account Name: Cash  ·  Account No: 1-01
XX-XX-XXXX	Income from loan	001	$2,000
XX-XX-XXXX	Income from owner’s equity	002	$3,000
XX-XX-XXXX	Payment for rent bill	006		$600
XX-XX-XXXX	Payment for electricity bill	007		$50
Total Cash			$4,350
Account Name: Accounts Receivable  ·  Account No: 1-02
XX-XX-XXXX	Billed client for sale of inventory	004	$1,500
Total Accounts Receivable			$1,500
Account Name: Inventory  ·  Account No: 1-03
XX-XX-XXXX	Purchased inventory	003	$2,000
XX-XX-XXXX	Sold inventory	005		$800
Total Inventory			$1,200

2. Liability Accounts

Date	Description	Ref	Debit	Credit
Account Name: Accounts Payable  ·  Account No: 2-01
XX-XX-XXXX	Purchased inventory	003		$2,000
Total Accounts Payable				$2,000
Account Name: Loan Account  ·  Account No: 2-02
XX-XX-XXXX	Borrowed money	001		$1,500
Total Loan Account				$1,500

3. Equity Accounts

Date	Description	Ref	Debit	Credit
Account Name: Owner’s Equity  ·  Account No: 3-01
XX-XX-XXXX	Owner deposited money to business checking account	002		$3,000
Total Owner’s Equity				$3,000

4. Revenue Accounts

Date	Description	Ref	Debit	Credit
Account Name: Sales Revenue  ·  Account No: 4-01
XX-XX-XXXX	Sold inventory	004		$1,500
Total Sales Revenue				$1,500

5. Expense Accounts

Date	Description	Ref	Debit	Credit
Account Name: Cost of Goods Sold  ·  Account No: 5-01
XX-XX-XXXX	Sold inventory	005	$800
Total Cost of Goods Sold			$800
Account Name: Electricity Expense  ·  Account No: 5-02
XX-XX-XXXX	Paid electricity bill	007	$50
Total Electricity Expense			$50
Account Name: Rent Expense  ·  Account No: 5-03
XX-XX-XXXX	Paid rent	006	$600
Total Rent Expense			$600

Create a Chart of Accounts

To keep your finances organized, it’s best to create a chart of accounts. This document is a categorized index of all accounts you will record on the general ledger.

Each entry on your chart of accounts will provide the following information:

• Account identification code: A unique number assigned to the account.
• Description: What the account represents.
• Account type: Whether the account is considered an asset, expense, liability, equity, or revenue.
• Corresponding financial statement: Which financial statement the account appears in. Expense and revenue accounts appear in income statements, while assets, liabilities, and equity appear in balance sheets.

Let’s expand on the general ledger above.

Number	Description	Account Type	Financial Statement
1-01	Cash	Asset	Balance sheet
1-02	Accounts Receivable	Asset	Balance sheet
1-03	Inventory	Asset	Balance sheet
2-01	Accounts Payable	Liability	Balance sheet
2-02	Loan Account	Liability	Balance sheet
3-01	Owner’s Equity	Equity	Balance sheet
4-01	Sales Revenue	Revenue	Income statement
5-01	Cost of Goods Sold	Expense	Income statement
5-02	Electricity Expense	Expense	Income statement
5-03	Rent Expense	Expense	Income statement

The document makes tracking your different account types easier. It also helps you easily determine which types of accounts correspond with which financial statements.

Ensure Accuracy with a Trial Balance

To ensure that your general ledger’s debit and credit columns match, create a trial balance. You can use the discrepancies in totals to spot any errors in recording before you finalize the information in your financial statements.

A trial balance typically consists of three columns. The first column lists all account types in your general ledger, while the next two list debits and credits. Record the total of each account under either the debit or credit column, depending on the balance you calculated in the general ledger.

Finally, add up the totals of each column to confirm equality.

Accounts	Debit	Credit
Cash (Asset)	$4,350
Accounts Receivable (Asset)	$1,500
Inventory (Asset)	$1,200
Accounts Payable (Liability)		$2,000
Loan Account (Liability)		$2,000
Owner’s Equity (Equity)		$3,000
Sales Revenue (Revenue)		$1,500
Cost of Goods Sold (Expense)	$800
Rent Expense (Expense)	$600
Electricity Expense (Expense)	$50
Totals	$8,500	$8,500

Conclusion

Double-entry bookkeeping sets you up for accurate financial reporting. While single-entry bookkeeping is an effective tool for tracking income, expenses, and balances, it cannot paint a complete picture of your business’ financial health. With double-entry bookkeeping, you also get to track how much your assets are worth, how much you owe, and your total equity. Its two-line recording system also helps you spot errors faster, ensuring greater recording accuracy.

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