Invoicing, Bill & Expense Management, Bookkeeping Online Small Business Management Solution

What is Double-Entry Bookkeeping?

Double-entry bookkeeping is at the heart of good financial management for any business. It follows a set of standards used by accounting professionals to record businesses activities and interpret business finances. The alternative to the double-entry bookkeeping method is the single-entry method, also known as the checkbook method because it is similar to tracking your business activities using only a checkbook. This works fine for individuals managing their personal finances, but it just doesn’t cut it for businesses.

In double-entry bookkeeping, each time you perform an action that has a financial impact, a transaction is recorded. It’s called “double-entry” because each transaction is recorded in at least two accounts: a source account, or where the money comes from, and a destination account, or where the money goes. For an example, consider what happens when you write a check to purchase office supplies. The source of the funds is your business checking account. The destination account is the expense account you set up to track office supplies.

The specific amounts of money that go in and out of accounts as a part of these transactions are referred to as debits and credits. In each transaction, at least one account is debited (such as the account you use to track your office supplies from our example above) and at least one account is credited (in the example, this would be your checking account); the total amount debited and the total amount credited must always be equal so your books will balance.

Before computers, transactions were recorded on a paper ledger. When a transaction was recorded, the associated accounts were written in the ledger and the amount for each account was entered in either the left side or the right side depending on the account type (Asset, Liability, Expense, etc.) and whether the account was being increased or decreased by the transaction.

Debits and credits don’t mean increase or decrease, but refer to which side of the ledger the amount gets recorded to: the left side for debits and the right side for credits.

In computerized accounting, like WorkingPoint, you don’t have to record transactions directly into the ledger. Instead, you use specific forms, like Deposit, Invoice, and Bill, to record your business activity. But under the hood, credits and debits are still being recorded to keep the books in balance.

Why Should I Manage My Books with Double-Entry Bookkeeping?

When starting a business, most entrepreneurs have an idea or a passion they want to bring it to the marketplace, but typically they don’t think much about how to keep track of their business records. But keeping track of business records is an important part of running a business. In fact, the unfortunate reality is that many businesses fail, not because the product or service wasn’t good, but because the entrepreneur failed to keep track of their business records in a meaningful way. If they had focused on keeping better track of their records, they could have seen how their business was doing and made informed decisions on how to manage or grow their business.

With double-entry bookkeeping you get a more complete view of your business finances over simply tracking your money in a checkbook. Not only can you track how much money goes in and out of your bank account, you can track where the money came from and where it went by categorizing your financial activity. This helps you track trends in spending so you can budget for the future. It also helps you project future earnings because you can see how you brought money into your business. And, you can measure the financial health of your business today by running and reviewing your financial reports.

Double-entry bookkeeping also helps you avoid mistakes through a system of built-in checks and balances. With each transaction requiring at least two accounts, one debit and one credit, you’ll always be categorizing your activity so you’ll always know where your money came from and where it went and your books will always be in balance.

Double-entry bookkeeping is the standard method for managing financial records because it meets the recommendations set out by the IRS. These recommendations include the ability to monitor the progress of your business to increase the likelihood of success; generate accurate financial reports that help you in dealing with your bank or creditors and manage your business; identify the source of your receipts so you know where your money came from and you can separate business from non-business expenses and taxable from non-taxable income; keep track of deductible expenses; and you’ll have the records you need to prepare your tax returns including income, expenses and credits. A double-entry bookkeeping system also tracks the value of your inventory and record cost of goods sold at the time of sale so you can prepare your taxes.

How do I use Double-Entry Bookkeeping with WorkingPoint?

With WorkingPoint, you won’t actually have to “use” double-entry bookkeeping. You’ll simply record your business activities and WorkingPoint will create the associated financial transactions for you.

For example, when you fill out a simple form to record a purchase you made for your business, WorkingPoint deducts (credits) the money from your bank account for the total amount of the payment and increases (debits) the category you selected that best describes what you bought. It’s the same with depositing money, entering a bill or invoicing your customer: complete the forms and WorkingPoint will take care of the rest.

If you prefer entering transactions using debits and credits, or your accountant wants to enter some closing entries, you can use an adjusting entry to debit and credit accounts as needed.

Hands-on or off, WorkingPoint lets you to manage your business finances in the way that makes sense for you.