The double-entry system provides checks and balances to ensure that your books are always in balance. In double-entry accounting, every transaction has two journal entries: a debit and a credit. Debits must always equal credits. Because debits equal credits, double-entry accounting prevents some common bookkeeping errors. Errors that aren't prevented are easier to find. Double-entry accounting is the basis of a true accounting system.

With double-entry accounting, every transaction in your business affects at least two accounts, since there is at least one debit and one credit for each transaction. Usually, one of the accounts is a balance sheet account. Entries that are not made to a balance sheet account are made to an income account or expense account. Income and expenses affect the net income of the business, which ultimately affects owner's equity. Each transaction (journal entry) is a real life example of the accounting equation (assets = liabilities + owner's equity).

 

You provide consulting services, on account, to one of your regular customers, Betty Fry, for $1,500. When you write up the invoice, you would make the following bookkeeping entry in your sales journal:

These entries show that your accounts receivable (a balance sheet account) has increased by $1,500, and your consulting revenue (an income statement account) has also increased by $1,500.

 

Upon receipt of the invoice, your customer sends you a check for $1,500 in payment of her account. When you receive the check, make the following entry in your cash receipts journal:

These entries show that your cash (a balance sheet account) has increased by $1,500, and your accounts receivable have decreased by $1,500.

Single-entry accounting. Rather than dealing with debits and credits, some businesses just record one side of the transaction. This is a single-entry accounting system. In the above example, you would simply record the revenue amount of $1,500 in your sales journal. However, you would also want to make a separate entry in your accounts receivable ledger, so that you keep track of all customers that owe you money.

We recommend a double-entry accounting system because it will result in more accurate financial records. Because debits must always equal credits, a double-entry system will help you find common bookkeeping errors. Such errors include an amount entered incorrectly, forgetting to record a transaction, improperly copying an amount from one page to another, and transposition errors. If your accounts don't balance (total debits don't equal total credits), you know you've made an error that must be investigated.

If you use a computer, the good news is that many accounting software programs will allow you to make a single entry for a transaction, and the software will make the second entry for you. The double-entry system is still there, but it exists mostly "behind the scenes."