Double-Entry Accounting for Modern-Day Businesses: What to Expect
When your company gets to a certain point in size where it becomes more viable for incorporation, several changes will have to be made in its operations. To accommodate the ever-growing list of responsibilities and adjustments that businesses face, certain structure tweaks and accounting strategies must be carried out.
Among the different parts of your business that are expected to change as it grows, thrives, and takes on a new structure, the financial processes will experience the most transformation. One specific change that you’ll have to take into account and handle above all else is the implementation of double-entry accounting. This can be a complicated matter, but it doesn’t have to be as painstakingly arduous as you might think.
What is Double-Entry Accounting?
Double-entry bookkeeping, in accounting, is a system of bookkeeping where every entry to an account requires a corresponding and opposite entry to a different account. The double-entry system has two equal and corresponding sides known as debit and credit.
The system uses the concept that every business and accounting transaction impacts your businesses finances in two ways.
For example, if a company sells a product, its revenue will increase. When a company borrows funds, the balance of the company’s debt increases by the same amount.
Understanding How Things Work From the Perspective of Accounting Firms
Although implementing a double-entry accounting method may seem like extra work, it is an essential aspect of scaling that cannot be ignored. The single-entry system is prone to an assortment of pitfalls that can cause serious inaccuracies in financial records.
In today’s age, where accounting software is readily available and the services of experts like 123 Financial Group can be outsourced, adopting a double-entry method is now easier than ever. To help you figure out what you have to do in terms of keeping your debits and credits straight, we’ve put together this cheat sheet that features everything you need to know.
Why It Pays To Have Such a System in Place
The double-entry accounting system mainly functions on a financially geared version of Newton’s famous third law: for every action, there is an equal and opposite reaction.
With the system itself, you’re essentially documenting and noting every single action and its accompanying reactions for your finances. Thanks to the way it’s formulated and implemented, the double-entry method helps ensure that things are kept in balance for your business so that you can have a real-time, accurate overview on your finances.
The most beneficial outcome of this bookkeeping and business accounting system is that you can quickly and easily get a clear overview of your business transactions. Plus, you can further recognise the implications of every single entry and payment.
In each transaction that is recorded using the method in question, there are two sides to be mindful of as you handle your documentation:
- The debit side: this is where your entries begin
- The credit side: this is where your entries are offset (and therefore concluded)
Compared to the banking use of debit and credit, the double-entry accounting system follows an opposite approach in defining the terms. This is because the transactions involved in your actual business operations have a directly opposite effect:
Recorded on the left side of a double-entry accounting report, debits are a critical entry point that must be approached carefully as getting them right or not mirrors an exact outcome in later stages of recording.
As a type of entry that is listed first before all else, these entries are placed on the left side of a document and correspond to any increases in assets, expenses, and dividends.
However, it’s worth noting that these types of entries can also cause decreases in certain accounts (such as income, liabilities, and equity) as they do increase—hence the need for a double-entry.
As the exact opposite, credits are recorded simultaneously with debits and are put on the right side of a sheet.
Used to denote any increases in either liabilities or equity, these types of entries increase the same exact accounts that debits increase (although their resulting effect is still listed as a positive number). Additionally, it is worth noting that these same efforts decrease assets, expenses, and dividends every time they are listed.
An Example of How Things Work: How Accountants in Newcastle Use the System
To put the concepts mentioned above into perspective, let’s look at an example of how the double-entry accounting system works.
So suppose that you have a checking account balance transaction that was credited $100,000 after taking care of an insurance payout for your employees. This transaction is classified as an expense, of course—which means that it must be entered as an expense first on a t-ledger (or t-account or general ledger, as it’s called).
Noting the details mentioned above, here’s what ends up happening:
Using the principles of double-entry accounting, this entry will be followed up by a notation on the opposite side of the t-account, which is where the checking account credit entry comes in. Here’s how it looks like when you have to input on the other side of the general ledger:
While this system may seem time-consuming to manage, the business results and accurate financial systems it provides will be well worth it. But if you would like a professional tax accountant to take away some of the work for you, seek help from 123 Financial Group.
Looking for Accounting Firms in Newcastle?
Implementing a double-entry accounting system for your business is an essential step in ensuring that it’s ready for growth and success. Once you start implementing it as soon as possible, you’ll be able to keep your figures in check with more organisation and ease!
If you want to implement the system as effectively as possible, enlist the services of Newcastle’s #1 certified small business accountants. 123 Financial Group is one of the most dedicated accounting firms in Newcastle and we’re here to help your business succeed. Get in touch with us today!