Double-entry bookkeeping is one of the methods of bookkeeping, and is considered a common way of doing bookkeeping, and is required in many situations. For example, in order to receive the special return deduction for tax returns, you must use double-entry bookkeeping.
Double-entry bookkeeping may seem difficult for those without knowledge of accounting or bookkeeping. However, if you have basic knowledge of accounting and bookkeeping, and use accounting software, it is possible to record your books using double-entry bookkeeping.
In this article, we will explain the basics of double-entry bookkeeping and the differences between it and single-entry bookkeeping in an easy-to-understand manner.
Double-entry bookkeeping involves recording the flow of money using debits and credits.
Bookkeeping involves recording, calculating, and organizing daily business activities. It helps clarify business performance and financial status.
Companies and sole proprietors record money in and out and transactions (entering into the books), settle accounts once a year, and compile a report to create “financial statements.”
Bookkeeping refers to the rules for compiling financial statements, and double-entry bookkeeping is characterized by dividing transactions into two parts, debit and credit. The table below summarizes what is recorded on each side.
| What to record | |
| Debit | Increase in assetsDecrease in liabilitiesDecrease in net assetsDecrease in capital Incurrence of expenses |
| Credit | Decrease in assetsIncrease in liabilitiesIncrease in netassets Increasein capital Generation of revenue |
It is a method mainly used to accurately grasp a company’s financial situation, and “bookkeeping” generally refers to double-entry bookkeeping.
Difference from single-entry bookkeeping
Single-entry bookkeeping is a method of bookkeeping that records cash receipts and expenditures one-sidedly.
For example, if you purchase a car with $1 million in cash, single-entry bookkeeping only records the expenditure of $1 million in cash. On the other hand, double-entry bookkeeping allows you to record not only the expenditure of $1 million, but also the increase in the number of cars as an asset.
● Single-entry bookkeeping: Records only specific items such as monetary receipts and expenditures
● Double-entry bookkeeping: Records a wide range of activities, not just monetary receipts
Single-entry bookkeeping can record changes in cash, but it is not possible to create a balance sheet because it is unclear which assets have increased or decreased due to transactions. It is primarily used to accurately understand the financial situation of government agencies.
Features of double-entry bookkeeping
In double-entry bookkeeping, daily transactions are recorded as debits and credits.
For example, if you buy a car with $1 million in cash, you would record how you used the $1 million on both the increase in assets (debit) and decrease in assets (credit) as follows:
| Debit | Credit | ||
| vehicle | $1 million | cash | $1 million |
As mentioned above, the task of setting up the account heading for a transaction and entering the amount is called journal entry. Double-entry bookkeeping accurately records the increase or decrease in assets and liabilities, allowing you to accurately grasp your financial situation. It also provides the information necessary to create financial statements such as income statements and balance sheets, so it is a good idea for not only companies but also sole proprietors and freelancers to learn it.
What is a balance sheet?
It is a financial statement showing a company’s assets, liabilities, and net assets at the end of a fiscal year. It provides a clear view of the company’s fund procurement and management status. However, it requires double-entry bookkeeping to be prepared.
What is an income statement?
It is also a financial statement that shows the operating results of a company for a specific period. It is prepared so that necessary expenses incurred in management, sales, profits, etc. can be seen at a glance. Unlike a balance sheet, it can be prepared using single-entry bookkeeping, but an income statement alone does not qualify for the special deduction for tax returns described below.
Benefits of using double-entry bookkeeping
The benefits of using double-entry bookkeeping are as follows:
● It helps you maintain accurate accounting records
● It also allows you to prepare balance sheets and profit and loss statements
We will explain the above benefits in order.
Ability to keep accurate accounting records
Recording your accounts using double-entry bookkeeping allows you to accurately grasp your company’s situation and assets. For example, you can record that you paid $10,000 for utility bills using single-entry bookkeeping. However, you cannot immediately grasp how you paid the $10,000 or how much cash you have.
Depending on the scale and content of your business, there are a wide variety of daily transactions, and it is difficult to grasp the changing information of income, expenses, loans, etc. using single-entry bookkeeping.
On the other hand, double-entry bookkeeping allows you to grasp the increase and decrease in assets and liabilities at a glance. Therefore, if you want to accurately grasp the state of your company, it is better to create financial statements using double-entry bookkeeping.
Able to create balance sheets and income statements
Double-entry bookkeeping allows you to prepare balance sheets and income statements.
| overview | |
| Balance sheet | A statement showing the financial position at a particular point in time |
| Income statement | Financial statements showing business performance over a certain period |
By making journal entries using double-entry bookkeeping, you can compile the information necessary to create financial statements like the ones above. Both balance sheets and income statements are used to judge the soundness and financial condition of a business, so they are useful when formulating future management policies.
Deepen your accounting knowledge
If you learn double-entry bookkeeping and become able to make journal entries and create balance sheets and income statements, you will naturally learn accounting knowledge. Also, understanding double-entry bookkeeping will be useful in business, as it will enable you to determine the assets and policies necessary for your company or business.
Disadvantages of using double-entry bookkeeping
The disadvantages of using double-entry bookkeeping are as follows:
● Recording is time-consuming
● Certain knowledge is required
We will explain the above disadvantages in order.
Recording takes time
The main drawback of double-entry bookkeeping is the time-consuming task of journalizing.
For example, expenses such as utility bills, office rent, and communication fees incurred separately from business purchases must be separated one by one, assigned to the appropriate account, and then recorded as the method of payment for the expenses, like as cash or credit card.
Double-entry bookkeeping requires more time-consuming journalizing than single-entry bookkeeping, so it is a good idea to do it on a regular basis.
A certain amount of knowledge is required
Double-entry bookkeeping can be difficult for beginners to understand.
For example, to create a balance sheet or income statement using double-entry bookkeeping, the following steps are required:
1. Record the transaction in the journal
2. Organize the journalized contents in the general ledger
3. Make a trial balance to verify the balance of debits and credits from the general ledger
4. Create a balance sheet or income statement from the trial balance.
In principle, the debit and credit figures match, so if the figures are different, there is a mistake in the above steps. However, it is difficult for beginners to find the points that are wrong, and they cannot create perfect double-entry bookkeeping without assistance.
Key points when using double-entry bookkeeping in business
The key points to keep in mind when using double-entry bookkeeping in your business are as follows:
● Deepen your knowledge of bookkeeping
● Use accounting software
We will explain the above points in order.
Deepen your knowledge of bookkeeping
It is difficult for beginners to create double-entry bookkeeping records, but it is possible with study.
For example, if you have the knowledge to pass the Level 3 bookkeeping exam, you may be able to create legitimate bookkeeping records that can be submitted to the tax office. Taxpayer associations and chambers of commerce hold bookkeeping seminars, and tax offices offer free bookkeeping training, so if you are interested, check them out.
Use accounting software
If you don’t have time and find it difficult to learn bookkeeping, you should consider using accounting software.
Depending on the accounting software, you can create a balance sheet and income statement just by setting the account items for expenses and deposits. In some cases, you can also file tax returns through the accounting software, which can significantly reduce accounting work.
FAQs
What is the difference between double-entry and single-entry bookkeeping?
Single-entry bookkeeping is a method of bookkeeping that records cash receipts and expenditures one-sidedly . For example, if you purchase a car for $1 million in cash, single-entry bookkeeping only records the expenditure of $1 million in cash. On the other hand, double-entry bookkeeping allows you to record not only the expenditure of $1 million, but also the increase in the number of cars as an asset.
How difficult is double-entry bookkeeping?
The difficulty of “double-entry bookkeeping” is quite high, to put it bluntly. It requires specialized knowledge and time, so much so that tax accountants are hired just to file tax returns. Some people take bookkeeping exams, but “double-entry bookkeeping” is a type of bookkeeping that requires bookkeeping knowledge. In conclusion, the bookkeeping required for tax returns is time-consuming, whether you use double-entry bookkeeping or simple bookkeeping.
Related Articles: