Along the way, more accounts may be added to the chart of accounts while others may be deleted if you realize they will never be used. Once that is set up, the chart of accounts is used as a point of reference each time two or more accounts are selected in order to enter a transaction into the general ledger.
#Double entry bookkeeping vs double entry accounting software
Typically, accounting software provides suggestions on the typical type of accounts that a business may require. When setting up financial records for a business, it’s important to create a detailed listing known as a chart of accounts. Set-Up and Standard Practice for Double-Entry Accounting While generally straightforward, these entries can become increasingly complex when more than two accounts are involved.
Paying an electricity bill would be entered as a debit under utility expense and result in an increase in expense while a credit would be added to cash and result in a decrease in assets. Receiving bank loan principal from a loan would be a debit for the cash received and result in an increase in assets while the credit would be to the bank loan account and represent an increase in liability. Issuing ordinary shares in your business for cash would result in a debit for the cash received and represent an increase in assets while there would be a credit for share capital, representing an increase in equity. Receiving interest from depositing money into a business bank account would result in a debit for the cash received with an accompanying credit for finance income, which would mean an increase in income. Purchasing a piece of equipment with cash would show a debit for the equipment and a credit for the cash, which results in a decrease in assets. To illustrate what this theory means as part of real-world accounting, here are some examples of how it is applied: On the credit entry side, which is on the right side of a transaction, other effects occur, including a decrease in expenses or assets and an increase in income, equity or liability.Īpplication of the Double-Entry Accounting System. Debit entries, which are on the left side of a transaction, create certain effects, such as an increase in expenses or assets and a decrease in income, equity or liability. Without acknowledging that there is an asset gained for every expense, an accounting system would only provide a very limited view of how a company manages its money.Įvery transaction is entered into a general ledger sheet or document-a balance sheet ledger account (asset, liability, and equity components) or income statement ledger account (income and expenditures) - which has columns for debit entries and credit entries: This principle means that, even though a company is spending cash out of their accounts, they are gaining something in return, such as the ad, or something else (e.g. In each of these components, the overall idea is that every transaction results in two effects that must be accounted for, which is also known as the Duality Principle. The expense of the ad-a liability-led to a decrease in owner’s equity through the disbursement of cash to pay for the ad.Īnother component of the double-entry concept is that amounts that are entered as debits must equal those added as credits within general ledger accounts. Let’s look at the equation in the context of the aforementioned print ad example. I like to call this “the financial compliance” equation. 
The main idea is to always keep a balance, so the double entry bookkeeping system can use what is known as the accounting equation. Similarly, if a company purchases a print ad, its cash account decreases while its expense account, under the account category of advertising expense, increases.
If a company takes out a loan, for example, its cash account will increase with the funds from that loan, but its liability account will also increase under the account category, known as loans payable. The Theory Behind Double-Entry BookkeepingĪt the core of double-entry bookkeeping is the concept that every transaction will involve at least two accounts, if not more.
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