The term “double-entry bookkeeping” is often mentioned as a cornerstone for managing a business’s finances.
But what does it mean, and why is it so universally adopted?
Below, we aim to demystify double-entry bookkeeping for small business owners and explain why it is crucial to your financial health – and why you might consider outsourcing this complex task to a professional accountant.
What is double-entry bookkeeping?
Double-entry bookkeeping is an accounting system that involves recording each transaction in at least two different accounts, typically as a debit in one account and a credit in another.
The underlying principle is the accounting equation, which states that assets must always equal liabilities plus equity.
Otherwise written as: A = L + E
In layman’s terms, what you own (assets) is financed either by debt (liabilities) or investments (equity).
- Debit and credit: In accounting jargon, a debit increases an asset or an expense account, and a credit increases a liability, equity, or revenue account. Don’t confuse this with the banking definitions of debit and credit – they are not the same.
- Journal entries: Each transaction starts as a journal entry. This is where you’ll indicate which accounts are affected and whether they are debited or credited.
- Ledger accounts: Journal entries are subsequently posted to ledger accounts. The ledger provides an account-by-account view of a company’s financial transactions and status.
- Balancing act: The sum of all debits must equal the sum of all credits. This ensures that the accounting equation stays balanced, reinforcing the financial stability of the business.
As you can see, this is a highly complex subject and one in which many business owners find themselves lost and confused.
Why use double-entry bookkeeping?
Accountants and successful business owners use this system for good reason.
- Improved accuracy: The system minimises errors and omissions. Because each transaction must balance, it creates a natural check and review mechanism. If your accounts don’t tally, then an error has occurred somewhere, prompting you to investigate.
- Comprehensive financial picture: Double-entry bookkeeping provides a complete financial picture of your business. It tracks not just what you own and owe, but how you financed your assets. This comprehensive view aids in decision-making and financial planning.
- Easier financial reporting: Generating financial statements becomes a lot more straightforward when using a double-entry system. Your Balance Sheet, Profit and Loss Account, and Cash Flow Statement can be drawn up systematically, providing key insights into your business’s financial health.
Why outsource to a professional accountant?
Most business owners outsource this system to an accountant to maximise their financial standing and efficiency. This is because double-entry bookkeeping has a few challenges:
- Complexity: While the concept of double-entry bookkeeping might seem straightforward, its implementation can be complicated. Even a minor mistake can lead to imbalances that can affect the integrity of your financial reports.
- Time-consuming: Maintaining double-entry books can be time-consuming, especially as your business grows. As a small business owner, your time is better spent on running and expanding your business rather than sifting through numbers.
- Expert insight: Professional accountants do more than just keep books. They provide invaluable financial advice tailored to your business model. An accountant will ensure you’re compliant with regulations, help you manage cash flow, and offer strategic financial planning.
- Cost-effective: Many small businesses hesitate to outsource accounting, fearing it will be too costly. However, consider the time and effort saved, the reduced risk of errors, and the value of expert financial advice. When looked at from this perspective, hiring an accountant is often more cost-effective in the long run.
Double-entry bookkeeping is more than just accounting jargon – it’s a key system that provides accuracy, comprehensive understanding, and ease of reporting in your business’s financial management.
Given its complexity and the expertise required to manage it effectively, outsourcing this function to a professional accountant is an investment in your business’s financial integrity and future success.
If you’re interested in ensuring that your business’s finances are in the best shape they can be, consider speaking to a qualified and experienced accountant.
You’ll not only gain peace of mind, but also free up time to focus on what really matters -growing your business.
Speak to one of our professionals about double-entry bookkeeping today.