accountants reviewing general ledger

What is Double-Entry Bookkeeping?

Unless your business deals strictly with cash transactions, you’ll likely use double-entry bookkeeping. With this method, everything you record will involve at least two accounts. It helps you keep track of asset and liability accounts and allows you to prepare financial statements directly from your general ledger. With double-entry bookkeeping, your financial records should always balance so your company’s assets will equal your liabilities plus your owners’ equity. Keep reading to learn how to use double-entry bookkeeping in your small business.

1. Set up your chart of accounts

When you’re first organizing your company’s books, you’ll create a chart of accounts. This will list all the account names and numbers your company uses. Typically, each account falls into one of five categories:

  1. Assets are anything your small business owns, including inventory, cash on hand, and buildings.
  2. Liabilities are anything that your company owes, including debt obligations. These accounts include your tax liability and credit cards.
  3. Owners’ equity accounts help you keep up with your investment in the small business.
  4. Revenue tracks your company’s sources of income.
  5. Expenses are everything your small business pays, including marketing costs and salaries.

Learn more about what to include in your company’s chart of accounts.

2. Understand credits and debits

When using double-entry bookkeeping, you’ll record each transaction in at least two separate accounts – debiting one and crediting the other. Record debits on the left side and credits on the right. For each transaction, make sure each side matches the other.

Each account will either increase or decrease.

Account TypeDebitCredit
AssetIncreaseDecrease
LiabilityDecreaseIncrease
Owners’ equityDecreaseIncrease
RevenueDecreaseIncrease
ExpensesIncreaseDecrease

3. Record your transactions

For each transaction, the first entry is the account that will be debited, and the second entry is the account that will be credited.

Example

  • If you buy inventory with cash for $5,000, debit your inventory account and credit your cash account. Your inventory account will increase, while your cash account will decrease.
  • If you buy $2,500 worth of inventory on credit, debit your inventory account, and credit your accounts payable. Both will increase.
  • If you pay one of your suppliers $1,000 toward a loan, debit accounts payable, and credit your cash account. Both will decrease.
  • If you purchase $200 worth of office supplies with cash, debit your office supplies expense account and credit your cash account. Your office supplies expense account will increase, and your cash account will decrease.
  • If you sold $1,500 worth of product in cash, debit your cash account, and credit your cash sales revenue account. Both will increase.

Date

Account

Debit

Credit

3/1/2017

Inventory

$5,000.00

 

 

Cash

 

$5,000.00

3/7/2017

Inventory

$2,500

 

 

Accounts Payable

 

$2,500

3/15/2017

Accounts Payable

$1,000

 

 

Cash

 

$1,000

3/17/2017

Office Supplies

$200

 

 

Cash

 

$200

3/24/2017

Cash

$1,500

 

 

Cash Sales Revenue

 

$1,500

Read also: Bookkeeping Basics