A Beginner’s Guide to Double Entry System
Overview of the Double Entry System
As the name suggests, the double entry is a bookkeeping and accounting system that works on the fact that any transaction has an equal and opposite effect on two accounts related to the transaction. Under it, two entries are made, which are recorded as debit in one account and credit in another. When one account is debited, the other account gets credited by an equal amount, therefore debit and credit remain equal. This results in your accountant being able to balance the company’s trial balance.
It is through this system you will be able to identify errors and discrepancies while making book entries. Also, you will be able to show profit and loss in the income statement and assets and liabilities in the balance sheet accurately. All of this makes the accounting system trustworthy and safe.
What Is the Difference Between a Double Entry and a Double Account System?
The double entry and double account system may sound the same but it is important to note that these systems are different. The majority of corporations use it to maintain their accounts. Meanwhile, they introduced a double account system, especially for big public utility firms.
The double account system divides the balance sheet into two sections: the capital account and the general balance sheet. In contrast, the double-entry system creates only one balance sheet. Furthermore, double entry and double account systems differ significantly, as the former is responsible for maintaining accounts. The double account system, especially when demonstrating how funds were utilized in acquiring fixed assets, uses active voice to present accounts clearly, particularly when showing the public.
Advantages of Double Entry System
You must be wondering why is double-entry system so popular and preferred by many. The reason is simple, it offers multiple advantages. These advantages are mentioned down below.
Offers a Comprehensive Financial Status
Small and medium-sized enterprises can use the this system to track their financial status and the rate of growth. Under this accounting system, you will be able to record all the financial transactions which can prevent fraud and misperception. The double-entry accounting or bookkeeping system is not a choice but a luxury for enterprises that employ more than one employee, inventory debts, or multiple accounts. The double-entry accounting system generates financial status reports, such as balance sheets and income statements, that require enterprises or businesses to check their own status.
Enhanced Cash Flow Management
Through the double-entry system, businesses can improve their cash flow by following and recording all their financial transactions. Under transaction recording comes every transaction, one on the debit side and one on the credit side, so that you can have a complete accurate financial record. It helps in showing a clear picture of your client’s financial health and helps in identifying unwanted expenses. Thus, helping in devising strategies for improving cash flow.
Helps in Making Better Financial Decisions
Using the double-entry bookkeeping system, you will able to generate financial statements such as balance sheets and income statements which will give your clients a clear financial health picture. By getting a clear financial picture, the double-entry system enables your clients to make smart financial decisions. Active Voice: Users can actively utilize the generated data for educational, research, and reference purposes, including determining how to invest in new projects, deciding the amount of debt to incur, and more.
Reduction in Bookkeeping Errors
Under double-entry bookkeeping, the assets must match with the liabilities and equity (capital). If it does not that then your books are incorrect. This system works like an alert system when entries are incorrect by helping to identify errors easily and offering solutions. Through double-entry you can maintain transparency in bookkeeping and offer accountability to your clients.
Trusted by Banks, Investors, and Financial Institutions
The double-entry system of accounting and bookkeeping is transparent and accurate making it less stressful for your clients to attract investors and get finances. Banks and investors highly trust the financial reports this system generates, as they provide a clear and accurate picture of the financial health of your client’s business. Also, all regulatory authorities such as HM Revenue and Customs, and Financial Conduct Authority accept the double-entry bookkeeping system.
Ready for Tax Preparation at the Year-End Closing
In preparing year-end taxes, analysts review all financial transactions conducted throughout the year and determine which transactions require taxation. You must record all this in your client’s tax return. Follow certain steps under the double-entry system to better prepare your client for the year-end.
In a double-entry system, each entry balances, thereby reducing the likelihood of errors, saving time and money when filing taxes, and aiding in the management of cash flow. All this ensures that your client’s financial statements are accurate and complete, making preparing the tax return easier.
Conclusion
The double-entry accounting system is an efficient way of recording financial transactions. While it is a little more complex than single-entry accounting it provides multiple benefits. Through this accounting system, your clients will get accurate and up-to-date financial reports through it you can identify flaws and discrepancies, compare income and expenses, and correct problems easily.
But if not done properly it can lead to more time consumption and difficulties leading to errors. Hence if you have ample financial resources then go ahead yourself otherwise you can opt for accounting outsourcing the task of double-entry accounting to a service provider such Corient.
We specialise in offering tailored services for double-entry accounting practices. Our teams have vast experience in multiple applications such as Xero, QuickBooks, and several others. We have designed our double-entry accounting services to provide your practice with a market edge, allowing you to save time for investing in other important tasks. We can connect at your convenience on a call or online meeting where we can discuss in detail about our services.