Double Entry Bookkeeping and Maximizing Its Benefits
If you use accounting software in Canada or work with a professional accountant or bookkeeper, then you are already benefiting from double entry bookkeeping. If you’re going it alone with a spreadsheet or worse, then you may not be doing proper double-entry bookkeeping. Double entry bookkeeping is the only acceptable way to do bookkeeping in Canada.
Double Entry Bookkeeping Principles
Double entry accounting is one of the oldest bookkeeping principles, formally dating back to at least 1500AD when modern accounting was first instituted in Italy. So strongly ingrained in business and culture is double-entry accounting that it even appears as the first written records ever! That’s right, the cuneiform tablets found in Mesopotamia show an early form of double-entry.
The rule of double entry: every transaction has two sides, and these two sides are always recorded separately.
Double Entry Bookkeeping Examples
Double entry is probably best explained through examples. I will list a few of them, and then I will show how this appears in the accounts
- If Chris lends me $10k, I record (1) the cash I received and (2) the debt I owe Chris
- If I pay Chris back $4k, I record (1) the cash I gave you and (2) the reduction in debt
- If Alex agrees to buy goods from me, I invoice Alex and record (1) revenue that I’ve earned and (2) that Alex owes me money for the goods
- When Alex pays the invoice, I record (1) the cash I received and (2) that Alex doesn’t owe me money any more
- When I pay a supplier, I record (1) the cash I paid out and (2) the value of the inventory I received
You can see that in any of these examples, if I write down only one side of the transaction then later one party will be very upset. If I only record the receiving the cash you loaned me then you will be upset later that I don’t remember I owe you anything.
In traditional accounting, physical books would be made with entries for each account. There is always one entry made in the left column of an account and a matching entry on the right column of another account. Accountants refer to the concept of debits and credits – each transaction has one debit and one credit.
Cash (asset account) | |
(1) $10,000 | |
(2) $4000 | |
Balance after (2): | $6000 |
(4) $50,000 | |
Balance after (4): | $56,000 |
Short-term loan – Chris (liability account) | |
(1) $10,000 | |
(2) $4000 | |
Balance after (2): | $6000 |
Accounts Receivable (asset account) | |
(3) $50,000 | |
(4) $50,000 | |
Balance | $0 |
Revenue (income account) | |
(3) $50,000 | |
$50,000 |
Advantages of Double Entry Bookkeeping
While it seems like it might be double the work, double-entry bookkeeping has some obvious advantages. Firstly it serves as an ongoing record of where cash came from and went to – there’s never just cash that magically disappears from the bank. If the bank balance is lower than expected, you can easily find the unexplained withdrawal and investigate for fraud.
Secondly, it provides an ideal way to ensure that your records are complete. If you add up all the entries for assets, liabilities, and equity it will balance. If it does not, you know you’ve missed something and should go back.
How to Use Double Entry Bookkeeping Today
You don’t need to put a lot of thought or effort into implementing double-entry bookkeeping in your startup or small business. It’s just the way accounting software like Quickbooks Online or Xero works, out of the box. It may, however, be unclear exactly in which account to record one side of the transaction. It’s not uncommon for business owners to receive cash payment against an invoice and to record the sales tax to the wrong account for instance, or to set up the payroll system to point to the wrong payroll liability accounts. Entreflow is an Accounting Firm in Vancouver with a Toronto Accounting office, serving startups and small businesses across Canada. We can help with all your accounting system setup needs to ensure your transactions flow into the right accounts and we can help you review your books to prepare for year-end.
Author: Iain Rogers, Founder & Advisor, BSc, MBA
My success as a business owner, sales & marketing executive comes from entrepreneurial vision and leadership, backed by an Ivy-League MBA and 15+ years of business leadership experience. I recognize new potential for products, technology and partnerships and take them to market while developing both strategy and people. Connect on LinkedIn.