If you are just starting a new business and want to go about it the right way, you will need to pay close attention to your finances. After all, you will want to pay your suppliers on time and receive revenues to compensate while conforming with all employment laws and paying just the right amount of tax. Yet as your company grows and you get busier, all of these issues become ever more complex, and you'll certainly want a solid bookkeeping system in place to avoid running into trouble. As you prepare, you may have come across the term "double-entry bookkeeping" as a recommended approach, but what exactly is this?
Single Versus Double
You might think that given a choice between single-entry and double-entry bookkeeping, the former would be simpler and more effective. Yet the double-entry option has been around for hundreds of years and is by far the most commonplace in small, medium and large organisations.
Separate and Opposing
In principle, the double-entry system means that every transaction has two separate and opposing elements. In other words, when money goes out (a debit), you must make a corresponding entry on the other side of the system as a credit.
The Ledger
In the old days, when bookkeeping really involved books, you would keep a ledger with debit entries on the left and credit entries on the right-hand side. All of these entries would be summarised to come up with a trial balance, and both sides of the sheet would need to match in order to reconcile.
Double-Entry Example
As this concept can sometimes be tricky to understand, consider a simple example. If you buy a laptop computer for one of your employees, you will make two entries. You will be reducing one asset (cash) as you physically buy the computer while gaining a separate asset (equipment) in the form of the computer itself. The amount you paid for the laptop will thus appear in two places to counterbalance.
Showing Profits
Your debits and credits must always reconcile. But when it comes to your end-of-year accounts, you will, of course, want to display a profit. In this case, both sides will still need to balance, but your assets (on the one side) will now be equal to both your liabilities and equity on the other. Equity is the amount of profit that you've built up through the process of trading.
Bookkeeping Help
To ensure that you handle your finances correctly, you need good systems in place. Primarily, you need a first-class bookkeeper to handle all these transactions and make sure that debits and credits are always recorded in their proper places.
For more information on bookkeeping, contact a professional near you.
Share28 January 2022
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