The double-entry concept of bookkeeping is a standard system used by both small and big business entities, especially accounting firms in Singapore. This concept has been in use for more than 500 years, and it can be traced back to the merchant of Venice. Double-entry bookkeeping system has stood the test of time. This guide will focus on how this concept is used and why it is a suitable accounting system.
The core of double-entry concept is the idea that each transaction involves at least two accounts or more. For example, if you take a loan to expand your business, the cash account for your business will increase by the amount of the loan while its liability will also increase by the same amount. Also, the interest account will be affected. Also, if your business purchases a printing machine, its cash account or bank account will decrease depending on the method of payment. The printing machine account will increase by the value of the printing machine.
The primary objective of the double-entry bookkeeping is to keep a balance, and this is the reason double-entry concept uses the accounting equation – I like terming it ‘the financial compliance’ equation.
Owner’s equity + Liabilities = Assets
Note that in the double-entry accounting system, the amounts entered on the debit side for one account should be equal to the credited amount for the same transaction.
The primary idea in double entry accounting system is that each transaction has two effects which must be accounted for. This is known as duality principle, and it implies that though the business is spending cash out of its accounts, it is gaining something. Without recognizing the fact that a business gains assets for every expense, the accounting system would offer a limited view of how the company manages its cash (Also see Reasons Working Capital Requirements Can Increase).
The double-entry accounting system can be applied extensively. For example, while purchasing fixed assets (Also see Accounting – FRS16: Property, Plant, and Equipment), making payments for goods obtained in credit, receiving a bank loan, paying bills, and more. The most important thing is to remember that for each transaction, two or more accounts are affected.
This accounting concept will help you to maintain complete records that can clearly show how your business manages its cash flow. Therefore, if you have been using Microsoft Excel sheets that show only the transaction, it is time to start keeping complete records that show the various accounts affected by a transaction. This will make it easier for you to manage your cash flow. Call us today for bookkeeping services so you can leave this “balancing” task to us.