August 13, 2020

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Understanding Double-Entry Bookkeeping

Double-entry bookkeeping may not seem like a very interesting topic, but it is very important to understand how it works. Most businesses these days use accounting software and not physical books, but the principle is still important to understand. We will keep this simple, and use examples to make things clear.

First, what is the purpose of double-entry bookkeeping?
The point is to give you an overall picture of where your money goes and to help you avoid mistakes during the bookkeeping process. Every transaction is recorded in at least two positions. It makes sense because every business transaction is an exchange of one thing with another. The double-entry system shows exactly how the exchange takes place, and what the results are. If you still don’t understand, let’s look at an example.

Say you run a cafe, and spend $ 500 to get the best coffee beans. If you only see your account balance, it will look as if you have lost $ 500, because your account has dropped by that amount. In fact, of course, coffee has value – you add it to your inventory, and it will use it to brew drinks to sell to customers. So in a double-entry system, you will make two entries:
Inventory: + $ 500
Cash account: – $ 500

It records the loss of cash and increased inventory, giving you a more accurate picture of what is happening in your business. So you will not be confused when going to close the book at the end of the month.

However, there is a lot of confusion that double-entry bookkeeping comes from that terminology. In everyday life, we are accustomed to thinking about decreased debits and increased credit. In the world of bookkeeping, this is even more complicated. If you are still confused, you can leave this task to someone you trust. Make sure they understand the basic concepts of bookkeeping so there is no data miss.