Double-entry bookkeeping: the most used method in accounting

General accounting follows very specific rules with regard to double-entry bookkeeping entries in the books. Among these principles, double-entry bookkeeping is one of the most important to respect when making accounting entries. In fact, it is 'The Rule' par excellence to be followed and which guarantees the balance of your accounting system by reflecting the regular recording of entries in the accounts.

It is based on the notions of give and take , or, put another way, debit and credit that you can find in your bank statement. On the surface, this system of give and take may be at odds with your bookkeeping. Don't panic! The double-entry rule is based on a clear and straightforward approach, which is why it is one of the easiest procedures to understand and apply in accounting.

In this article, we will reveal the secrets of double-entry bookkeeping.

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What is the principle of double-entry bookkeeping?

In order to understand the mechanism of double-entry bookkeeping, one must understand the guidelines behind accounting analysis.

The purpose of bookkeeping is to present a true and accurate picture of the company through the keeping of its accounts. To do this, every transaction must be entered and recorded. This accounting is divided into subsidiary books in which the different flows of the company are entered.

These books have two columns for entering amounts:

• a debit column,
• a credit column.

In contrast to your bank statement, debit records cash inflows into your business (e.g. incoming payment from a customer) and credit records cash outflows (e.g. payment made to a vendor).

So there are amounts to be entered in two columns for each transaction... two columns that must be identical in terms of amounts.

Double-entry accounting

Origin

Double-entry bookkeeping spread throughout Italy's merchant cities in the 15th century, but found its epicentre mainly in what are remembered today as the maritime republics, namely Genoa and Venice. It was especially in the Serenissima that the markets of the time devised the double-entry method in response to the florentine development of their trade.

It was Luca Paciolo who wrote the first treatise on double-entry, theorising a practice that all Venetian merchants used and practised. This treatise was published in 1494 in Venice under the title ' La Summa de arithmetica, geometria, proportioni et proportionalita '. And to this day, it is considered the oldest and most complete work on double-entry bookkeeping.

Definition

The double-entry method consists in the fact that a transaction is always recorded twice in the accounting records, be it the ledger , the chart of accounts , the profit and loss account or the balance sheet , whether on debit or credit.

In effect, an accounting entry consists of :

• one or more debit posting lines, and
• one or more credit lines.

At the end of each entry, the total of debits must equal the total of credits, and only in this balanced situation can we say that the balance sheet 'balances'.

Without this balance, the accounting entry is unbalanced and so is your general accounting. The number of accounting accounts, and thus the number of accounting lines in your ledger, does not matter. Obviously, there will always be at least two.

The concept of give and take

Every economic or financial transaction must be recorded in the company's books following a two-column breakdown:

• debit : answers the question "How are the company's resources used?", i.e. uses
• debit : answers the question "Where do the company's resources come from?", i.e. the sources

To record correct accounting entries, these two questions must always be asked for each operation.

So if our company decided to buy raw materials, using the money in the treasury, we should ask ourselves the above two questions for the economic and financial aspect.

Since I have bought raw materials, in the purchase ledger the amounts spent will be recorded in Debit, thus taking care of the economic aspect of the transaction.

In the cash register, I will record the amount in Debit, because the resources come from cash, thus taking care of the financial aspect.

In the case where my company has sold some products, immediately collecting the proceeds of the sale, the situation will be as follows:

In the bank ledger, I will record the amount equivalent to the sale proceeds in debit, since I am using these resources, depositing them in my bank account (financial aspect).

The amount earned comes from the sale of resources produced by my company. I will then record the amount in debit in the sale ledger (financial aspect).

Double-entry accounting example

Suppose company X purchases a machine tool on 19/02/2018 from company Y for EUR 1,200 including VAT (VAT of EUR 200). It pays for the machine on the same day by bank cheque.

In this example, there are two separate transactions:

• The acquisition of the machinery by company X,
• The disbursement of the price of the machinery to pay company Y.

However, there will not be two lines of accounting entries but four.

Recording of accounting entries

Here is how to record the purchase of the equipment in the journal of company X

This is how the transaction is recorded in the treasury of company X

Invoice and payment are two different accounting entries, so each time an entry must be made that affects different accounts in my balance sheet.

Each time, one transaction affects at least two accounts per accounting entry. This is the principle of double-entry bookkeeping.

Let us now proceed to another example that will better illustrate the concept of give and take.

Our company made a sale on 1/03/2020 for a total of €2,500, accepting as method of payment a transfer deferred over 60 days.

So we have to register this transaction.

On 1 March the first registration takes place and the accounts involved are:

• goods/sales
• receivables from customers

The first is a profit and loss account and represents the proceeds of our sale. Since it is, therefore, considered a source, we will mark the 2500 euros in the credit column.

The second is a financial account and since it indicates how we use resources, we will record the 2500 in the debit column.

Goods c/sales

Receivables from customers

After 60 days, the customer makes payment, and thus the accounts affected will be as follows

• customer receivables
• bank account

Since the customer has made the payment, the amount of 2500 represents a source in the accounts receivable ledger, so I will mark this amount in the credit column and balance this account. In this way, the credit ledger will be balanced because I no longer have any receivables from customers.

Since the customer payment has been made, I will find the amount in the company's current account. So the transaction has to be recorded in the bank's ledger, under the heading of Having, because it tells us how I have used the company's resources.

Receivables from customers

Bank c/c

In this way, we recorded the payment of EUR 2500 in favour of our company:

on the financial level, via the cash ledger in the debit column.

What are the two double-entry accounting methods?

Double-entry bookkeeping covers the two main accounting approaches, i.e. :

• Accrual-based accounting ;
• Cash-based accounting .

Its mastery is therefore indispensable for all those who wish to engage in accounting. Moreover, it requires no special effort. Having grasped the guiding principles and assimilated the methodology to be followed, the accountant can guarantee the conformity of all documents subject to this accounting convention.

Accrual-based accounting

Practically all existing companies are subject to accrual accounting. It is applied to all forms of companies. Only professionals and structures under the not-for-profit business scheme are not obliged to follow this accounting approach. In practice, however, they always opt for this method, as we shall see below.

According to the accrual accounting principle, transactions are recorded in two stages. The first time a transaction must be recorded in the purchase or sales ledger is when the company :

• Contracts a debt;
• Acquires a receivable.

Subsequently, the bookkeeper must record the transaction a second time when payment finally takes place. At each step, he must credit and debit the corresponding accounts. Likewise, he is responsible for maintaining the balance. In this sense, double entry is necessary. Here, the objective is again to :

• Ensure transparency of accounts;
• Ensure traceability of transactions.

Cash-based accounting

Cash accounting focuses on cash flows following commitments received or given by the company. A transaction is therefore recorded in a single transaction when the customer pays the full amount due to the institution or when a disbursement has taken place.

This might suggest that there is no need for double-entry bookkeeping. However, double-entry bookkeeping is also essential in this case. Debits and credits must be recorded. The main purpose of this measure is to provide a minimum of information on the transactions that have taken place. On the other hand, it will also facilitate the preparation of various financial statements, such as balance sheets.

It must be remembered that cash accounting is intended for :

• Not-for-profit businesses ;
• Consultants;
• Persons exercising a regulated liberal profession.

It grants beneficiaries the possibility of simplified accounting . Since each transaction will only be recorded when the invoice is paid, it allows them to benefit from considerable time savings.

However, users of this particular system prefer to adopt double-entry bookkeeping, which greatly simplifies the analysis of accounts in the event of a tax audit.

Likewise, they too can benefit from using the double-entry method. In fact, they will be able to dissect their accounts in more detail.

They will be able to identify:

• The main items of expenditure;
• The main sources of income.

Double-entry method VS Single-entry method

The simple batch method

The simple consignment method is based on a single account for all transactions: this involves reasoning in terms of income and expenditure and establishing a total balance. Each transaction is numbered in chronological order and recorded in a 6-column table with date, detail and amount.

To establish a simple partial account, it is then sufficient to add up the amounts of expenses and income for the year to determine the profit.

Double-entry bookkeeping and simple accounting compared

Advantages of double-entry bookkeeping

The double-entry method is a much more effective method than the simple method. In fact, it makes it possible to:

• Record transactions that are deferred over time, such as loans or provisions.
• Permanently check that receivables are equal to payables. In other words, the total of what the company owes is perfectly equal to the total of what the company owns. In this way, an income or expense is always associated with the corresponding method of financing.
• Presenting a more accurate picture of the company's assets and finances

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Double-entry bookkeeping using accounting software

Most accounting software programmes report an unbalanced (non-balanced) entry at the time of recording. They also provide an automatic counterpart for treasury flows. In this case, these programmes balance the income via the account that is associated with the bank entry.

But this is not the case for other ledgers. And the counterpart that is used to balance the account, according to double-entry principles, must be entered by hand.

If an unbalanced entry is forced, the accounting software should assign the difference, by default, to an account identified as a suspense account. But not all accounting software does this. In this case, the imbalance can only be seen by manually studying and checking all accounting entries item by item.

Obviously, as you can imagine, this is time-consuming and tedious work. It is therefore better to record balanced entries, right from the start and at all times!