I must be misunderstanding something when trying to research this topic because I genuinely do not understand to point of DE bookkeeping?
To me, DE shows the exact same information that single entry bookkeeping does. In single entry you have Debit (an expense) or Credit (an income) and for each purchase or income you write a single line with how much money is involved, and that number gets added or subtracted from the balance.
But from what I can tell, in DE bookkeeping, you write the exact same thing, but then you have a second line with the exact same amount in the other column. So for example if you make a purchase of $500 for books, in one line you write “Books | Debit: $500 | Balance: $XXXX” and then in a line immediately underneath it you write “Books | Credit: $500 | Balance: $XXXX” which all can be summarized in single-entry by saying “Books | -$500 | Balance: $XXXX”?
So other than maybe proof reading by “balancing the books” to make sure both columns add up to the same amount, I can’t or don’t understand if there’s any actual difference? Can anyone help?
In: Economics
> So other than maybe proof reading by “balancing the books” to make sure both columns add up to the same amount,
Yes, exactly that. Every item is accounted for, and then accounted for *again*. Keeping your accounting balanced may seem trivial for regular folks, but for businesses it can be a serious endeavor. Think of hundreds or *thousands* of entries, which can end up being pretty complicated. Like, consider accounts receivable, which is money you are owed but have not yet been paid – think, someone has contracted your factory to produce 1000 units and you’ve started production but they haven’t started paying you yet. But you can record that as an asset because they *must* pay you, it’s in a contract, and showing that asset can be important for a number of reasons, but nonetheless it’s still not money in your pocket.
You can imagine that when there’s millions of dollars being accounted for like this, money can get lost, stolen, forgotten…Double-entry accounting forces you to do all of the math to add up everything *twice*. And then it’s super easy to find if there’s an error because it should always always *always* add up to 0. Always. That way, you don’t have to think about, “How much money should I have? Is it $1,380,287? Or was it $1,382,870?” Doesn’t matter what the total is for your assets and liabilities – they balance to 0. If it *doesn’t* balance to 0, there’s a problem.
In most cases it’s not going to be a line immediately underneath it.
Let’s argue I pay rent, I haven’t done this before so my rent account has $0. I have $5000 in cash and rent is $1000 I’m going to Credit my Cash account and debit my Rent account. I write in my Cash account, rent |credit $1000| balance $4000. I then write in my Rent account, Rent paid with cash| debit: $1000 | balance $1000. I now know where my cash went by looking at my cash account AND I know how much I paid with rent without searching through all of the cash account without having to search my cash account.
This is really important for larger businesses who might have multiple rent payment due every month. It’s also far easier to track where things are coming and going. Also makes it easier when you have to prepare financial statements. How much did we spend on rent? Well we can look at the rent account and we have an answer.
So, the key point is that the two entries are supposed to be in *different logbooks*. Everything that leaves your account then arrives at some other account, and that accounts entry points back to your account as the origin of that money.
thus, if you and me both have copies of the transaction, I can’t just “add a zero” to the incoming transaction to magic some extra money into my account (IE, say i got $5000 for those books), because they can check your records, which I dont have access to to edit, and show a different amount ($500), and then i’d be having to explain how what i was doing was not fraud (and likely failing).
does that make sense?
Don’t think any of the replies so far have quite hit the mark.
It is because in double entry accounting, you are running *two* lists of transactions.
It’s the same single transaction, but entered in two different ways (hence the name).
One is the assets of the company. So if to take in $100, you add $100 of cash to your assets. Easy.
The other is the liabilities of the company. So if you took in that $100 from a loan, you would add $100 of loans to your liabilities. If you took it as profit, you would add $100 to your shareholder’s equity.
*For every single asset in the company, there is a corresponding liability*. A transaction does not just have one property or characteristic alone, it’s crucial to understand this point.
And assets and liabilities always balance (unless you made a mistake!). Every asset belonging to the company has a corresponding claim against it, even if it’s just the shareholders saying ‘I own that’. Add them all together and you can construct the balance sheet for the company, which is one of the three (or 4) most fundamental financial statements.
There are multiple reasons why it is important to know both the assets *and* the liabilities of the company. But the one obvious thing is that it can tell you how much the company is worth, at least in the accounting sense. Take the assets, deduct all the other liabilities and you end up with shareholders’ equity, the ‘net worth’ of the company – basically what the shareholders would get to take home once the company is liquidated and all the other claims on the company’s assets are satisfied.
You are missing the crucial difference in Double Entry Bookkeeping… that is that the extra entries are assigned to different account types/categories.
Here is an over simplified explanation…
With single entry, let’s say your account has a $50,000 balance.
You pay a utility bill of $10,000 (single entry)… your balance is now $40,000.
You deposit $30,000 from a business improvement loan (single entry) now your balance $70,000.
All this doesn’t tell you that much, just your running balance and the description of the transactions.
Now let’s do double entry…
Start with the same $50,000
$10,000 utility payment lowers the bank balance, but also is entered a second time as a cost in the business expenses account.
The $30,000 raises the bank balance, but is entered a second time raising the business liabilities by $30,000.
So instead of just knowing your business account total is $70,000 (single entry)… with double entry, you know that your business has spent $10,000 in expenses, owes $30,000 on a loan, and your current net assets are $40,000… not the $70,000 in your bank account.
In other words, double entry gives a more complete accounting picture of a business.
What helped me understand it was this equation:
Assets = Liabilities + Equity
This equation is the foundation of all modern accounting.
– Assets are the things that business owns
– Liabilities are the money that the business owns
– Equity is the amount of wealth the owner of the business has
This equation must always be in balance. Always. So if you get a $5,000 cash payment from a customer (asset) it either goes to paying a bill (liabilities) or increases the wealth of the owner (equity). This means that the $5,000 gets entered twice – one on each side of the equation – hence double entry book keeping.
fraud and mistake prevention mostly. If an insider pocket some extra dime or undercharge for some service, it will show up in the book.
Another reason not mentioned here yet. In single accounting, you may know that you bought books for 500 and its fairly easy for you to keep track of those books but in a big company, many people need to look at the balance and be able to reconstruct how much there is of what, sometimes people that dont even belong to the company like inspectors. They wouldnt be able to figure out if you still have those books, lost them or sold them but forgot taking note.
With double accounting, the person looking at it can immediatly see that you have $500 worth of books
“Balancing the books” as you mentioned is the point, but it’s more than just simple double checking. Accounting is all about recording the transactions of a business and reflecting what it owns, owes, and is worth. This is reflected in the fundamental equation of assets = liabilities + equity.
Businesses are all about money in and money out, and everything affects at least two accounts. If you buy something, you lose cash, but you gain an asset. If you take a loan, you gain cash, but you have a debt to repay. Double entry accounting keeps track of these transactions and their relationship and reflects it’s all equal in the end, the money and assets and debt don’t just pop out of the ether. If one side of the equation doesn’t equal the other, it means something wasn’t recorded or got screwed up.
Latest Answers