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
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.
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