Well, iIt enables a company to track all of its transactions and understand how it is doing in terms of profitability, cash on hand, and business growth. It also supports all of the ongoing reporting and filing obligations that companies have – sales tax returns, annual financial statements, tax returns, etc., which are all based on double-entry bookkeeping. What Are the Principles of Double-Entry Bookkeeping?
The principles of double-entry bookkeeping are very simple: every transaction has two equal and opposing elements. For example, if you sell products, your cash on hand will go up and your inventory will go down. It is for this reason that accountants speak of accounting and refer to a “balance” in the accounts.
Postings that result from double-entry bookkeeping are often referred to as debits and credits. These represent the two sides of any accounting transaction. A company’s accounting records, simple or complex, will be an accumulation of these duplicate entries. These entries can be summarized in what is known as a ledger, which represents the sum of all entries analyzed by type.
When you post these journal entries to a general ledger, debit entries are posted on the left, and credit entries are posted on the right. These are summarized in a test balance, which shows that the account balances are broken down by type result from the sum of all associated debits and credits. If done correctly, your test balance will show that the general credit balance is the same as the general debit balance.
Your general ledger contains a page for all of your accounts in what is known as a chart of accounts, which is organized by account category. A ledger is generally divided into at least nine main categories:
- financial assets
- Capital entered
- Share capital/participation
The main categories of the general ledger can often be reduced to sub-ledgers to reveal additional details such as cash, accounts receivable, accounts payable, etc.
Here is a simplified description of how charges and credits work in the double-entry bookkeeping system.
What Do Debit And Credit Mean?
It is easier to explain charges and credits than accounting concepts as opposed to physical things. Every transaction in your company results in a charge on one account and a credit on the other. Together they represent the money that goes in and out of your business – as one account grows, another has to decrease. For example, a transaction that increases your wealth would be posted as a charge on that particular asset account. On the other hand, this transaction would also be booked as a credit to another account. Credits increase the income, liability, and equity accounts, while debits increase the asset and expense accounts. Debits are posted on the left and credits on the right. The sum of each charge and the corresponding credit must always be zero.
- Increase an asset account or decrease a liability account or an equity account (for example, equity)
- Increase an expense account
- Reduce sales
- Always posted on the left side of a ledger
- Increase a liability or equity account or decrease an asset account
- Reduce an expense account
- Increase in sales
- Always engraved on the right
Double-entry bookkeeping (also sometimes called double-entry bookkeeping) enables a business to keep track of all its financial transactions in a structured way. You can then provide the owners or their accountants with the information they need to meet any tax and financial needs the business has, such as sales tax returns, annual financial statements, tax returns, and cash flow statements.
It also enables business owners to track their finances on a regular basis, helping them understand the performance of the business and helping them make important financial decisions.
With double-entry bookkeeping to record transactions, you and your accountant can have a complete and detailed view of your financial affairs.
Simply put, all businesses must use double-entry bookkeeping. This is the only way to ensure that financial information is complete and correct and that it supports all ongoing reporting functions of the company.
Some business owners handle all of the double-entry bookkeeping, but in most cases, there are accountants or bookkeepers involved to help establish and operate proper accounting systems.
The traditional approach to corporate bookkeeping is changing. Although manual records, spreadsheets, and even desktop accounting software have worked for many years, the changing needs of small and medium-sized businesses (SMB) require a more flexible accounting solution.
Entrepreneurs are increasingly working remotely, at least in some way, shape, or form. Flexible access to your finances is more important than ever. These needs have driven the development of cloud-based accounting systems that dominate the market for small and medium-sized businesses today. These systems automate aspects of double-entry bookkeeping and are essential tools for business owners, accountants, and bookkeepers.
Looking ahead, there is growing pressure on small businesses to digitize their accounting and tax reports. Digital compliance is becoming a necessity with the advent of Making Tax Digital (MTD). This step into digitization will motivate more and more companies and individuals to look for cloud-based accounting solutions.
It may seem like you can save money by doing everything in your business yourself, but using a local accountant can save you time and money in the long run. These savings result from reduced risk of human error, years of experience working with many other clients, no late payments to HMRC, or missed tax deadlines. Add to this the benefits of tax planning and corporate reporting and you will find that choosing a local accountant is one of the best decisions you can make.
At Advantax Accountants, we are seasoned accountants using cloud accounting systems. We use products like QuickBooks and Xero, as well as Dext, a receipt processor that allows you to use your smartphone to take photos of your receipts and then pull up relevant information that you can incorporate into your accounting process. This software helps us ensure that your company is ready for digitization.