Understanding Double-Entry Bookkeeping
Let’s face it, most entrepreneurs and business owners don’t know anything about double-entry bookkeeping, and they don’t want to know. For large companies, that’s no problem: you just need to hire a specialist. But in the early days, you might not be able to do everything. Even if you go to an accountant to help you prepare your annual tax return, you need to know the basics of how to save your documents throughout the year. The bookkeeper gold coast will discuss the basics of double-entry bookkeeping with you.
Don’t skip this step! 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 a comprehensive picture of where your money is going and to help you avoid mistakes. 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.
Let’s look at an example. Let’s 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 loss of cash (capital) and increased inventory, giving you a more accurate picture of what is happening in your business.
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 accounting, this is even more complicated. So for this tutorial, to keep it simple, we will discuss the ups and downs of credit and debit.