What is Double Entry: Why Double Entry Bookkeeping is Important

Double entry bookkeeping is a system of accounting that has been in use for centuries, and it is still widely used today. It is a method of recording financial transactions in which every transaction is recorded in two different accounts: one account is credited, and the other account is debited. This system of accounting is essential for businesses and organizations because it ensures that financial records are accurate and complete.

Double entry bookkeeping and Accounting are important for accuracy and are recommended by both GAAP and IFRS. Every business transaction has two aspects we consider when we pay cash against salaries it affects both accounts as per accounting and bookkeeping rules the cash decrease and salary expense increase, double entry bookkeeping record for both aspects of the transaction. Double entry bookkeeping and accounting records for both aspects of the transaction. Double entry bookkeeping provides a detailed view of a business's financial health and accurate information about the business's financial health.

What is double entry bookkeeping? 

Evert financial transaction has two aspects and respectively hits two accounts. There is a debit and credit concept in accounting which is then applied. You have to debit one account and credit the other one. If you are wondering what debit and credit and what account should be debited and what should be credited here is the explanation to it for all classes of financial transactions.

Importance of double entry bookkeeping

One of the main advantages of double entry bookkeeping is that it helps to prevent errors and fraud. With this system, every transaction must be recorded in two different accounts, which means that any discrepancies or errors will be immediately apparent. This makes it much more difficult for fraudsters to manipulate the financial records of a business or organization.


Another advantage of double entry bookkeeping is that it provides a clear and comprehensive picture of a business's financial health. By recording every transaction in two different accounts, this system ensures that all financial information is organized and easy to understand. This makes it much easier for business owners, managers, and investors to make informed decisions about the company's future.


In addition, double entry bookkeeping is also important for tax and regulatory compliance. By maintaining accurate financial records, businesses can ensure that they are complying with all relevant laws and regulations. This can help to avoid costly fines and legal penalties, as well as protect the reputation of the business.

Double entry or credit/debit for Assets

For assets is the asset increases it becomes debit and if it decreases it becomes credit. 

Double entry or credit/debit for Liabilities

If liability increases, it becomes a credit and if liability decreases it becomes a debit.

Double entry or credit/debit for Income

When income increases or is earned it becomes credit and vice versa

Double entry or credit/debit for Expenses

Expenses when increased become debit and vice versa.


Consider you have purchased the machinery for $1000 dollars and you paid 40% and 60% is payable after a month, and using this plant you generate 100 units which you sold for $200 $2 dollar per unit, and your expenses for that week was 20 dollars here is the double entries for the given scenario:


Before going forward with the example, we need information about charts of accounts. The chart of accounts is the list of accounts that your categories transaction into and appear as a separate line item of financial statement/financial reports is it profit and loss or balance sheet?













Misc. expenses



The chart of accounts is the list of accounts that your categories transaction into and appear as separate line items of financial statement/financial reports are it profit and loss or balance sheet. Setting up a chart of accounts is a technical task depending upon the nature and industry in which the business operates.


Here are charts of accounts 


·        Building

·        Accounts receivable

·        Cash

·        Inventory assets

·        Petty cash balance

·        Prepaid insurance

·        Savings funds

·        Undeposited funds

·        Vehicles   


·        Accounts payable

·        Accrued liability

·        Notes payable

·        Company credit card balances

·        Payroll 

Owner’s equity

·        Common stock

·        Preferred stock

·        Retained earnings (accounts associated with the owner’s equity)

·        Revenue

·        Expenses

There is a famous equation in double entry bookkeeping that the sum of equity and liability must be equal to assets which is termed the accounting equation. Double-entry bookkeeping must follow this equation: Assets = Liabilities + Equity. 


Assets include

·        Property plant and equipment

·        Cash

·        Cash equivalents

·        certificates of deposit or Treasury bills (Liquid asset)

·        Inventory

·        Account receivable 

·        Short-term investment (cash equivalent)

Liabilities include

·        Debt

·        Dividends payable

·        Long-term debt

Equity is the amount that shareholders contribute initially plus/minus any retained earnings. This can also be explained as equity is the amount available to be distributed among shareholders after all assets are liquated and debts or liabilities are paid.


The retained earning refers to in the second last paragraph is the percentage of earnings that is kept under the equity section of the balance sheet and is held and not yet paid to shareholders. Retained earnings may be positive or negative. Positive retained earnings are the accumulation of profit over the periods and negative retained earnings are the accumulation of losses over the years doing your own bookkeeping is a time-consuming cost and it may result in inaccuracies.

Partner with professional bookkeepers that understand every aspect of bookkeeping from double entry bookkeeping to taxation. It helps you avoid tax audits and penalties and make an informed decision and has an accurate set of financial statements.