The role of accounting in Management

5. Double-entry

A concept that most entrepreneurs struggle with, is double-entry bookkeeping. If you just get started and have very few or only cash based transactions to record, you may work with a general ledger and just enter each transaction once. This is called a journal entry. This can be done on excel or google sheets.

However, as soon as you need to keep track of several accounts just working with a general ledger becomes complicated. As a business owner you should consider that double-entry bookkeeping was invented by professionals handling money so that they could catch mistakes quickly, as both sides always balance unless there is an error. Start-ups cannot afford to lose money and should therefore be especially careful with their record keeping.

In a double-entry bookkeeping system every transaction is recorded as a debit and a credit, whereby debits are used to record incoming money, while credits are used for outgoing funds. A bookkeeping or accounting software does this automatically. If you e.g. buy a new piece of equipment you record the cost as a credit (decrease) on the bank account or cash, depending on how you paid for it, and as a debit (increase) on your equipment account. Both accounts are assets accounts. This reflects that you exchanged money for equipment, but did not decrease the value of your company because the decrease in cash resulted in an increase in equipment value you hold.

In the same manner income from a sale is credited to the sales account and debited to the cash account. When supplies are taken from the store to be used in the office they are credited to the supplies account and debited to the supplies expense account, and so on. Therefore, each account has one or several corresponding accounts. Check out the list of accounts under resources for more detail.