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Understanding Double Entry Accounting: Principles and Benefits

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By Katherine McDermott - Guest Contributor

Published | Updated on
5 min read
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Double entry accounting is a simple way to track and monitor your business’s financial records.

Double entry accounting is a method of recording finances, where each transaction has two entries—debit and credit. It is important to get insight into the financial position of a business. Double entry accounting creates the foundation for other types of specialized accounting and bookkeeping, so other frameworks can be used in conjunction.

While single entry accounting is more straightforward and less time-consuming as it shows each transaction once, double entry accounting creates robust, detailed reports about a business’s financial health by showing that every transaction has equal and opposite effects in at least two different accounts. 

In this article, we’ll explain what double entry accounting is, how it ensures financial accuracy, and its significance and benefits for businesses.

What is double entry accounting, and why is it significant for businesses?

Double entry accounting is the process of recording financial transactions that rely on a two-sided entry. Each entry has a corresponding entrance and an opposite exit to a different account. In double entry accounting, the debits are always equal to credits, ensuring proper checks and balances for each transaction. The formula for double entry accounting is: Assets = Liabilities + Equity.

Overall, double entry accounting helps track finances and keeps a business’s books balanced, necessitating the involvement of a minimum of two accounts. It is an effective accounting system, especially for small-and-midsize-businesses (SMBs), as they need to ensure transparency and accuracy in cash forecasting and revenue projections.

How does the double entry system ensure accurate financial records?

Double entry accounting ensures financial accuracy in several ways. SMBs can use it to ensure optimum utilization of planned budget by tracking money spent on each transaction. Double entry accounting can also  

  • Help prevent frauds: SMBs can use their double entry records to cross-check between two different accounts, allowing them to identify and prevent frauds.

  • Provides balanced equation with dual recording: Double entry accounting ensures that every transaction has an equal and opposite effect in two different accounts. This helps to maintain a balanced equation of debts and credits.

  • Encourages quick identification of errors: Recording each transaction allows accountants to check for any discrepancies in the financial accounts proactively. Early tracking helps them to reconcile accounts and avoid possible losses.

What are debits and credits, and how do they function in double entry accounting?

Debits and credits are the core features of double entry accounting. For example, a sale transaction might increase revenue, lower inventory, and create a tax liability on the collected sales tax. Double entry accounting aims to track all these assets, liabilities, revenue, and expenses entering and exiting the business. Each transaction has both a debit and credit, which are not positive or negative values. Instead, they signal the type of account they are affecting.

Within double entry accounting, most businesses operate different types of accounts, typically including assets, liabilities, equity, revenue, and expenses.

  • Asset accounts: Show the value of what the business owns, such as cash in the bank and prepaid expenses.

  • Liabilities accounts: Include what the business owes, such as employee salaries.

  • Equity accounts: Show the business’s retained earnings or surplus stocks.

  • Revenue accounts: Explains sales, interest revenue, or dividend revenue.

  • Expense accounts: Illustrates day-to-day operating costs, including utilities, rent, and maintenance.

Double entry accounting records both the increase and decrease in all these accounts, resulting in a zero-sum balance.

An entry on the debit side indicates an increase in the overall account balance for assets and expenses, and an entry on the credit side reflects an increase in liabilities, equity, and revenue.

Benefits of understanding double entry accounting for small businesses

Double entry accounting can be time-consuming for SMBs with limited resources. However,  it offers increased financial control and visibility into their daily operations. Tracking finances with double accounting will help SMBs in many ways.

   Accurate financial documents

With double entry accounting, small businesses can ensure accurate and detailed financial reporting and documents across critical tools, including the balance sheet, income statement, and cash flow statement. SMBs can analyze historical data, revealing trends, patterns, and fluctuations from season to season.

   Better informed decisions

Business owners can closely assess performance across departments, products, and services using in-depth information recorded in the double entry accounting. With more detailed and accurate data in double entry accounting, SMBs that are otherwise strapped for time, cash, and other resources can allocate more energy to the top-performing business segments.

   Ensure regulatory compliance

Double entry accounting ensures proper risk management by highlighting potentially vulnerable areas. As regulators typically require accurate financial reporting, double entry accounting reduces non-compliance risk.

   Improves stakeholder communication

With accurate and easy-to-access financial documents, stakeholders and leadership can stay up to date with the ongoing processes. SMB owners can leverage double entry accounting data to encourage transparency among small teams, work closely with the accounting and finance departments, and offer valuable financial insights to vendors and partners.

Next steps to leverage double entry accounting software


Double entry accounting software can be a meticulous recordkeeping process, depending on the number of transactions your business has. However, accounting software can empower SMB owners to understand data easily and save time among internal teams.

To learn more about accounting and finance for your small business, check out the below resources:


Looking for Accounting software? Check out Capterra's list of the best Accounting software solutions.

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About the Author

Katherine McDermott Headshot

Katherine McDermott is a product marketing expert in B2B technology and SaaS.

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