Double entry bookkeeping is something that confuses a lot of people. Essentially, what it means is that when you make a sale, record a bill or record any other type of transaction in your business, your accounting system will record entries in both the right side and left side of an account (an account is like a storage compartment with two sides).
Let’s say your goal was to balance a scale – if you put something on one side, in order for it to balance, you need to put something of the same weight on the other side. Think of double entry bookkeeping as that – trying to maintain the balance in a scale, but rather than a scale, an account by putting the same amount in the left side as you would in the right side.
If you want to watch a video that explains the definition of double entry bookkeeping quickly, check this video out:
The left and right side of an account is called debit and credit. That means if you put $10 in the sales account on the right hand side (credit), under double entry bookkeeping, you’ll need to put another $10 somewhere else on the left hand side. Let’s say the customer has paid on the spot, the $10 would then be placed in the cash account on the left hand side (debit).
The action of recording the things that happen in a business is called bookkeeping. Doing the two entries is called double entry. So… put them together and you have double entry bookkeeping.
Why are their two entries?
Well because it helps keep your records more accurate and complete and it helps make it ‘balance’.
I’ll show you what I mean.
Say you make that sale. So you record $10 on one side to represent sales. On the other side, you’d also record $10 to represent the cash that you believe should come in from the sale.
However, if you made the sale of $10 but then recorded only $5 of cash that you received, then it doesn’t balance. The sale is heavier than the cash and it means that you’re light on cash.
Because it doesn’t balance, there needs to be some explanation for the missing $5. Oh yeah… it was because this person gave you a coupon for a $5 discount. So you record this on the left side as a discount on the sale. And then you have balance again as the accounts added together – sales (right hand side of $10), cash (left hand side $5) and discount on sale (left hand side $5) balance.
Double entry bookkeeping helps to keep your records accurate by enforcing the need for balance. Imagine if there wasn’t double entry? There would be errors that wouldn't be able to be detected and missing explanations for things.
Double entry bookkeeping means recording financial information in a way where there are entries both on the right and the left side of an account. This is to help pick up errors and also helps to make sure your accounts are accurate.