What is double-entry bookkeeping?
One speaks of double-entry bookkeeping because in a financial accounting system, every business transaction is recorded twice.
Financial Statement Overview
Financial statements include, among others, the balance sheet and the income statement, also called profit and loss statement. While the balance sheet is made up of the assets, the liabilities, and the equity capital (= difference between the assets and the liabilities), the income statement includes a company’s expenses and revenues. The difference between these latter results in a profit or a loss. Each account of the balance sheet and income statement is, in turn, divided into two sides: a debit and a credit.
Double-entry bookkeeping: how and why?
To ensure that the balance sheet is balanced, each posting record is recorded twice, once in the debit of an account and once in the credit of another account. In other words, it shows once what the money was used for (e.g., purchase of goods) and once where the money came from (e.g., bank account).
Double-entry bookkeeping allows to demonstrate the success of a business in two ways:
- By comparing the changes in assets and liabilities in the balance sheet (=change in equity; increase or decrease).
- By comparing income and expenses in the income statement (=profit or loss).
Note that in double-entry accounting, there is a profit or loss in both the balance sheet and the income statement; this must always be the same in the balance sheet as in the income statement. Otherwise, something must be wrong in the double-entry bookkeeping. The problem is often rooted in one-sided bookings.
Do you have any innovative business idea you would like to make come true? Use STARTUPS.CH experts to become self-employed.
Get started as Mompreneur: www.mom-preneur.ch/en/home
Get started as Dadpreneur: www.dad-preneur.ch/en/home
Get started as Seniorpreneur: www.senior-preneur.ch/en/home
Get started as Youngpreneur: www.young-preneur.ch/en/home
