Reasons For & Advantages of Double-Entry Bookkeeping
Accurate bookkeeping is essential to the success of any company. Two common forms of bookkeeping exist: single-entry bookkeeping and double-entry bookkeeping. Single-entry bookkeeping allows for one entry per transaction occurring within a company. Every transaction in double-entry bookkeeping is two-fold -- a debit and a credit. There are advantages to using double-entry bookkeeping, such as the ability to prepare financial statements. Double-entry bookkeeping helps minimize errors and is beneficial in preparing reports for external use.
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Recognize Profitability
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The ability to recognize your company's profitability is one reason to use double entry bookkeeping. Double-entry bookkeeping allows you to easily assess your firm's profits and losses. You can see exactly where your sales are coming from, and, if needed, you can make adjustments to increase those sales. You also have an in-depth view of your expenses, and you can make the necessary adjustments to reduce your expenses, if possible.
Systematic Approach
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Double-entry bookkeeping is systematic, meaning that the approach is methodical and easy to learn through step-by-step instructions. The systematic approach to double-entry bookkeeping is that for every transaction, at least two entries are made. For example, if a company sells a product for $500 cash, a debit for $500 is made to the cash account and a credit for $500 is made to the sales account. This process is repeated for every transaction. After entering all entries, all debits and credits are calculated to ensure they equal. If they are not equal, an error has occurred.
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Easy Detection of Errors
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One advantage of double-entry bookkeeping is that it is easy to detect common errors made by bookkeepers or accountants. A visual inspection of simple transactions can ensure that debits and credits equal one another. More complex entries require balancing accounts with a calculator or computer software. This process is called account reconciliation. A brief explanation accompanies an entry, and this also helps prevents errors. It is important to note it is possible to have errors unchecked in double-entry bookkeeping. You could use the wrong account name when making an entry. The accounts will balance, but the transaction will cause an error during the preparation of financial statements because the entry was incorrectly classified.
Financial Statement Preparations
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Financial statements offer a snapshot of a company's financial position at any given time. Double-entry bookkeeping makes it possible to prepare financial statements accurately, because every entry has a corresponding entry. You can see the exact amount of your assets, liabilities, revenue and expenses. This allows you to easily prepare a balance sheet, income statement and cash flow statement. The ability to prepare financial statements also is helpful when dealing with external users, such as banks and investors.
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