How Double-Entry Bookkeeping Works
The difference between having financial information and safety and the lack of it in any business is largely determined by the practice of financial bookkeeping. Financial transactions should be accurately recorded when they occur. The common systems of bookkeeping include single-entry and double-entry bookkeeping. In double-entry bookkeeping, every financial transaction has an effect on the debit and credit of the business and as such must be recorded appropriately in both the debit and credit columns. For example, if a business bought goods worth $1,000, it must debit its account as having spent $,1000 while at the same time credit its account as having received goods or assets worth $1,000. It is this practice that gives it its name as a double-entry. In a double-entry bookkeeping system, the sum total on the debit columns and the sum total on the credit columns must be similar in value.
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Daily Records
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In well-organized business organizations, a book or document noting every financial transaction is produced. The first step in double-entry bookkeeping therefore involves the jotting down of all the daily financial transactions into the relevant day books or journals. A cash transaction will have a cash book. A check transaction will have a checkbook. A credit allowance will have an invoice book and so on. As a result, all sources of financing and the use of that finance will be captured in journals according to the day and often the time it happened.
Debit Entries
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Double-entry bookkeeping involves gathering and combining all debit entries from the various journals or day books into one book with two columns. The first column is the debit column, which is tabulated on the left side of the book. On this column, all entries that involved the use or spending of finances are written down. This column will therefore have all expense or liabilities decreased by the individual or the business from such records as obtained from the petty book, cash book and checkbook. Expenses like payment of salaries or buying of assets are tabulated here.
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Credit Entries
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The next step in double-entry bookkeeping involves gathering and combining all credit entries from the various journals or day books into the second columns of the book, which is on the right-hand side. On this column, all entries that involved the receiving of finances are written down. This column will have all funds received or assets increased by the individual or the business, such as those obtained from the various financial books. The credit column may have funds received from sales or loans.
Balancing
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The last step in double-entry bookkeeping involves the balancing of the debit and the credit columns. Calculate all the amounts that appear on the debit column and record the total. Do the same with the credit side, recording the totals. The two columns must or should have the same amounts on each side. If the two columns are not of equal amounts, it means that there is an error somewhere in the double-entry process. This error could be the result of not correctly calculating the figures or omitting to put an entry either on the debit or credit column.
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