Understanding how double-entry bookkeeping works

You may have heard the term double-entry accounting/bookkeeping. This means that, for every financial transaction that you record, there are at least two entries—a debit and a credit. This ensures that both sides of the accounting equation always remain in balance.

The accounting equation is as follows:

Assets = Liabilities + Owner's Equity

Let's look at the following example.

Let's say a T-shirt owner goes out and purchases $100 of T-shirts from a supplier. They don't pay for the T-shirts right away, but the supplier will send a bill later on. For this transaction, inventory increases by $100 and liabilities increase by $100. Since both assets and liabilities increased, our books remain in balance.

The impact of this transaction on the accounting equation is as follows:

Assets = Liabilities + Owner's Equity
$100 = $100 + $0

Behind the scenes in QuickBooks, the following journal entry would be recorded for this transaction:

Financial Impact	Account	Amount
Debit (Dr.)	Inventory (T-Shirts)	$100
Credit (Cr.)	Accounts Payable	$100

 

In this section, we have covered the seven main areas of focus for managing the books for your business: money coming into your business in the form of sales to customers; money going out of the business for expenses such as office supplies and rent; inventory and fixed asset purchases, and how to record them on your books; money you owe to suppliers and creditors (liabilities); how to manage the chart of accounts; the two accounting methods (cash-basis versus accrual); and how double-entry bookkeeping works.