What is double-entry bookkeeping?

Double-entry bookkeeping is a highly regarded and widely used method for recording the financial dealings of businesses. In this article, we’ll discuss the ins and outs of how it works in theory, how to manage it in practice, and the pros and cons to consider. 

What is a double-entry bookkeeping system?

A double-entry bookkeeping system is a very common accounting system generally used as standard practice, especially by larger companies. It’s been around for a very long time — definitely as early as the 1300s, and perhaps even before then! 

The idea behind this system is in its name: for every business transaction that takes place, you record it in your accounts at least twice. Anything you record in one account must have an equal and opposite entry in another account. For example, if you gain money from taking out a loan, you record not only the increase in cash but also the debt you now owe. 

In fact, double-entry bookkeeping is where the phrase “balance the books” comes from. Ultimately, it’s all about achieving balanced transactions across your accounts. 

We’ll get into the details shortly, but first let’s take a quick look at the alternative.

Double-entry bookkeeping vs single-entry bookkeeping

The alternative to double-entry is single-entry bookkeeping. In this system, transactions are recorded only once. For example, if the bank gave your business a loan in January, you’d record the increase in cash only. If you paid the loan back in December, you’d record the outgoings then. You wouldn’t record the need to pay back the loan in January, as you would with double-entry bookkeeping.

Single-entry accounting is certainly easier than double-entry. This means it might be a good fit for small businesses dealing with simpler transactions. But it doesn’t give as clear a financial picture as double-entry bookkeeping does. 

How does double-entry bookkeeping work?

Double-entry bookkeeping explained 

To understand the main principles, we need to cover three things: the types of account, the accounting equation, and debit vs credit. 

What are the account types?

There are five main types of account:

• Assets: These are anything your business owns or is owed, for example cash, property, equipment, and owed payments. 

• Liabilities: These are anything your business owes, for example taxes, loan repayments, and accounts payable. 

• Revenue: The money coming into your business, i.e. your income, most commonly from sales. 
• Expenses: The money leaving your business, i.e. your spendings, for example on wages and supplies.

• Equity: The value of your business. 

Also read: Accounts payable: What you need to know

Equity is definitely the trickiest one, so here we’ll take a deeper look. Equity is the capital that shareholders have invested into the business, balanced against the amount you pay these shareholders back in dividends, plus accumulated retained earnings, i.e. your profit. And profit = your total revenue minus your total expenses. So equity can be summarised as follows:

Equity = Owner’s Equity (shareholder investments) — Dividends (payments to shareholders) + Retained Earnings (Revenue — Expenses)

This calculation for equity will become important later when we look at the accounting equation.

All your business transactions can be divided into these five main accounts. Each account will be further divided into various sub-accounts depending on your business. For example, under assets you might have a sub-account called property. Under expenses, you might have one called wages. 

Accounting equation vs traditional approach

The division of accounts discussed above is called the accounting equation or the “American approach”. We’ll focus on this approach because the accounting equation is an important piece of the puzzle in double-entry bookkeeping. 

But it’s worth briefly noting there’s also the traditional or British approach, which organises accounts a bit differently. 

• Real accounts: These relate to your assets, liabilities, and owner’s equity.
• Personal accounts: These relate to individuals or organisations you have transactions with, for example suppliers and customers. 
• Nominal accounts: These relate to your revenue and expenses, as well as gains and losses.

What’s the accounting equation?

Now that we’ve covered the different accounts, we need to do some maths. Double-entry bookkeeping is all about balance. And this balance is achieved through the accounting equation:

Assets = Liabilities + Equity

In other words, everything you own must equal everything you owe (your debts and any investments into your business).

But as we’ve seen, equity can be broken down further. So if we combine the two equations, we get the following:

Assets = Liabilities + Owner’s Equity – Dividends + Revenue – Expenses

And because maths is clever and allows us to rearrange equations, we can rejig it to look like this:

Dividends + Expenses + Assets = Liabilities + Owner’s Equity + Revenue 

A handy way to remember this equation is with the mnemonic DEALER. Remember that dividends, expenses, and assets are on the left side of the equation, and liabilities, owner’s equity, and revenue are on the right. This is helpful when thinking about debiting and crediting your accounts.

How do debits and credits work in double-entry bookkeeping?

A simple way to think about debits (dr) vs credits (cr) is that credits are where your money comes from, while debits are where your money goes. 

Your money comes from the liabilities you take on, the investment of your shareholders (owner’s equity), and the revenue from your business (the LER part of DEALER). Your money goes towards what you pay back to shareholders (dividends), what you pay out in expenses, and your accumulation of assets (the DEA part).

This is where our handy DEALER equation comes in. If your dividends, expenses, or assets (i.e. the left-hand side) increase, you debit these accounts. If they decrease, you credit them. On the flipside, if your liabilities, owner’s equity, or revenue (i.e. the right-hand side) increase, you credit these accounts. If they decrease, you debit them. 

When you record transactions, you do this by either debiting or crediting your accounts. Think of your accounts like the shape of a T, with the account name written along the top and a line down the middle. Debits always go on the left and credits always go on the right.

Let’s take a look at some examples.

Double-entry bookkeeping examples

Example 1

A shareholder invests £500 into your business. Cash is an asset, so your assets have increased. You therefore debit your cash sub-account with £500. At the same time, your owner’s equity has also increased. You therefore credit your owner’s equity account with £500. Both accounts have increased, but you debit one and credit the other in the accounting equation.

Example 2

You pay back a bank loan of £1,000. This is a decrease to your assets, so you credit your cash sub-account £1,000. At the same time, your liabilities have decreased because you no longer owe this money. So, you debit your loans payable sub-account £1,000. 

How to manage double-entry bookkeeping

Is double-entry bookkeeping hard? Well, it’s not the easiest— but now we know how the theory works, we can take a look at managing this method of bookkeeping in practice. 

Daybooks, journals, T-accounts, and ledgers

You’ll need a few different documents to record transactions:

• Daybooks/Journals: Daybooks, also called journals, are where you record all transactions that happen in the course of a day. Make sure you capture them in full detail so you have a papertrail. Think about which accounts will be affected by each transaction and how. 

• Ledgers/T-accounts: Ledgers are your accounts and sub-accounts. As we mentioned above, these are shaped like a T, hence why they’re also called T-accounts. You record your transactions in these accounts — debits on the left and credits on the right. You can also merge some transactions together to help streamline your ledgers. For example, you might just record total revenue for a day, rather than each individual sale.

• Accounts/General ledger: This is the summary of all your accounts and financial transactions. Your total debits should balance against your total credits. 

Financial statements

If your business produces financial statements, it’s easy to translate the information from your double-entry accounts into these statements. For example: 

• Balance sheet: This presents your assets balanced against your liabilities and your equity to show your overall financial position. 

• Income statement: Also called the profit and loss statement, this presents your revenue minus your expenses to show whether you’ve made a profit or a loss, and by how much.

Also read: How to calculate turnover for your company

Outsourcing double-entry bookkeeping

Many businesses choose to outsource their double-entry bookkeeping, which is understandable given its complexity. A professional bookkeeper can make the whole process much easier. If you decide not to outsource, it might be beneficial to invest in some software to make your bookkeeping process simpler and more accurate.

What are the advantages of double-entry bookkeeping?

Even though it’s a complicated system, there’s a reason double-entry bookkeeping has been so widely adopted. In fact, there are several:

• Error and fraud detection: Double-entry accounting provides a natural check and balance for all your bookkeeping. Your total debits should match your total credits. If they don’t, there’s an error somewhere. It’s also harder for people to get away with fraud, as it’s more difficult to slip dodgy dealings under the radar. 

• Financial big picture: Double-entry bookkeeping provides a complete picture of the financial state of your business. It doesn’t just show what you currently have and past transactions, but also future transactions and how they’ll affect you.

• Decision-making: This comprehensive picture makes decisions easier because you have a better understanding of the financial health of your business. Looking to expand or diversify? The double-entry system will give you a clearer idea about whether that’s really possible. 

• Loans and investments: Similarly, companies that use double-entry bookkeeping might find it easier to attract investors or secure loans from banks. They can see your financial health and have more confidence in their investment. 

• Financial statements: The double-entry accounting system makes producing financial statements easier because you’ve done much of the work already. 

What are the disadvantages of double-entry bookkeeping?

While there are plenty of positives, double-entry accounting isn’t without its flaws:

• Complex: The most obvious con is that double-entry is more complicated than single-entry. It can take a long time to understand all the different accounts, how debiting and crediting works, and so on. 

• Time-consuming: Because of its complexity, and because everything needs to be recorded at least twice, double-entry bookkeeping takes longer than single-entry. 

• Expensive: Many companies choose to outsource this type of bookkeeping to a professional, but this can be pricey. 

• Not foolproof: Double-entry bookkeeping doesn’t guarantee against errors or fraud. It certainly makes them less likely, but nothing in life is foolproof! 

Quickfire summary

Double-entry bookkeeping is a time-tested accounting method that’s been helping businesses stay financially organized for centuries. The core idea is beautifully simple: every transaction gets recorded twice to keep everything balanced. This creates a natural system of checks and balances that makes errors easier to spot and gives you a complete picture of your business’s financial health.

While it’s more complex than single-entry bookkeeping and takes more time to master, the benefits are compelling. You’ll have better fraud protection, clearer decision-making insights, and likely an easier time attracting investors or securing loans. Many businesses find the investment in professional help or good software worthwhile, as the system’s built-in accuracy checks and detailed reporting capabilities make it the gold standard for serious financial management.

Also read:

• What to know about your business tax account
• Continuous payment authority: Everything you need to know
• Making Tax Digital: everything you need to know