Given the importance of financial accounting in modern economies, it's hard to imagine how a business would fare without a sound, state-of-the-art double-entry accounting system. In a global marketplace where businesses process millions of transactions every year, the system offers a welcome reprieve to corporate accounting managers eager to record and report economic events on time.
Double-entry accounting is the foundation of modern-day business record keeping. It sets the rules that corporate bookkeepers must follow when posting economic events. All accounting standards, including those in effect in the nonprofit arena, recommend that bookkeepers use the double-entry accounting method. In this method, each transaction affects two separate accounts, one on the debit side of the general ledger and another on the credit side. A general ledger is a two-faceted accounting form that features credits and debits. The ledger often has subsidiary ledgers, or sub-ledgers, to allow bookkeepers to record transaction details.
A double-entry accounting system consists of tools, equipment and state-of-the-art computer software a company relies on to record its transactions. In a modern business environment where innovation and technology are the order of the day, businesses invest substantial amounts to design or purchase good systems. With adequate double-entry accounting software, a company can accurately record its economic events and enable financial managers to validate the correctness of recorded data. The tools of the trade include financial analysis software, bookkeeping programs, and financial accounting and reporting applications.
Bookkeeping enables an organization to effectively use its double-entry accounting system to record transactions in real time. The business does so through journal entries in financial accounts, which run the gamut from assets and liabilities to equity, revenues and expenses. A bookkeeper, or junior accountant, debits an asset or expense account to increase its worth and credits the account to reduce its amount. The junior accountant records the opposite entry for a revenue, liability or equity account. These entries abide by double-entry accounting rules, such as generally accepted accounting principles and international financial reporting standards.
A company that conforms to double-entry accounting standards is more likely to prepare and publish accurate financial statements. This shows potential investors that top leadership is serious about putting into place sound procedures and systems for long-term profitability. State-of-the-art double-entry accounting systems enable organizations to be forthcoming with performance data, generally by revealing four sets of data summaries. These include statements of financial position, statements of profit and loss, statement of shareholders' equity and statements of cash flows. "Statement of financial position," "statement of financial condition" and "balance sheet" are identical terms.
- GNU Cash: Understanding Double-Entry Accounting
- State of Indiana: Chapter 12: Double-Entry Accounting System
- Indian Council of Forestry Research and Education: Accounting Manual on Double-Entry System of Accounting for ICFRE
- State of New Jersey: Comprehensive Financial System Instructional Manual (PDF)
Marquis Codjia is a New York-based freelance writer, investor and banker. He has authored articles since 2000, covering topics such as politics, technology and business. A certified public accountant and certified financial manager, Codjia received a Master of Business Administration from Rutgers University, majoring in investment analysis and financial management.