Why is Double-Entry Bookkeeping Important?

Why is Double-Entry Bookkeeping Important?

By CFO Tech Outlook | Friday, February 14, 2020

Double-entry booking offers a more authentic look at a business’s financial state than single-entry bookkeeping. One cause for this is that double-entry bookkeeping implements the matching principle.

FREMONT, CA: Double-entry bookkeeping is an accounting system that records a debit and credit for every financial transaction occurring within a company. It is seen distinctly through the employment of a T-account or the accounting equation—assets equal liabilities along with shareholders’ equity.

Double-entry bookkeeping rose in Italy and is now used globally. It is significant in maintaining an accurate financial system. Businesses benefit greatly from using double-entry accounting as it aids in accurate financial reporting and decreases errors and fraudulent activity.

Accuracy

Double-entry booking offers a more authentic look at a business’s financial state than single-entry bookkeeping. One cause for this is that double-entry bookkeeping implements the matching principle. The principle makes use of accrual accounting rules to document revenue and the expenses concerning revenue. Recording both costs and revenue offers an accurate calculation of profits and losses. They are represented on the income statement that includes accounts calculated directly from the admissions made in double-entry bookkeeping.

Error Reduction

Human errors can distort an enterprise’s financial position. Double-entry bookkeeping decreases errors because it offers checks and balances. With the development of technology, many accounting software programs mechanically offer double-entry bookkeeping when a transaction is entered. The occurrence reduces the chance that a deal is posted to the wrong offsetting account. Mistakes are easily caught with double-entry bookkeeping by ensuring debit and credit amounts equal.

Leaves an Audit Trail

Double-entry bookkeeping trims down the fraud by leaving an adult trail. An audit trail facilitates one to trace transactions from the journal entries that were updated to the general ledger. For instance, if a company’s cash balance seems too high on the balance sheet, they can trace back the transactions made to the cash account and see if it is accurate. Additionally, one can see the correct financial records affected by posting transactions. Double-entry bookkeeping also makes use of reference numbers and offers brief descriptions with each entry made.

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