You have probably heard the term “double entry accounting” but might not know what it means, or why it matters to you and your business. It is a common bookkeeping method that you or your bookkeeping services provider are probably already using.
Double entry accounting is the balancing of debits and credits and shows the value of your company. Your company’s value is equal to its liabilities plus its equity. For example, imagine that you just bought a new piece of equipment for your business. You have less cash because you spent it on the equipment (a debit), but the value of the money is not gone—it is now in the equipment that your business owns (a credit). This combination reflects the true value of your company.
Why does this matter? Your bookkeeping services professional’s job is to make sure that your books are an accurate and reliable reflection of your business, and double entry accounting helps to provide a realistic view of the worth of your company. This will become crucial if and when you’re seeking financing, presenting information to lenders, or trying to make a decision about investments. By using double entry accounting, your books reflect the worth and standing of your business as a whole.
And if you do receive a loan, you will need to be mindful that the increase in cash is also reflected on the liability side, as a loan that needs to be repaid.
If you’re doing the books for your own company, it would be wise to make sure you’re putting this principle into practice. Otherwise, check in with your bookkeeping services provider to learn more about how Double Entry Accounting is at work in your business.