Double-Entry Accounting: What It Is and Why It Matters

The double-entry system protects your small business against costly accounting errors.
Billie Anne Grigg
Hillary Crawford
By Hillary Crawford and  Billie Anne Grigg 
Updated
Edited by Ryan Lane

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Double-entry accounting is a bookkeeping system that requires two entries — one debit and one credit — for every transaction. Your books are balanced when debits and credits zero each other out. Unlike single-entry accounting, which focuses on tracking revenue and expenses, double-entry accounting also tracks assets, liabilities and equity.

The accounting system might sound like double the work, but it paints a more complete picture of how money is moving through your business. And nowadays, accounting software manages a large portion of the process behind the scenes.

What is double-entry accounting?

Double-entry accounting describes how a bookkeeper records a business’s transactions: Every transaction produces a debit in one account and a credit in the other. Together, they represent money flowing into and out of your business.

Credits increase revenue, liabilities and equity accounts, whereas debits increase asset and expense accounts. Debits are recorded on the left side of the general ledger and credits are recorded on the right. The sum of every debit and its corresponding credit should always be zero.

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QuickBooks

QuickBooks Online

NerdWallet Rating 
5.0
Annual Fee 

$0

How do debits and credits work with double-entry accounting?

Here’s a breakdown of how debits and credits affect each account:

Account type

Debit

Credit

Assets

Expenses

Revenue

Liabilities

Equity

This equation is at the heart of double-entry accounting:

Assets = Liabilities + Equity.

Liabilities and equity affect assets and vice versa, so as one side of the equation changes, the other side does, too. This helps explain why a single business transaction affects two accounts (and requires two entries) as opposed to just one.

For example, when you take out a business loan, you increase (credit) your liabilities account because you’ll need to pay your lender back in the future. You simultaneously increase (debit) your cash assets because you have more cash to spend in the present.

What’s the difference between single-entry and double-entry accounting?

Unlike double-entry accounting, single-entry accounting doesn’t balance debits and credits. Instead, each transaction affects just one account and results in only one entry (as opposed to two). The method focuses mainly on income and expenses and doesn’t take equity, assets and liabilities into account the same way that double-entry accounting does.

Here are some other main differences between single-entry and double-entry accounting:

Single-entry accounting

Double-entry accounting

Tracking

Tracks revenue and expenses.

Tracks assets, liabilities, equity, revenue and expenses.

Entries

One entry per transaction.

Two entries per transaction.

Accounting errors

Prone to mistakes.

Reduces accounting errors.

Process

Can be handwritten or maintained in a spreadsheet.

Should be used with accounting software.

Insight

Can’t produce much insight beyond a profit and loss statement.

Can provide valuable insight into a company’s financial health.

Best for

Sole proprietors, freelancers and service-based businesses with very little assets, inventory or liabilities.

All small businesses with significant assets, liabilities or inventory.

Single-entry accounting example

Single-entry accounting is like keeping a cash book. Entries generally include a date, description, amount and remaining balance. Let’s say you paid rent and received a loan from the bank in June 2023. You started out the month with $50,000 in your business bank account. Here’s how the entries might look:

Date

Description

Revenue

Expenses

Balance

6/1/23

Starting balance

$50,000

6/2/23

Received bank loan

$20,000

$70,000

6/15/23

Paid rent

$3,000

$67,000

It looks like your business is $17,000 ahead of where it started, but that doesn’t tell the whole story. You also have $20,000 in liabilities, which you’ll have to pay back to the bank with interest. This is why single-entry accounting isn’t sufficient for most businesses.

Double-entry accounting example

You’re in the same situation as above, but using a double-entry accounting system instead of single-entry. Here’s what it might look like:

Date

Description

Account

Debit

Credit

6/2/23

Received bank loan

Cash (assets account)

$20,000

Loans payable (liabilities account)

$20,000

6/15/23

Paid rent

Rent (liabilities account)

$3,000

Cash (assets account)

$3,000

Now, you can look back and see that the bank loan created $20,000 in liabilities. It’s also apparent that rent money came from your cash account. Money flowing through your business has a clear source and destination.

Double-entry accounting software

Most modern accounting software, like QuickBooks Online, Xero and FreshBooks, is based on the double-entry accounting system. When you enter your transactions into the software — typically using a form that looks like a check, invoice or bill — the second part of the transaction automatically happens behind the scenes as part of the software’s programming.

If you’re not sure whether your accounting system is double-entry, a good rule of thumb is to look for a balance sheet. If you can produce a balance sheet from your accounting software without having to input anything other than the date for the report, you are using a double-entry accounting system.

Here are NerdWallet’s top picks for double-entry accounting software for small businesses:

Accounting software

Pricing

Best for

$30 per month and up.

Overall accounting software.

$15 per month and up.

Unlimited users.

Free and up.

Mobile-first features.

$19 per month and up.

Freelancer-friendly features. (Least expensive plan does not include double-entry accounting reports.)

Free.

Free, unlimited invoicing.

$1,481 per year and up.

Industry-specific features.

Frequently asked questions

In a double-entry accounting system, every transaction impacts two separate accounts. For example, let’s say your business pays a $300 utilities bill. In that case, you’d debit your liabilities account $300 and credit your cash account $300.

Whereas single-entry accounting focuses mainly on income and expenses, double-entry accounting also factors in liabilities, assets and equity to give you a more complete overview of your business’s financial standing.

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Best Accounting Software for Small Businesses
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QuickBooks

QuickBooks Online

NerdWallet Rating 
5.0
Learn more

on QuickBooks' website

$30/month 

Additional pricing tiers (per month): $60, $90, $200.

50% off 

for first three months or free 30-day trial.

Learn more

on QuickBooks' website

Xero

Xero

NerdWallet Rating 
5.0
Learn more

on Xero's website

$15/month 

Additional pricing tiers (per month): $42, $78.

30-day free trial 

or monthly discount (terms vary).

Learn more

on Xero's website

Zoho Books

Zoho Books

NerdWallet Rating 
4.5
Learn more

on Zoho Books' website

$0 

Additional pricing tiers (per month): $20, $50, $70, $150, $275.

14-day free trial 

of the Premium plan.

Learn more

on Zoho Books' website

FreshBooks

FreshBooks

NerdWallet Rating 
4.5
Learn more

on FreshBooks' website

$19/month 

Additional pricing tiers (per month): $33, $60, custom.

30-day free trial 

or monthly discount (terms vary).

Learn more

on FreshBooks' website