WTF (What the Finance) is double-entry accounting and why do I need it?
Wow great questions! Do you feel super overwhelmed when it comes to accounting? What with all the numbers, fancy lingo, and the fear of getting audited or losing out on hard earned money?
Okay, sure, accounting can seem pretty intimidating but if we take it step-by-step you’ll find it’s much simpler than you think!
Alright, so double-entry accounting. That sounds like something you shouldn’t be doing right? Like something you would get audited for? Well actually, it’s just fancy accounting talk for keeping track of money and assets in your business.
Whether you’re bringing in money or goods into your business, there’s always a two-way transaction. To bring in goods, you need to spend money. To bring in money, you would have to provide goods or services. Double-entry accounting is the system for tracking the two-way transaction.
Double-entry accounting just means that you’re not only tracking the money going out of your business but also the value of the assets coming into it. So that computer you’re working on, as well as other assets and inventory you’ve acquired for you business, is providing value for the overall financial status of your business. Even though it’s not physical money, it represents added value for your biz.
For example, if you spend $1,500 on a new computer for your business, yes, you’re spending $1,500 but you’re also gaining $1,500 in value for your business through your computer. Double-entry accounting tracks both the incoming and outgoing of money and assets in your business.
Another example would be if you sell goods. If you were to sell a $50 sweatshirt, there would be $50 coming into your bank account but also $50 worth of merchandise leaving your inventory.
See how it all checks out?
It’s essentially a check and balance to make sure that the financial status of your business is accurately reflected which is especially helpful come tax time.
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Need help understanding write-off’s for your business? Read my previous post with some tasteful Seinfeld references:
Do I need to do double-entry accounting?
That depends. If your a solopreneur, freelancer, independent contractor, etc. like me, then probably not. This is a more helpful tool for people growing their businesses.
So if you consider yourself a small business, have employees, hire independent contractors, etc. then this is essential to making sure your accounts are updated and will give you a much clearer idea about the status of your business’s finances which helps when you purchase insurance or if you decide to sell your business down the line. It’s always a good idea to have a record of the performance of your business to keep track of its health and profitability over time.
That seems like a lot of work.
Sure, if you don’t have accounting software and are trying to keep track of everything on spreadsheets, you’re just asking to have a mental breakdown.
No need to panic! If you don’t already have accounting software, you can try using Freshbooks. [Full disclosure: I am an affiliate for Freshbooks. I recommend their product to you because I get incredible value from their services, not because of the commission I receive if you choose to subscribe to their services through my links.]
Freshbooks makes it really easy to track your time, expenses, and has built-in double-entry accounting tools!
Check the software you currently use to see if they have these simple to use tools, and if they don’t, consider switching over to my preferred accounting software.