What is double-entry accounting?
Double-entry accounting is a method in which every transaction recorded will have a corresponding entry in at least one other account. The transactions are normally opposites, meaning that if a transaction results in the increase of one account, there would also be a decrease in another account.
Here’s an example:
You own a small shipping store called Post Ops. One week, you make several purchases including 1) Shipping supplies from a wholesaler, who sends you an invoice for $2,500, 2) A printer from a retail store, using a business check to pay $400, and 3) Advertising signs and fliers, for which you paid $100 down, and will pay the remaining $400 by installments.
Now let’s take each transaction separately and apply the double-entry method to see where we would allocate each.
Scenario 1: You buy shipping supplies for $2,500, so you are increasing your Shipping Supplies Expense category, but you have to pay for them, so there will obviously be a change in another account somewhere. Since this amount is invoiced, we’ll be crediting your Accounts Payable, which means this is money you are liable for paying to someone else. This is what the entry will look like:
Shipping Supplies Expense 2,500
Accounts Payable 2,500
This entry tells you that you have increased shipping supplies by 2,500, and you’ve also increased your accounts payable balance by 2,500.
But didn’t we say the transactions should be opposites? Shouldn’t it be a decrease in Accounts Payable? The answer is no, it shouldn’t be a decrease in Accounts Payable. They ARE opposites because Accounts Payable is a liability account. An increase in a liability account means that what you owe to others is increasing, making your actual worth decrease.
Make sense? The beauty of ZipBooks is that once you tell us what you purchased and how you purchased it, we do this for you so you don’t have to worry about it!
Scenario 2: You buy a printer for $400 using a business check. So, your Office Equipment category (an asset) will increase, and since you used a check, your Cash category will decrease. This is what the entry looks like:
Office Equipment 400
This one is pretty straightforward. You bought something and paid cash for it. End of story!
Scenario 3: You buy advertising materials and the total purchase price is $500. You pay $100 cash, and the rest will be invoiced to you. So, in this case you would increase your Advertising Expense category, and decrease your Cash, but also increase your Accounts Payable. This is what it will look like:
Advertising Expense 500
Accounts Payable 400
Note: A credit in a liability account is an increase, but a credit in an asset account is a decrease. That’s why even though you’re crediting both Cash and Accounts Payable, one is increasing and the other is decreasing.
Let’s say you decide to pay off the remaining $400 all at once. This is what the entry will look like:
Accounts Payable 400