Recording transactions right (double entry)

An integral principle of budgeting according to the financial statements is double-entry accounting. If done correctly, the double entries ensure that both sides of the balance sheet equation always match.

The double-entry principle states that each business transaction should always be recorded in two places in the financial statements. In other words, each transaction will always have two effects on the company’s books.

The calculations for the cash flow and retained earnings statements can be set up so that they automatically adjust numbers based on the first entry.

Most transactions are cash transactions, i.e. where the first entry is on the cash account, and the second entry goes to the relevant category.

Below are examples of how transactions are entered into the financial statements. We use the balance sheet equation to illustrate these examples.

Example: A supplier delivers a service/good and you pay the supplier $200 in the same period

Example: You sell a good/service to a customer for $500. They pay $400 this period and $100 next period

If you cannot get both sides of your balance sheet equation to match, some transaction has been recorded incorrectly.

Double-entry in accounting tools

Popular accounting tools such as Quickbooks, Xero, Sage Intacct, and Oracle NetSuite adhere to double-entry bookkeeping. When you import and categorize your bank statements, the transactions are automatically posted to the cash account, and the second entry occurs in the account of your choosing.

If you wish to add transactions that have not resulted in a cash transaction (and therefore are not imported via your bank), you can input journal entries.