Double-entry bookkeeping: Guide for your small business

Published Friday 5 December 2025

Table of contents

• What is double-entry bookkeeping?
• Why use double-entry bookkeeping?
• Basic rules of double-entry bookkeeping
• Types of accounts in double-entry bookkeeping
• Understanding the key principles of double-entry bookkeeping
• How does double-entry bookkeeping work?
• Tax considerations for double-entry bookkeeping
• Resources and tools for double-entry bookkeeping
• Implement double-entry bookkeeping in your business today
• FAQs on double-entry bookkeeping

Key takeaways

• Implement double-entry bookkeeping to record every financial transaction twice—once as a debit and once as a credit—ensuring your books always balance and automatically detecting errors when debits don't equal credits.

• Organize your business transactions into five main account types: assets (what you own), liabilities (what you owe), equity (owner's stake), income (revenue earned), and expenses (costs incurred) to create a complete financial picture.

• Apply the fundamental rule that total debits must equal total credits for every transaction, using the accounting equation Assets = Liabilities + Owner's Equity to maintain accurate and balanced financial records.

• Utilize modern accounting software to automate the double-entry process while understanding that debits increase asset and expense accounts but decrease liability and revenue accounts, with credits working in the opposite way.

What is double-entry bookkeeping?

Double-entry bookkeeping is an accounting method that records every financial transaction twice – once as a debit and once as a credit. This dual recording system gives you a complete view of how each transaction affects your business finances and helps prevent errors in your books.

Here's how it works in practice:

• Recording expenses: When you buy supplies, you record the expense and how it reduces your bank balance
• Making loan payments: You record both the payment leaving your account and the reduction in what you owe
• Processing sales: You record the income and where the money goes (bank account or accounts receivable)

For more on the fundamentals, read our guide on How to do bookkeeping.

Why use double-entry bookkeeping?

While single-entry bookkeeping can work for very simple businesses, most growing businesses rely on the double-entry method. It's the global standard for a reason. It gives you a complete and accurate picture of your finances so you can make confident decisions.

The main benefits include:

• Improved accuracy: Because the books must always balance, it's easier to spot errors and prevent fraud
• Complete financial picture: You can see not just your income and expenses, but also what your business owns (assets) and what it owes (liabilities)
• Better reporting: It allows you to create essential financial statements like the balance sheet and profit and loss statement, which are often required for loans or investors

Basic rules of double-entry bookkeeping

Double-entry bookkeeping is built on a few core rules that ensure your accounts stay balanced. Every transaction affects at least two accounts, with one being debited and the other credited.

The three golden rules to remember are:

• Debit the receiver, credit the giver
• Debit what comes in, credit what goes out
• Debit all expenses and losses, credit all income and gains

The most important rule is that for every transaction, the total debits must equal the total credits. This keeps your accounting equation in balance.

Types of accounts in double-entry bookkeeping

Your business transactions are organised into different accounts. Together, these accounts make up your chart of accounts, which is the foundation of your financial records. There are five main types:

• Assets: What your business owns, like cash in the bank, equipment, and money owed to you (accounts receivable)
• Liabilities: What your business owes, such as loans, credit card balances, and bills to suppliers (accounts payable)
• Equity: The owner's stake in the company. It's what's left after you subtract liabilities from assets
• Income (or Revenue): Money your business earns from sales of goods or services
• Expenses: Costs incurred to run the business, like rent, salaries, and marketing

Understanding the key principles of double-entry bookkeeping

Duality is the core principle of double-entry bookkeeping. Every business transaction affects your finances in two ways.

Common examples:

• Taking a loan: Increases your cash but also increases your debt
• Making a sale: Increases your revenue but decreases your inventory
• Buying equipment: Decreases your cash but increases your business assets
• Paying bills: Decreases your cash but also decreases what you owe

This dual recording supports the accounting equation: Assets = Liabilities + Owner's Equity.

Here's why this matters:

• Automatic error detection: If your debits don't equal credits, the equation won't balance
• Financial accuracy: Balanced books mean reliable financial reports
• Clear business picture: Shows exactly what you own, owe, and have invested

Your balance sheet uses this equation to display your complete financial position at any point in time.

How does double-entry bookkeeping work?

Traditional double-entry bookkeeping uses journals and ledgers to track transactions systematically.

The process involves three steps:

1. Record in journals: Each account type (bank, expenses, loans) has its own journal where you log transactions
2. Post to the ledger: Transfer journal entries to a master ledger that summarises all account balances
3. Balance the books: Check that total debits equal total credits – if not, there's an error to fix

Modern accounting software automates this entire process, but understanding these steps helps you grasp how double-entry works.

Read the chapter on double-entry bookkeeping in the Xero bookkeeping guide for a step-by-step overview.

Recording transactions

Recording transactions requires entries in at least two accounts with the date and description.

Basic recording rules:

• Debits increase: Asset accounts and expense accounts
• Debits decrease: Liability accounts and revenue accounts
• Credits increase: Liability accounts and revenue accounts
• Credits decrease: Asset accounts and expense accounts

Example: $100 credit card sale with $7 processing fee

Transaction breakdown:

• Credit to sales: $100 (increases revenue)
• Debit to bank account: $93 (increases cash assets)
• Debit to expenses: $7 (increases processing costs)

Result: $100 credits = $100 debits (balanced entry)

Posting to the ledger

Once you've recorded the transactions in their respective journals, you put everything into the ledger. The ledger organises transactions into the following categories: revenue, expenses, liabilities, assets, and equity. You can clearly see the balance of each ledger account.

Continuing the credit card sale example:

• You note $100 as a credit to revenue
• Then, you note a $7 debit to expenses
• And then note a $93 debit to assets

If you generate a profit and loss statement with these numbers, you'll see $100 in revenue, $7 in expenses, and $93 in profit. On the balance sheet, this information is shown as $93 in assets.

Debits and credits

Debits and credits are the cornerstone of double-entry bookkeeping. As noted above, every transaction has a dual effect on your business, and to keep the books balanced, the total amount debited must equal the total amount credited.

Debit and credit rules:

Debits increase:

• Asset accounts (cash, equipment, inventory)
• Expense accounts (rent, utilities, supplies)

Credits increase:

• Liability accounts (loans, accounts payable)
• Revenue accounts (sales, service income)
• Equity accounts (owner investments, retained earnings)

Tax considerations for double-entry bookkeeping

The tax regulations in your area may dictate the type of bookkeeping your business needs to use, but even in cases where you aren't required to use double-entry, you may still benefit from its advantages.

The Australian Taxation Office (ATO) requires businesses to keep their accounting records for at least five years, and this retention period generally starts from when you prepared or obtained the record or completed the transaction, whichever is later. If you face an audit, you will need to show your records, and it's important to note that different organisations have different requirements; for example, the Australian Securities & Investments Commission (ASIC) requires companies to keep financial records for at least 7 years. Depending on your revenue, assets, or other factors, the ATO may require you to use double-entry bookkeeping.

Resources and tools for double-entry bookkeeping

Accounting software like Xero automates double-entry bookkeeping for you. For instance, if you connect your bank account, you simply classify each transaction as revenue or an expense, and then, the system automatically makes the corresponding double-entry for you.

When you're dealing with confusing entries such as setting up a loan or entering a capital asset, the software prompts you to make the correct entries. There are also apps that can automate various aspects of the process by syncing with your point-of-sale, bank, or other systems.

Implement double-entry bookkeeping in your business today

Double-entry bookkeeping can seem complex at first, but once you set it up it gives you a clear, thorough view of your business finances. An adviser can help you set up the system so that it’s easy for you to use. Use the Xero advisor directory to find an adviser who can help with your small business accounting and bookkeeping.

FAQs on double-entry bookkeeping

Here are answers to some common questions about double-entry bookkeeping.

What's the difference between single-entry and double-entry bookkeeping?

Single-entry bookkeeping records each transaction once, usually as either income or an expense. It's like managing a chequebook. Double-entry bookkeeping records each transaction in two accounts, showing not just cash flow but also changes in assets and liabilities. This provides a more complete and accurate financial picture.

What are accounts receivable and payable in bookkeeping?

Accounts receivable is an asset account that tracks money owed to your business by customers. Accounts payable represents money you owe suppliers and appears as a liability on your books.

When you receive a bill:

• Debit: Expense account (increases costs)
• Credit: Accounts payable (increases what you owe)

When you pay the bill:

• Debit: Accounts payable (decreases what you owe)
• Credit: Bank account (decreases cash) or Credit: Line of credit (increases debt if using credit)

Do I need an accountant for double-entry bookkeeping?

While you can manage double-entry bookkeeping on your own, especially with user-friendly software like Xero, an accountant or bookkeeper can be a great help. Setting up double-entry bookkeeping starts with creating a chart of accounts – your business’s financial roadmap.

Essential account categories:

• Assets: Cash, bank accounts, equipment, inventory
• Liabilities: Loans, credit cards, accounts payable
• Revenue: Sales, service income, other earnings
• Expenses: Rent, utilities, supplies, marketing costs
• Equity: Owner investments, retained earnings

You can add accounts as your business grows and needs change.