Double entry accounting: How it works for your business

Published Saturday 17 January 2026

Table of contents

• What is double-entry bookkeeping?
• Single-entry vs double-entry bookkeeping
• Advantages of 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), which automatically balances your books and makes errors easier to spot when debits don't equal credits.
• Utilize accounting software like Xero to automate the double-entry process, as it creates the second entry automatically when you classify transactions, reducing manual effort while maintaining accuracy.
• Apply the fundamental debit and credit rules consistently: debits increase assets and expenses while decreasing liabilities, and credits increase liabilities and revenue while decreasing assets and expenses.
• Recognize that double-entry bookkeeping provides a complete financial picture by tracking assets, liabilities, equity, income, and expenses together, enabling you to create essential financial statements and make informed business decisions.

What is double-entry bookkeeping?

Double-entry bookkeeping is a method of recording every financial transaction twice, once as a debit and once as a credit. This dual recording system ensures accuracy and gives you a complete picture of how each transaction affects your business finances.

Here's how it works in practice:

• Recording expenses: When you buy office supplies, you record the expense and show how it reduces your bank balance
• Making loan payments: You record both the payment leaving your account and the reduction in what you owe

The key advantage of double-entry bookkeeping is accuracy and completeness: you get a full financial picture of your business with built-in error checking. Learn more about bookkeeping basics in the guide to bookkeeping.

Single-entry vs double-entry bookkeeping

Single-entry bookkeeping is where you record a transaction one time. For example, you might use a spreadsheet to record your income and expenses without making corresponding entries about how they affect your assets or liabilities. That's a single-entry system.

If you have a very simple business without any assets or loans, single-entry bookkeeping can help you stay on top of the financials. However, for most businesses, double-entry bookkeeping gives a more accurate and complete overview of your financial situation.

Most modern accounting software lets you input a single transaction, and it automatically creates the second entry in the background, giving you the benefits of double-entry without the manual effort.

Advantages of double-entry bookkeeping

Adopting the double-entry method offers a clearer, more accurate view of your business finances. It provides several key benefits that help you run your business with more confidence.

• Improved accuracy: Because the books must balance, it's easier to spot errors. If debits don't equal credits, you know something needs to be fixed.
• Complete financial picture: You get a full view of your business by tracking not just income and expenses, but also assets, liabilities, and equity. This helps you understand the real financial health of your business.
• Better reporting and analysis: Double-entry is the foundation for creating essential financial statements like the balance sheet and income statement, giving you the insights needed for smart decisions.
• Simplified tax compliance: With detailed and accurate records, preparing and filing tax returns becomes a more straightforward process, helping you meet key deadlines; for example, Canadian corporations have to file its income tax return within six months of the end of their fiscal period.

Understanding the key principles of double-entry bookkeeping

Duality is the core principle that every transaction affects your business in two ways. This dual impact maintains balance in your financial records:

• Taking a loan: Increases your debt but also increases your bank balance
• Making a sale: Brings in money but reduces your inventory levels

This dual recording supports the accounting equation: Assets = Liabilities + Equity. When entries are correct, your books balance automatically. When they're wrong, the imbalance shows you there's an error to fix.

Your balance sheet displays this relationship clearly, showing how your assets are financed through either borrowed money (liabilities) or your own investment (equity).

How does double-entry bookkeeping work?

Traditional double-entry bookkeeping uses journals and ledgers to track transactions. Here's how the process works:

1. Set up journals: Create separate journals for each account (bank, loans, expenses, assets)
2. Record transactions: Enter each transaction as both a debit and credit in appropriate journals
3. Update the ledger: Summarize all journal entries in your main ledger
4. Generate reports: Use ledger totals to create balance sheets and other financial reports

This is called balancing the books, and if they don't balance, you know that you've made a mistake somewhere in the ledgers.

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

Recording transactions

Recording transactions follows these basic rules:

• Expenses: Always recorded as debits
• Sales and revenue: Always recorded as credits
• Debits: Increase assets, decrease liabilities
• Credits: Decrease assets, increase liabilities

Each entry includes the date and any relevant notes about the transaction.

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

1. Record the sale: $100 credit to sales revenue
2. Record the deposit: $93 debit to bank account (debits increase assets)
3. Record the fee: $7 debit to processing expenses
4. Check balance: Total debits ($93 + $7 = $100) equal total credits ($100)

Posting to the ledger

Posting to the ledger organizes all journal entries into five main categories:

• Revenue: $100 credit (sales income)
• Expenses: $7 debit (processing fees)
• Assets: $93 debit (bank deposit)
• Liabilities: Any amounts owed
• Equity: Owner's investment and retained earnings

This gives you clear account balances and shows exactly where your money comes from and goes.

The result: Your financial statements show the complete picture: $100 revenue minus $7 expenses equals $93 profit. This $93 also appears as increased assets on your balance sheet, proving your books balance correctly.

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. You can learn more in the guide to 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
• Expense accounts

Debits decrease:

• Liability accounts
• Equity accounts

Credits increase:

• Liability accounts
• Revenue accounts
• Equity accounts

Credits decrease:

• Asset accounts
• Expense accounts

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 Canada Revenue Agency (CRA) requires most small businesses to use the accrual (double-entry) method of bookkeeping, but it allows farmers, fishers, and self-employed commission-based salespeople to use the single-entry system.

Make sure you understand how the tax rates in Canada affect your bottom line.

Resources and tools for double-entry bookkeeping

Accounting software like Xero makes double-entry bookkeeping a breeze. 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 takes some learning, but it is critical if you want a thorough understanding of your business finances.

An advisor can help you set up the system so that it's easy for you to use. Check out the Xero advisor directory to get help with your small business accounting and bookkeeping, or try Xero for free today.

FAQs on double-entry bookkeeping

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

What are the rules of double entry?

There are a few core rules to follow. Every transaction must affect at least two accounts to reflect the dual nature of business activities. For every transaction, the total amount of debits must equal the total amount of credits, keeping the accounting equation in balance.

What is the golden rule of double entry accounting?

The three golden rules of accounting help guide how to record transactions. They are:

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

These rules form the foundation of the double-entry system.