Double Entry Bookkeeping: How It Works for Your Business

Published Thursday 8 January 2026

Table of contents

• What is double-entry bookkeeping?
• Why use double-entry bookkeeping?
• Understanding the key principles of double-entry bookkeeping
• Types of accounts in double-entry bookkeeping
• How does double-entry bookkeeping work?
• Double-entry vs single-entry bookkeeping: which is better?
• 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 provides built-in error checking and ensures your books always balance correctly.
• Utilise modern accounting software to automate the double-entry process, as most bookkeeping platforms create the dual entries in the background when you classify transactions, eliminating manual complexity while maintaining accuracy.
• Recognise that double-entry bookkeeping is required for most New Zealand businesses that must prepare financial statements, particularly if your income and expenses exceed $30,000 annually or if you need to secure funding from lenders or investors.
• Apply the fundamental principle that debits increase assets and expenses while credits increase liabilities, revenue, and equity accounts, ensuring every transaction affects at least two accounts and maintains the accounting equation balance.

What is double-entry bookkeeping?

Double-entry bookkeeping is a system where every financial transaction is recorded twice, once as a debit and once as a credit. This dual recording shows how each transaction affects your business in two different ways, providing a complete financial picture.

Here's how it works in practice:

• Recording an expense: You record the expense itself and how it affects your bank account or credit card balance
• Making a loan payment: You record both the reduction in your bank account and the decrease in your loan balance

The double-entry method delivers two key benefits:

• Improved accuracy: Built-in error checking ensures your books balance
• Complete financial overview: See exactly how each transaction impacts your entire business

Learn more about bookkeeping basics in How to do bookkeeping.

Why use double-entry bookkeeping?

While single-entry bookkeeping tracks money coming in and out, double-entry gives you a much clearer picture of your business's financial health. It's the standard for several reasons:

• It keeps your records accurate. Because every entry must balance, it's easier to spot and fix errors. This built-in check and balance system ensures your books are always correct.
• You get a complete financial picture. You can see not just your cash flow, but also what you own (assets) and what you owe (liabilities). This helps you make smarter, more confident business decisions.
• It simplifies tax time. With a full record of your income, expenses, assets, and liabilities, preparing tax returns becomes much more straightforward, as all the necessary information is available for forms like a company's non-individual income tax return (IR4).
• It helps with funding. If you ever need a loan or want to bring on investors, they will want to see financial statements prepared using the double-entry method.

Understanding the key principles of double-entry bookkeeping

Duality is the fundamental principle of double-entry bookkeeping. Every business transaction affects at least two accounts, creating a balanced equation. For example:

• If you take out a loan you increase your debt level, but you also increase the balance in your bank account or you bring new assets into the business.
• If you make a sale, you receive money but you also reduce inventory.

The dual effect of double-entry bookkeeping also supports the accounting equation. If you enter the amounts correctly, the two entries balance each other out. If you enter the numbers incorrectly, your balance sheet will contain errors.

Your balance sheet shows all of your business's assets, liabilities, and owner's equity. It also illustrates the relationship between those three elements, which is the accounting equation: liabilities plus equity equals assets. Or to put it another way, assets minus liabilities equals owner's equity.

Types of accounts in double-entry bookkeeping

Every transaction is recorded in at least two accounts. These accounts are all listed in your chart of accounts, which is the backbone of your bookkeeping system. The five main types are:

1. Assets

These are things your business owns that have value, like cash in the bank, equipment, vehicles, or money owed to you by customers (accounts receivable).

2. Liabilities

This is what your business owes to others. Examples include bank loans, credit card balances, or bills you need to pay to suppliers (accounts payable).

3. Equity

This is the net worth of your business. It's the value of your assets minus your liabilities. It also includes the money you or others have invested in the business.

4. Income

Also known as revenue, this is the money your business earns from selling goods or services.

5. Expenses

These are the costs of running your business, such as rent, wages, marketing, and supplies.

How does double-entry bookkeeping work?

Traditional double-entry bookkeeping organises your financial records into journals and ledgers to track every transaction systematically.

Each business account gets its own journal:

• Bank account transactions
• Loan payments and balances
• Business expenses
• Asset purchases and sales

The recording process follows these steps:

1. Record the transaction: Enter it in the appropriate journal as both a debit and credit
2. Update the ledger: Summarise all account balances from your journals
3. Generate reports: Use ledger information to create balance sheets and other financial reports

Accountants call this 'balancing the books'. If your books don’t balance, you’ve made a mistake somewhere in the ledgers.

Check out the chapter on double-entry bookkeeping in our guide to get a step-by-step overview.

Recording transactions

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

Basic recording rules:

• Expenses: Always recorded as debits
• Sales and revenue: Always recorded as credits

Account effects:

• Debits: Increase assets, decrease liabilities
• Credits: Decrease assets, increase liabilities

To give you an example, let's say you made $100 in credit card sales:

1. Your payment processor sent $93 to your bank and charged you $7 in payment processing fees
2. You record $100 as a credit in your sales journal
3. Then, you record $93 as a debit in your bank account; remember, debits grow assets so even though it's a deposit, it's recorded as a debit
4. Then, you also record $7 as a debit in your expense journal

Now, you have an equal number of debits and credits.

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.

To continue with the above example:

1. You note $100 as a credit to revenue
2. Then, you note a $7 debit to expenses
3. 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 foundation of double-entry bookkeeping. They ensure your books stay balanced because the total debits must always equal the total credits for every transaction.

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

Double-entry vs single-entry bookkeeping: which is better?

Single-entry bookkeeping records each transaction only once, typically in a simple spreadsheet format. Unlike double-entry, it tracks income and expenses without showing how these transactions affect your assets or liabilities.

Choose single-entry when:

• Your business has no assets or loans
• You only need basic income and expense tracking

Choose double-entry when:

• Your business owns assets or has liabilities
• You need complete financial oversight
• You want built-in accuracy checks

Here's the good news: most bookkeeping software lets you put in a single entry, and then, it creates a double-entry in the background.

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.

Inland Revenue (IR) requires large businesses and organisations with public accountability to use double-entry bookkeeping to prepare their financial statements. Generally, companies are not considered "large" and can prepare minimum financial statements if their total income is $33 million or less and their assets are $66 million or less over the last two accounting years. Other businesses may use single-entry bookkeeping if they prefer.

However, Inland Revenue says you must keep all business records, including pay as you earn (PAYE) records and taxable supply records for goods and services tax (GST), for seven years after the end of the financial year they relate to.

Resources and tools for double-entry bookkeeping

Modern accounting software automates double-entry bookkeeping, eliminating manual complexity while maintaining accuracy.

Key automation features:

• Bank integration: Automatically creates double entries when you classify transactions
• Guided entry: Prompts you through complex transactions like loans and asset purchases
• System integration: Syncs with point-of-sale, banking, and other business systems
• Error prevention: Built-in checks ensure your books always balance

Implement double-entry bookkeeping in your business today

Double-entry bookkeeping can seem complex at first, but it’s a powerful way to understand your business’s finances in depth. 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.

Ready to simplify your bookkeeping? Try Xero for free and see how easy double-entry bookkeeping can be with the right tools.

FAQs on double-entry bookkeeping

Here are answers to some frequently asked questions (FAQs) about double-entry bookkeeping.

What are the three basic rules of double-entry bookkeeping?

The ‘golden rules’ of accounting help guide the double-entry system. 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 ensure every transaction is balanced correctly.

What is accounts receivable in double-entry bookkeeping?

Accounts receivable refers to the money that your clients owe you. In double-entry bookkeeping, accounts receivable is an asset. When you invoice your client, you record the sale as a credit to revenue and then, you record a debit to your accounts receivable account. Then, when your client pays you, you record a credit to your accounts receivable account to reduce the value of that asset, and you simultaneously record a debit to your bank account to increase the value of that asset.

What is accounts payable in double-entry bookkeeping?

Accounts payable is money that you owe to other people, and in double-entry bookkeeping, it's considered to be a liability. When you defer an expense, you record the expense as a debit, and then, you record the amount due as a credit in your accounts payable journal. When you pay the bill, you record a debit to accounts payable which decreases the amount of that liability, and then you record a credit to your bank account which decreases the value of that asset.

If you paid the bill with a line of credit, you would also note a debit, but in this case, the debit would be increasing a liability account.

How do I set up a double-entry bookkeeping system for my business?

To set up double-entry bookkeeping, you first need to identify your accounts and create a journal for each one. All of your assets, liabilities, expenses, and revenue streams will each have their own account, and you can add more accounts as your business grows and changes. You'll handle this process by setting up a chart of accounts, which is like a map.

Using online accounting software like Xero can help simplify this process.