Double entry bookkeeping: How it works for your small business

Published Wednesday 26 November 2025

Table of contents

• What is double-entry bookkeeping?
• Why use double-entry bookkeeping?
• Double-entry vs single-entry bookkeeping
• Understanding the key principles of double-entry bookkeeping
• How does double-entry bookkeeping work
• Tax considerations for double-entry bookkeeping
• FAQs on double-entry bookkeeping

Key takeaways

• Implement double-entry bookkeeping to record every transaction twice—once as a debit and once as a credit—ensuring your books always balance and providing a complete view of your business's financial health.

• Utilize the fundamental rule that total debits must equal total credits to catch errors immediately, as any imbalance signals a mistake that needs correction.

• Apply the basic debit and credit principles where debits increase assets and expenses while credits increase liabilities, revenue, and equity to properly categorize all transactions.

• Consider using accounting software like Xero to automate the double-entry process, as it creates the corresponding entries automatically when you classify transactions as revenue or expenses.

What is double-entry bookkeeping?

Double-entry bookkeeping is an accounting method where every 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.

Key benefit: You get a complete, accurate view of your business finances with this method.

How double-entry bookkeeping works

• record an expense and how it affects your bank account or credit card balance
• record a loan payment and how it affects both your bank account and loan balance

Learn more about bookkeeping basics in our guide to doing bookkeeping

Why use double-entry bookkeeping?

While single-entry bookkeeping tracks money coming in and out, double-entry gives you a complete picture of your business's financial health. It helps you run your business with more clarity and confidence.

Double-entry bookkeeping gives you these benefits:

• see exactly what your business owns (assets) and what it owes (liabilities), not just your cash flow
• spot errors and prevent costly mistakes because the books must balance
• create accurate reports like a balance sheet and profit and loss statement to understand performance
• make smarter choices about spending, investment and growth with reliable data

Double-entry vs single-entry bookkeeping

Single-entry bookkeeping is where you record a transaction one time. For example, let's say you use a spreadsheet to record your income and expenses, and you don't make any corresponding entries about how your income and expenses affect your assets or liabilities. That's a single-entry system.

If you have a simple business without any assets or loans, single-entry bookkeeping can help you stay on top of your finances. But if you have any assets or liabilities, double-entry bookkeeping gives you a more accurate overview of your business's financial situation.

Most bookkeeping software lets you enter a single transaction, and then creates the double-entry in the background.

Understanding the key principles of double-entry bookkeeping

Duality is the core principle of double-entry bookkeeping – every transaction has a dual effect on your business.

Common examples:

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

Why this matters: The dual effect supports the accounting equation (Assets = Liabilities + Equity). When entries are correct, they balance each other out. When they don't balance, you'll spot errors in your balance sheet immediately.

Your balance sheet shows all your business's assets, liabilities and owner's equity. It also shows the relationship between these three elements: liabilities plus equity equals assets – the accounting equation. Or, assets minus liabilities equals owner's equity.

How does double-entry bookkeeping work

Double-entry bookkeeping uses journals and ledgers to track your business finances. Each account, such as bank, loans, expenses or assets, has its own journal.

The process:

• Record transactions: Make a credit in one journal and a debit in another
• Summarise balances: Transfer all account balances to the main ledger
• Generate reports: Use ledger information to create balance reports

The result: This creates balanced books – if your debits don't equal your credits, you know there's an error to fix.

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

Recording transactions

Transaction recording requires entries in at least two journals with the date and relevant notes.

Basic rules:

• Expenses: Record as debits
• Sales/revenue: Record as credits
• debits increase assets and decrease liabilities
• credits decrease assets and increase liabilities

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

• Your payment processor sent £93 to your bank and charged you £7 in payment processing fees
• You record £100 as a credit in your sales journal
• 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
• Then, you also record £7 as a debit in your expense journal

Now, you've got an equal number of debits and credits.

Posting to the ledger

Posting to the ledger organises all journal entries into five main categories: revenue, expenses, liabilities, assets and equity. You'll get clear account balances for reporting.

Example breakdown:

• revenue: £100 credit
• expenses: £7 debit
• assets: £93 debit

Your profit and loss statement shows £100 revenue, £7 expenses and £93 profit. Your balance sheet shows £93 in assets.

Debits and credits

Debits and credits are the foundation of double-entry bookkeeping. The fundamental rule: total debits must always equal total credits.

Debit rules:

• Increase: Assets and expenses
• Decrease: Liabilities and equity

Credit rules:

• Increase: Liabilities, revenue, and equity
• Decrease: Assets and expenses

Tax considerations for double-entry bookkeeping

UK tax requirements don't mandate double-entry bookkeeping, but all businesses must maintain income and expense records; for instance, limited companies are required to hold onto records for six years from the end of the last financial year they relate to.

Legal requirements:

• Record keeping: All sales, expenses, and VAT transactions
• Retention period: HMRC requires sole traders to keep records for at least 5 years after the 31 January submission deadline of the relevant tax year.
• Method flexibility: Single or double-entry bookkeeping both acceptable

Even when not required, double-entry bookkeeping gives you better accuracy and financial oversight.

FAQs on double-entry bookkeeping

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

What is the basic rule of double-entry bookkeeping?

The basic rule is that for every transaction, the total debits must equal the total credits. This means every entry affects at least two accounts, which keeps your books balanced and ensures the accounting equation (assets = liabilities + equity) always holds true.

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'd also note a debit, but in this case, the debit increases a liability account.