Improve Your Ecommerce Business Finance Tracking with Double-Entry Bookkeeping
Double-entry bookkeeping, also known as double-entry accounting, is a system that helps small business owners effectively manage their finances, analyze cash flow and determine profitability. Unlike single-entry bookkeeping, it can also aid in detecting errors, theft, and provide a clear picture of financial health to outsiders, such as banks and investors. In this article, we will explore double-entry bookkeeping in detail and discover how to incorporate it into your ecommerce business.
Bottom Line: Ecommerce business owners and managers should read this article to learn how implementing double-entry bookkeeping can improve your financial tracking, enhance profitability analysis, and demonstrate fiscal responsibility to potential lenders and investors.
What is Double-Entry Bookkeeping?
Double-entry bookkeeping involves recording each business transaction twice, with one entry showing the source of money and the other entry showing the money’s destination. This system has two columns: debits and credits. The key feature of double-entry accounting is that these two columns must balance.
Purpose and Benefits of Double-Entry Accounting
Some advantages of double-entry bookkeeping include:
- Analyzing cash flows
- Determining profitability
- Detecting errors and theft
- Facilitating outside reviews
However, there are some limitations to double-entry bookkeeping as well:
- It’s more complex and time-consuming compared to single-entry bookkeeping
- It may be costly for very small businesses
Double-Entry vs. Single-Entry Bookkeeping
Here are some key differences between double-entry and single-entry bookkeeping:
- Single-entry records a transaction once, double-entry records it twice
- Single-entry works for very small businesses, while double-entry is used by larger businesses with more transactions
- Single-entry is simpler, double-entry is more comprehensive and generates accurate financial statements
- Double-entry provides more information about the business’s financial condition and makes tax preparation easier
Getting Started with Double-Entry Bookkeeping
One of the easiest ways to start with double-entry bookkeeping is using an accounting software program. Some necessary steps include setting up a chart of accounts, creating a business journal, creating a ledger, and conducting a trial balance of the ledger. This process may be challenging if you have little or no accounting experience, but accounting software can help automate and streamline the process.
In conclusion, implementing double-entry bookkeeping in your ecommerce business can significantly improve your financial tracking and lead to better financial health. It may require some effort and investment upfront, but the long-term benefits will be worth it.