Double entry bookkeeping is an accounting method where every transaction affects at least two accounts—a debit and a credit. This system has been used for over 500 years because it provides accuracy, completeness, and error detection that single-entry methods cannot match.
This guide explains double entry bookkeeping in simple terms for Pakistani small business owners, even if you have no accounting background.
What is Double Entry Bookkeeping?
In double entry, every transaction has two sides—something is given and something is received. When you sell goods for cash:
- Cash increases (you receive money)
- Sales increases (you give goods)
Both sides are recorded. The total debits always equal total credits—this is the fundamental rule that keeps your books balanced.
Why Double Entry Matters
1. Accuracy
If debits do not equal credits, you know there is an error. Single-entry bookkeeping has no such self-checking mechanism.
2. Complete Picture
Double entry tracks both the Balance Sheet (assets, liabilities, equity) and Income Statement (revenue, expenses). You see the full financial picture.
3. Audit Trail
Every transaction is documented with both sides. Tracing any amount back to its source is straightforward.
4. Required for Compliance
FBR and SECP require proper books of accounts. Double entry is the accepted standard for business accounting in Pakistan.
Understanding Debits and Credits
Debits and credits are simply the left and right sides of an account. What increases with a debit or credit depends on the account type:
| Account Type | Increases With | Decreases With |
|---|---|---|
| Assets (Cash, Inventory, Receivables) | Debit | Credit |
| Expenses (Rent, Salaries, Utilities) | Debit | Credit |
| Liabilities (Loans, Payables) | Credit | Debit |
| Equity (Capital, Retained Earnings) | Credit | Debit |
| Revenue (Sales, Service Income) | Credit | Debit |
Remember: Assets and Expenses are “Debit accounts” (increase with debit). Liabilities, Equity, and Revenue are “Credit accounts” (increase with credit).
Common Transaction Examples
1. Cash Sale (PKR 10,000)
| Account | Debit | Credit |
|---|---|---|
| Cash | 10,000 | |
| Sales Revenue | 10,000 |
Cash (asset) increases with debit. Sales (revenue) increases with credit.
2. Credit Purchase (PKR 50,000)
| Account | Debit | Credit |
|---|---|---|
| Purchases/Inventory | 50,000 | |
| Accounts Payable | 50,000 |
Inventory (asset) increases with debit. Payables (liability) increases with credit.
3. Paying Rent (PKR 25,000)
| Account | Debit | Credit |
|---|---|---|
| Rent Expense | 25,000 | |
| Bank | 25,000 |
Rent (expense) increases with debit. Bank (asset) decreases with credit.
4. Customer Pays Outstanding Invoice (PKR 30,000)
| Account | Debit | Credit |
|---|---|---|
| Bank | 30,000 | |
| Accounts Receivable | 30,000 |
Bank (asset) increases with debit. Receivables (asset) decreases with credit.
5. Owner Invests Capital (PKR 500,000)
| Account | Debit | Credit |
|---|---|---|
| Bank | 500,000 | |
| Owner’s Capital | 500,000 |
Bank (asset) increases with debit. Capital (equity) increases with credit.
The Accounting Equation
Double entry maintains this fundamental equation:
Assets = Liabilities + Equity
Or expanded:
Assets = Liabilities + Capital + Revenue - ExpensesEvery valid double entry transaction keeps this equation balanced. If it becomes unbalanced, there is an error.
Single Entry vs Double Entry
| Aspect | Single Entry | Double Entry |
|---|---|---|
| Records | Cash only (like a checkbook) | All transactions, both sides |
| Error detection | Difficult | Built-in (must balance) |
| Financial statements | Cannot produce complete | Full Balance Sheet & P&L |
| Suitable for | Very small cash businesses | All businesses |
| Compliance | May not meet requirements | Meets all standards |
How Accounting Software Helps
You do not need to manually record debits and credits. Modern accounting software handles double entry automatically:
- Enter a sale → software debits cash/receivables and credits sales
- Record expense → software debits expense and credits cash/payables
- Trial balance always balances
- Financial statements generate automatically
You work with familiar forms (invoices, bills, payments) while the software maintains proper double entry behind the scenes.
The Chart of Accounts Connection
Your chart of accounts defines what accounts exist for recording transactions. Each account is classified as Asset, Liability, Equity, Revenue, or Expense—determining whether debits or credits increase it.
Common Mistakes to Avoid
- Unbalanced entries: Total debits must equal total credits
- Wrong account type: Debiting revenue instead of crediting
- Missing entries: Recording only one side of transaction
- Wrong accounts: Using expense account for asset purchase
Frequently Asked Questions
Do I need to know debits and credits if I use software?
Why is it called double entry?
Can I switch from single to double entry?
What is a trial balance?
Is double entry required for small businesses in Pakistan?
Conclusion
Double entry bookkeeping is the foundation of reliable accounting. While it sounds complex, modern software makes it accessible to every business owner. The accuracy and completeness it provides are essential for financial management, compliance, and growth.
Ready for proper business accounting? HysabOne handles double entry automatically while you work with simple, intuitive forms. Contact us on WhatsApp for a demo.
Last Updated: December 2024