Double-entry bookkeeping (also known as 'double-entry accounting') is a commercial accounting system where business transactions are entered twice (hence 'double-entry'): transactions are posted to two accounts, the account and the contra account.
Double-entry bookkeeping explained in simple terms
Your questions about double-entry accounting answered:
What is the difference between simple and double-entry accounting?
Accounting systems normally fall into one of two categories: simple and double-entry bookkeeping.
In simple bookkeeping, all receipts and expenditures are recorded in chronological order. In other words, you simply record that you have received or spent money.
In contrast to simple accounting, in double-entry accounting all receipts and expenditures are entered not once but twice (hence the name 'double-entry' accounting): first, you record which account the transaction was applied to (account e.g. your bank account or the cash register). Second, you record what the money was used for (contra account e.g. travel expenses, office supplies, purchasing goods).
Is double-entry bookkeeping obligatory in Switzerland?
Not all Swiss companies are required to use double-entry bookkeeping. Companies that are required to use double-entry bookkeeping in Switzerland include
- Limited liability companies (GmbH)
- Stock corporations (AG)
- Sole traders and partnerships with annual turnover of at least CHF 500,000
When do companies become required to use double-entry bookkeeping?
According to the Swiss Code of Obligations (OR) Article 957, sole traders and partnerships are only required to use double-entry bookkeeping if their annual turnover in the previous business year was at least CHF 500,000.
Although SMEs and self-employed people with annual turnover of less than CHF 500,000 are not required to use double-entry bookkeeping, it can still be worthwhile to do so. Find out why in the next section!
Why double-entry accounting?
Simple bookkeeping (cash-basis accounting) can only show whether an account is running a profit or loss. Double-entry bookkeeping, on the other hand, is an important tool for a company's success. It has numerous advantages:
- It provides a large amount of useful additional information: for example, how much money your company has spent on specific things, the value of your stocks, and exactly how much money your company has on any given day.
- The information gained from double-entry bookkeeping can be used to develop other key performance indicators that help you measure and increase your company's success: for example, cash-flow and liquidity.
- You know what proportion of your business is financed by equity or debt.
- Clear, easy to follow bookkeeping helps you avoid problems, for example with the tax authorities.
- You can easily check whether your bookkeeping is correct, because the balance in your bank account or cash register must match the balance in your bookkeeping after entries are posted.
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The basics of double-entry bookkeeping: an introduction
The basis of double-entry bookkeeping is the balance sheet. The balance sheet is made up of accounts, which are split between an assets side and a liabilities side (net present value). The balance sheet must always be balanced, i.e. the assets and liabilities sides must ultimately have the same value.
Credit and Debit
When your company spends or receives money, these transactions must be posted to the appropriate account on the assets or liabilities side of the balance sheet. To ensure the balance sheet is balanced, each transaction is posted to two accounts instead of just one: once to show what the money was spent on and once to show where it came from.
This involves posting the entry once on the debit side and once on the credit side:
- In an assets account additions are posted on the debit side and disposals are posted on the credit side (the account increases on the debit side and decreases on the credit side). For example, if you buy goods and pay for them in cash, your inventory (debit) will increase and your cash (credit) will decrease. Examples of accounts on the assets side include: cash, vehicles, machines and buildings.
- In a liabilities account the exact reverse happens: disposals are posted on the debit side and additions are posted on the credit side (the account decreases on the debit side and increases on the credit side). Examples of accounts on the liabilities side include: equity, trade payables or debt capital.
Remember: the debit side is always on the left and the credit side is always on the right of the account. The credit account is also known as a 'contra account'.
The following simplified examples should help clarify double-entry bookkeeping:
Example: cash expenditure for office supplies
You buy office supplies for CHF 87.50. You pay in cash.
The following accounts are used:
- Cash account
- Office supplies account
In your accounting software, you post CHF 87.50 to the credit side of the cash account (because it is a cash transaction and you have spent money) and to the debit side of the office supplies account. Both accounts are on the assets side of the balance sheet.
Example: settling receivables
A customer settles an invoice (receivable) for CHF 150.00 by bank transfer.
In your accounting software you post CHF 150.00 to the debit side of the bank account (because you have received money by bank transfer) and the credit side of the receivables contra account (because a receivable was settled). Both accounts are on the assets side of the balance sheet.
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