Double-entry bookkeeping

What it means

Double-entry bookkeeping records every transaction on two accounts at once - one debit, one credit, in the same amount. Each entry therefore shows not only what happened but where it came from and where it went.

That duality produces the basic equation: assets equal liabilities and equity. The books are thus a control system in themselves, not merely a list of movements.

Accounts split into balance sheet accounts, which show the state of assets and the sources that fund them, and income statement accounts, which collect expenses and revenue for the period. Balance sheet accounts carry their balances into the next year; income statement accounts are closed at year end and their net becomes the profit or loss that flows into equity.

How it works in practice

Companies, including an s. r. o., must keep them. Transactions are recorded chronologically in the journal and systematically in the general ledger, which produces the trial balance and then the statements.

The essential difference from single-entry bookkeeping is timing: revenue arises when the invoice is issued, not when payment arrives. So double entry shows profitability even before the money comes in.

When a company or sole trader moves from single-entry to double-entry books, we build the starting position for opening the books from a list of assets, stock, receivables and liabilities on the last day of single entry. At the same time we deal with items that the switch would otherwise tax twice or not at all.

What to watch out for

Auditability matters as much as accuracy: every entry rests on an accounting document and is corrected by a correcting entry, never overwritten. Breaking that rule casts doubt on the books as a whole, not on one item.

Balanced debits and credits do not prove the books are right. An entry to the wrong account, such as buying fixed assets straight into expenses, leaves both sides equal, so the balance check will not catch it. The error distorts profit and tax and often surfaces only in a tax inspection.