Double-entry bookkeeping explained in simple terms

Double-entry bookkeeping (also called "double-entry accounting") is a method of accounting in which business transactions are recorded twice: on account and contra account. Companies in Switzerland are obliged to carry out double-entry accounting from a certain annual turnover.

What is the difference between single- and double-entry accounting?

A distinction is made between single- and double-entry accounting:

Single-entry bookkeeping

In single-entry accounting, also often called "single-entry bookkeeping" or sometimes "simple bookkeeping", all income and expenses are recorded only once and sorted by date. From this calculation of income versus expenditure, you can only see whether a profit or loss has been incurred.

Double-entry bookkeeping

In the case of double-entry accounting, you record all income and expenses twice (hence the "double-entry" in the name): on the one hand, you indicate the account on which the movement took place (account: e.g., in your bank account or in the cash register) and, on the other hand, what the money was used for (counter account: e.g., travel expenses, office supplies, costs of purchasing goods).

Is double-entry bookkeeping mandatory in Switzerland?

In Switzerland, the following companies, among others, are obliged to carry out double-entry bookkeeping:

• Limited liability companies (GmbHs)
• Stock corporations (AGs)
• Sole proprietorships and partnerships with an annual turnover of at least CHF 500,000

From what point is a company obliged to perform double-entry bookkeeping?

According to Article 957 of the Swiss Code of Obligations (OR), sole proprietorships and partnerships are only obliged to carry out double-entry bookkeeping if they have achieved an annual turnover of at least CHF 500,000 in the last financial year.

Although SMEs and self-employed people with an annual turnover of less than CHF 500,000 are not obliged to maintain double-entry accounting, it can still be worthwhile to use the double-entry method. You will learn why in the next section!

What are the advantages of using double-entry bookkeeping?

Single-entry accounting (simple accounting or the calculation of income versus expenditure) only allows you to determine whether a profit or loss has been incurred. Double-entry accounting, on the other hand, is an important indicator of a company's success. It results in numerous advantages:

• You receive a lot of additional information that is relevant to your company: for example, you will know how much money your company has spent for certain purposes. You will know the value of your stockpiles, among other things, and, at any time, can find out how much money is available to your company – as at that exact day.
• The data that double-entry accounting provides allows you to derive further insights that you can use to measure and increase the success of your company, such as cash flow and liquidity.
• You will know to what extent your company is financed from equity or debt capital.
• Your accounting is clear and easy to understand. Among other things, this can avoid problems with the tax authorities.
• You can easily check your accounting yourself, because the balance at your bank or in your cash register has to match the balance in your accounting after everything is posted.

Fundamentals of double-entry bookkeeping: an introduction

The basis of double-entry accounting is the balance sheet. The real accounts, which are divided into an asset side (assets) and a liability side (capital values), are an essential part of the balance sheet. The balance sheet must always be balanced, i.e., the same value must ultimately be present on both the asset side and the liability side of the balance sheet.

Debit and credit

If you spend money or earn money in your company, these transactions must be posted to their respectively designated real accounts on the assets or liabilities side of the balance sheet. In order for the balance sheet to be in balance, business transactions are not only posted to one account, but to two accounts, in the same amount for each: with one, you record what the money is used for and, with the other, where the money comes from.

You create one posting on the debit side and one posting on the credit side:

• On an assets real account, you enter additions on the debit side and disposals 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 in cash, you end up with a higher inventory (debit), but the value in your cash register (credit) decreases. Examples of real accounts on the assets side are the cash register, a vehicle fleet, machines and buildings.
• On a liabilities real account, things are exactly the same but the other way around: disposals are posted on the debit side, and additions on the credit side (the account decreases on the debit side and increases on the credit side). Examples of real accounts on the liabilities side are: equity, trade payables or borrowed capital.

Double-entry accounting in Switzerland: examples

Here are a few simplified examples intended to illustrate double-entry accounting in greater detail:

Example: Cash expenses for office supplies

You buy office supplies amounting to CHF 87.50. You pay in cash.

The following accounts are affected:

• Cash register account
• Office supplies account

In your accounting program, enter the amount of CHF 87.50 and select the cash register account on the credit side (since it is a cash transaction and you have spent money), and the office supplies account on the debit side. Both accounts are on the assets side of the balance sheet.

Example: Settlement of receivables

A customer pays an invoice (claim) for CHF 150.00 by bank transfer.

You enter the amount of CHF 150.00 by selecting the bank account on the debit side (since you have received money by bank transfer) and the receivables contra account on the credit side (since receivables have been settled). Both accounts are on the assets side of the balance sheet.