Rapid Growth and Accounting: Why Double Entry Bookkeeping is the Way to Go
It’s imperative to reign in your accounting practices and set up a system that works now and in the future — especially for high-growth brands. As your business gets bigger, accounting becomes more complex, it’s increasingly important to keep good, clean financial records.
Below, let’s look at some basic accounting principles, double entry accounting, and how this flexible accounting setup will help you to manage your finances as a rapidly scaling brand.
Table of contents
- Accounting in eCommerce: the basics
- Managing accounting as a high-growth brand
- What is double entry accounting?
- How double entry accounting supports scale
- Examples: double entry system in action
- Moving forward with double entry accounting and inventory management
Accounting in eCommerce: the basics
Even if you’re not a numbers person, there are a few basic accounting and inventory principles that are helpful to know.
First, let’s go over some definitions:
(Already know this stuff? Skip ahead to where we define double entry accounting.)
- Assets: what you own/possess and are owed; this includes cash, inventory, and accounts payable
- Liability: what you owe to others; this could be things like unpaid vendor invoices or loans
- Capital: your company’s equity
- Revenue: income from the sale of goods
- Expense: business costs to run and improve the company
- Account: a detailed record of financial transactions
- Balance sheet: a financial statement that accounts for assets, liabilities, and capital for a given period of time—this basically tells you how financially “healthy” your company is
- Debit: increases assets while decreasing liabilities; this is on the left side of an accounting entry
- Credit: decreases assets while increasing liabilities; this is on the right side of an accounting entry
Managing accounting as a high-growth brand
For brands with big growth goals, double entry accounting is the way to go. It might sound complicated, especially if numbers make your palms sweat, but once you take the time to set it up, it’s (mostly) smooth sailing.
In case you haven’t guessed our POV by now, we strongly recommend getting all of your backend operations in order prior to growth — and that includes accounting. If you have processes with inaccurate data or that prohibit nimble operations, you’ll be spending your time addressing those issues rather than focusing on growth opportunities. Flexibility is key, and you need it across all areas of the business.
What is double entry accounting anyway?
Double entry accounting is exactly what it sounds like: For every transaction, you record it in two or more accounts. Each of these recordings offset one another. In other words, you note both what’s coming in (debit) and what’s going out (credit).
This double-record of each transaction provides insight and detail into what and why it’s happening — and how it affects a company. And for high-growth brands, it’s important to not only understand what’s happening but also the cause of it. This is where opportunities lie.
FYI: Double entry accounting is also referred to as double entry bookkeeping, double entry system, double entry transactions, double bookkeeping system, and dual entry system.
There’s a basic formula which double entry accounting uses:
Assets = liabilities + capital
Types of accounts
Remember those definitions we talked about earlier? (If you skipped it, you can go back by clicking here.) Those will come in handy here.
Like we said, double entry bookkeeping involves recording every transaction in at least one account. The types of accounts you might use include:
- Assets account: dollar amount of a company’s possessions, including cash inflow and outflow; debits increase assets while credits decrease assets
- Liabilities account: dollar amount of a business’s debts; debits decrease liabilities while credits increase liabilities
- Revenue/income/gains account: this is what a company receives in sales and interest income; debits increase revenue while credits decrease revenue
- Expense/loss account: the amount of money a business spends, including stock, payroll, rent, and advertising; debits decrease expenses while credits increase expenses
- Capital/equity account: owner’s contributed capital and earnings; debits increase capital while credits decrease capital
Inventory debits and credits
Let’s start with one common eCommerce example do understand whether a transaction is an inventory debit or credit. When a brand purchases inventory from a supplier, that transaction is recorded in the assets account and the expense account.
For example, you ordered 200 units of fanny packs, sold to you at $5/unit for a total $1,000. This $1,000 would be recorded in your expense account, while you’d add $1,000 of stock in your assets account. It might look like this in your assets account:
|200 fanny packs||$1,000|
And you’d record it like this in your expenses account:
|200 fanny packs||$1,000|
While you lost $1,000 in cash, you gained $1,000 in inventory (which you can sell for a profit).
Alternatives to double entry accounting: What is single entry accounting?
One common alternative to double entry accounting is single entry accounting. As you might imagine, this means that each transaction is only recorded once. Assets and liabilities aren’t tracked separately or kept in balance.
While this approach is certainly more straightforward and simple, it’s not the most viable solution for high-growth brands. This limits visibility into your business, and also makes you more susceptible to clerical errors. Solopreneurs with simpler business operations may use this approach, but it’s not a great fit for most eCommerce brands.
How double entry accounting supports scale
Cleaner and more accurate data
Good, clean accounting becomes more important as you grow. As your business becomes more complex, many brands turn to more double entry accounting systems to more accurately manage their assets.
Double entry bookkeeping keeps data cleaner and more accurate because of few reasons, one being that it’s easier to detect errors. Because transactions are recorded twice, there’s more accountability and transparency across accounts. If one column doesn’t match the other, you can go back and track the source of the discrepancy.
As growing brands have more transactions, that leaves you more susceptible to bookkeeping errors. It’s important to catch them as they happen, rather than after you’ve made business decisions based on inaccurate data.
Along with increased accuracy, the data you receive from double entry accounting is richer. These metrics provide actionable insights for your retail reporting, which you can use to identify growth opportunities. Because you have a descriptive explanation of inflow and outflow, you can make more informed decisions when it comes to investments or cutting costs.
Remember: Every transaction is recorded at least twice. This means you have different contexts for each transaction, which provides more detail around expenses and revenue. A comprehensive view is essential for rapid growth—you need to be able to look at the big picture and drill down to granular data.
If you don’t know which areas of your business are most profitable, how can you make any growth-oriented moves? Using a simpler system like single entry is shooting in the dark. And when it comes to sustainable growth, you need to see the whole picture.
Set it up now for growth later
Even if you’re in a “pre-growth” stage in your business, dual entry accounting could be the way to go. Not only will it be easier for you to migrate your existing accounting processes to a new system, but it’ll also give you a chance to hit that stage of growth more quickly and easily.
Your business transactions are comparatively simple. Adopting the dual entry system now means an easier transition and more time to get used to it. As you hire staff, purchase new equipment, and invest in inventory, the dual system will become more valuable. This means you don’t have to switch complex transactions of a rapidly scaling brand to an entirely new system.
You need to make sure that your existing accounting solution supports nimble operations for when you do achieve scale—one that doesn’t impose arbitrary restrictions which will hinder your growth.
To achieve rapid growth, nimble operations are absolutely crucial. You can’t grow fast if your brand moves slow. Double entry accounting is a more efficient alternative to other accounting methods. Because it’s the industry standard, that makes it easier to work with accountants, use accounting software, and prepare financial statements.
Plus, it’s important that your accounting software integrates seamlessly with the rest of your tech stack to fully support inventory accounting and your retail operations. Check that your IMS and retail reporting tool will play nicely before you commit to an accounting tool. Options like Quickbooks and Xero both integrate with Stitch, for example.
This also makes tax time a lot easier. Who could argue against something like that, especially considering the fact that more than half of entrepreneurs believe admin for managing federal taxes is worse than actually paying those taxes.
But beyond that, double entry accounting allows for flexible business operations. As you experiment with new ideas and workflows, dual entry will be able to accommodate outside-the-box approaches. You’ve gotta be nimble to grow!
Better for investors
Seeking investors? If you want them to take you seriously, double entry accounting is the way to go. As we mentioned, because it’s industry standard, it’s more recognizable and accepted across the board. This means you’re more likely to impress potential investors with your forecasted success and strong records.
Examples: double entry system in action
- Purchasing inventory from a manufacturer/supplier. In this instance, you’d have a cash purchase entry for the cost of the stock on your credits column for your cash account. You’d also record a debit for the acquired asset (the stock) in your purchasing software.
- Selling merchandise to a consumer. Here, you’d record revenue and loss of assets. The assets would be a credit, while the cash inflow is posted as a debit.
- Paying employee wages. These transactions are recorded as a debit to your expense account and a credit to your assets for the investment in your staff.
- Purchasing delivery trucks or warehouse space. This would be a debit to your assets account and a credit to your expense account.
Moving forward with double entry accounting and inventory management
It’s important that you set up accounting processes that work both now and in the future. As you enter rapid-growth stages in your business, it’s difficult to migrate to new systems. And you need a framework that can be nimble and flexible enough to keep up with where your brand is headed.
Accounting needs to work hand-in-hand with how you manage your operations management to maintain operational efficiency. Finance teams can easily obtain granular financial data (landed costs, COGs, inventory assets, FIFO, etc.) from Stitch for their accounting software to accurately close out the books. This complete solution provides brands control and flexibility over their operations while providing full visibility into their granular financial data.