Basic Double-Entry Accounting Primer

Introduction

Socotra uses double-entry accounting for all of its billing functionality. It follows the principle that for every debit entry (an entry on the left side of an account) there must be a corresponding credit entry (an entry on the right side of an account), ensuring that the accounting equation (Assets = Liabilities + Equity) remains balanced.

Double-entry accounting is essential to accurately record and report financial transactions. This provides a systematic and structured approach to financial tracking, resulting in improved accuracy, error detection, and support for comprehensive financial analysis. By following the principles of double-entry accounting and using T-Accounts to visualize transactions, Socotra helps maintain accurate financial records and supports more informed business decisions.

With this system, Socotra facilitates improved internal controls to safeguard financials, prevent fraud, and ensure compliance with accounting policies and procedures. These controls mitigate risks associated with insurance billing operations and enhance financial integrity. In addition, compliance with regulatory requirements that mandate accurate and transparent financial reporting is simplified, using a systematic and auditable record of transactions.

General Principles

Socotra follows the general rules for double-entry accounting, including:

  1. The Accounting Equation: Assets = Liabilities + Equity. This equation must always balance, which provides a check on the accuracy of financial data, and helps to identify errors or discrepancies.

  2. Dual Entry: Every transaction affects at least two accounts, with one debit entry and one credit entry, ensuring that the accounting equation remains balanced.

  3. Consistency: Accounting practices are consistent over time to enable accurate financial reporting and analysis.

  4. Materiality: Only transactions that are significant or material to the financial statements need to be recorded.

  5. Accrual Basis: Transactions are recorded when they occur, regardless of when cash is exchanged, following the accrual basis of accounting.

Note

Equity in the accounting equation is considered to include accrued income and expenses. Future releases will allow for transactions to roll up income and expense activity to the equity accounts directly.

T-Accounts

T-Accounts are a visual representation of double-entry accounting, used to record and track transactions in individual accounts. Each T-Account resembles the letter “T”, with the left side representing debits and the right side representing credits.

T-Accounts provide a clear and visual representation of transactional activity within individual accounts, making it easier to understand and analyze financial data. The structure of T-Accounts ensures that every transaction affects at least two accounts, with one debit entry and one credit entry, thereby maintaining the balance of the accounting equation.

The different types of T-Accounts are:

  1. Assets: Resources that have economic value. In T-Accounts, increases in assets are recorded as debits, and decreases as credits. Cash received from payments and amounts on unpaid invoices represent carrier assets.

  2. Liabilities: Obligations or debts owed to external parties. Credit balances on insured accounts are represented with liability accounts.

  3. Income: Revenue from primary activities. Charges on policies accrue to income accounts.

  4. Expenses: Costs incurred in operations to generate revenue. Write-offs are a form of expense.

  5. Equity: A summary of the overall business, which equates to assets minus liabilities when combined with accrued income and expenses.

Different types of accounts are classified based on whether they typically have debit balances (debit-side accounts) or credit balances (credit-side accounts).

  • Debits increase the value of asset and expense accounts, and decrease the value of liability, income, and equity accounts.

  • Credits decrease the value of asset and expense accounts, and increase the value of liability, income, and equity accounts.

Transactions

Transactions are always balanced between debits and credits, and multiple T-Accounts can be affected. By requiring every transaction to have at least two entries, both the source and destination of financial flows are captured, which ensures accuracy and reliability of financial data. The dual-entry nature of transactions creates a clear audit trail, allowing you to trace the flow of financial transactions and verify accuracy.

See Also