Bookkeeping is a finance essential, and all this number crunching is the lifeblood of a company. As a business owner, your utmost priority is to make sure that your finances are being accounted for properly, on a regular basis, and that not a single dollar you are earning is going to waste. Therefore, to keep your business afloat, it’s important that you’re aware of the two primary kinds of bookkeeping systems that exist. These are: single-entry bookkeeping and double-entry bookkeeping systems.
Even if you are not directly involved in the process and would rather have your bookkeepers manage this function, it’s always helpful to be aware of the unique features that set these two methods apart. This way, you’ll get to know whether your current bookkeeping approach is working for your business or not.
What is single-entry bookkeeping?
Single-entry bookkeeping is perhaps the simplest and most basic system of bookkeeping. It does not require any specific skills or knowledge to implement and is meant mainly for small businesses and startups. In this system, every financial transaction is recorded through a single entry (log) in the journal, including both incoming as well as outgoing cash.
How does single-entry bookkeeping work?
In the single-entry bookkeeping system, there is a dedicated cash book that records details of all incoming and outgoing money. The book usually consists of four columns.
The first column includes the date, the second the narration of the entry, the third the transaction value, and the fourth column consists purely of the balance. The transaction value is indicated as positive if money is received into the business and negative if money is moved out of the business. If you prefer to see your income and expenses separately, you can choose to have two individual columns to record your transactions, but even with two columns, it will still be considered as a single entry.
The single-entry bookkeeping method is indeed very simple to implement and is recommended for small businesses that have recently started their operations, have little to no inventory, and are looking for a quick and straightforward method for bookkeeping.
For a large-scale enterprise, single-entry bookkeeping approach will not be ideal. A single, small error will pave the way for multiple errors to pop up in the long run and those will be a bit hard to spot.. Preparing financial statements using single entry can also prove to be a challenging task, and there’s always a high possibility of fraud with this approach. That’s why this system is limited to small businesses who are in the process of growing and expanding their business.
What is double-entry bookkeeping system?
In the double-entry bookkeeping system, every transaction is reflected in two different accounts. One transaction shows the debit and the other the credit. In this system, the amount which is recorded as debit must be the same amount as the one recorded as credit. Double-entry bookkeeping is optimal for large-scale businesses who want completely error-free recording of their transactions.
How does double-entry bookkeeping work?
Let us take an example to fully understand how the double-entry bookkeeping system works.
Assume you have purchased some furniture for $1000. Afterwards, you record this transaction in two different accounts. The first account will be the furniture account, where it will show you $1,000 under debit. The second account will be the cash account, under which it will show the same amount of $1,000, but as credit. Now, let’s assume a client named ABC Ltd. has paid your bill for $2,000, which it will show under the column of debit for the cash account. In the ABC Ltd. account, it will show your $2,000 as credit. Put it all together, and all your transactions of credit and debit will be balanced. This is one of the significant features of the double-entry bookkeeping system, which is why it’s so popular with businesses.
Typically, in the double-entry bookkeeping system, you need to maintain a journal where you record all transactions as and when they occur. Afterwards, you update the ledger where the entries are recorded under each account on a daily basis. At this stage, you need to balance both your debit and credit. Based on the ledger, you will need to prepare a summary of all transactions, which is known as the trial balance. This will be used to prepare other reports like Profit and Loss Statements, Balance Sheets and Cash Flow statements.
Thanks to the use of software, there is no need for you to maintain any physical books. You just need to make an entry and the software will take care of the rest.
Comparing single-entry and double-entry bookkeeping system
Now that we’ve analyzed both systems, let’s compare them to see which one works best for your business.
- Single-entry system is best suited for small businesses and freelancers. Double-entry bookkeeping system can be utilized by both small and large companies.
- Single-entry bookkeeping is easy to implement while double-entry system can become increasingly complexed as the number of transactions increase.
- You can implement single-entry system using a single ledger or a spreadsheet. Double-entry, on the other hand, requires different ledgers. The use of software is necessary if you wish to keep your work simplified.
- The single-entry system is the most basic way of bookkeeping, whereas double entry is a comprehensive and scientific approach towards bookkeeping.
- It is very difficult to catch errors or frauds in the single-entry system. The double entry bookkeeping system makes it easier to discover errors and detect fraud.
- Net income can be calculated by single-entry bookkeeping, but to develop a balance sheet, you need to use the double-entry bookkeeping system.
- In the single-entry system, the accounts of the owner and the company can easily get mixed up. This is not the case in double-entry where all accounts are individually maintained.
- Calculating profit and loss is much more accurate in the double-entry bookkeeping system. Also, you can prepare financial statements directly from your books.
- Preparing reports is not so easy when you are using the single-entry system. The double entry system is versatile and makes preparing reports of all kinds much more efficient.
- The records of a single-entry system are of no use for external parties like investors. The statements generated as a result of double-entry system are used by investors to assess the company and decide whether they want to invest in it or not.
Based on the holistic comparison above, you now have a better idea of how the double-entry bookkeeping system edges out single-entry bookkeeping in terms of convenience and proficiency.
Even if you are running a small business, it goes without saying that you aspire to scale up your activities. That’s why it is recommended that you utilize double-entry bookkeeping as it will streamline your financial management and open up more investment opportunities for your organization. Whatever you choose, it always helps to have a professional team of bookkeepers crunching your numbers for you. Try Monily free for the first two months and you will see your books accurately reflecting your business goals.