One of the significant decisions you must make when starting a business is whether to use double or single-entry bookkeeping. Your business survival highly depends on your ability to maintain accurate records of all your financial transactions. So, which is the best bookkeeping system for your business? This article discusses single entry vs. double-entry bookkeeping plus the pros and cons of each financial reporting system.
What is Single-Entry Bookkeeping?
Single entry bookkeeping is an accounting system that features one entry for every transaction. It is an excellent choice for small, uncomplicated businesses with minimal activity.
With a single-entry bookkeeping system, you will record transactions like taxable income, cash, and tax-deductible expenses. Each transaction included in the single column can either be negative or positive. However, you can also add expenses and revenue in a two-column ledger with each transaction on one line.
You can manage your single-entry bookkeeping system in accounting software or use a spreadsheet or paper. A typical single entry journal contains details like;
- Transaction description
- The value of the transaction; can either be an expense or an income
The last row on your single-entry table should highlight the monthly or yearly ending balance. There is also no harm in adding another column for notes.
Advantages of Single-Entry Bookkeeping
Single-entry bookkeeping is simple and easy to manage, making it an ideal choice for business owners who don’t have adequate accounting knowledge. In addition, it doesn’t feature complex rules and principles of financial recording.
You don’t have to hire a professional bookkeeper or accountant to manage your single-entry bookkeeping system; hence the cost is low compared to the double-entry system.
In addition, a single-entry system involves recording a few transactions. It, therefore, doesn’t require an expensive software program.
Easy to Determine Profit
A single-entry system allows you to calculate the profits or losses of your business. As a result, you can understand your business’s financial health and areas you need to reduce costs.
Ideal for Service-Based Businesses
If you run a small service-based business, a single-entry system is an economical choice. You don’t need to invest in an expensive accounting system since you won’t be dealing with inventory complications.
Disadvantages of Single-Entry Bookkeeping
Unsystematic and Unscientific
The single-entry system is an unsystematic method of recording and keeping business financial transactions since it doesn’t feature any fixed rules or principles for updating the records.
Hard to Track Assets and Liabilities
While this drawback wouldn’t be an issue for small businesses, it would matter for larger businesses with many assets like buildings and cars. In addition, it’s almost impossible to track the effects of liabilities with a single-entry system.
It’s an Incomplete Accounting System
The single-entry accounting system is considered incomplete since it doesn’t include critical accounts like inventory, payable, and receivable. Meaning it’s almost impossible to create an income statement or balance sheet.
Generally, a single-entry system doesn’t reflect the actual financial health of the business.
Hard to Detect Errors or Fraud
The rule of thumb in a double-entry booking system is that the credits and debits figures must match in the final report- a mismatch indicates inaccurate entries. On the other hand, the single-entry system doesn’t follow this rule; hence mistakes can be compounded without noticing.
What is Double-Entry Bookkeeping?
A double-entry bookkeeping system involves recording financial transactions in two accounts- debit and credit accounts. It relies on the rule of duality; every transaction affects both accounts simultaneously. One account is therefore credited while the other is debited. At the end of the financial period, the total credits must equal total debits.
It’s easier to detect errors with a double-entry accounting system due to the equation it is based on:
Assets = Liabilities + Equity
Liabilities, in this case, represent everything you owe including payroll, and assets are what your business owns. Equity is the shareholder’s stake in the business.
Advantages of Double-Entry Bookkeeping
Ensures Accuracy and Detects Fraud
With a double-entry system, bookkeepers can notice and correct errors quickly. All transactions are recorded on two accounts -the debits and credits must balance. Therefore, there is minimal to zero chance of mistakes, misappropriation, and fraud.
Complete Accounting System
The double-entry system features personal, real, and nominal accounts. Therefore, you can quickly generate financial reports straight from the accounts since all the relevant information is available.
Scientific and Systematic System
You must follow specific rules and principles of recording financial transactions when using the double-entry system-this is why it’s classified as a scientific system.
Generate a Trial Balance
A double-entry system allows you to generate an income statement and balance sheet that make up the trial balance. You can monitor your business growth and assess revenue and expenditures using data on an income statement.
As a result, it becomes easier to decide what areas need more investment and how you can cut costs to boost profits.
Disadvantages of Double-Entry Bookkeeping
The double-entry accounting system requires numerous accounting books like cash books, ledgers, and journals. In addition, you might need to hire a bookkeeper or invest in bookkeeping software. It’s, therefore, costlier than the single-entry system.
The double-entry accounting system is complex since it follows certain accounting principles and standards. You must therefore have expert knowledge and experience to manage the books.
What Is the Difference Between Single Entry and Double-Entry?
Number of Entries
With a double-entry system, a single transaction has two entries, one in the debit account and the second in the credit account. On the other hand, a single-entry system features one entry for each transaction.
What Is Recorded
A single-entry system records cash flowing in and out of business- revenue and expenses. The cash can be physical cash, electronic fund transfers, or credit card payments.
The double-entry system includes expenses, assets, revenue, equities, and liabilities.
How Transactions are Recorded
Bookkeepers that use a single-entry system document revenue when it flows in and record an expense when it flows out. In contrast, businesses that use the double-entry system document revenue when earned and document expenses before making payments.
Maintaining correct financial records can help you prepare for the tax period, create a budget, and evaluate your business’s financial health.
The best bookkeeping system depends on the size of your business and requirements. A double-entry system is arguably the best since it can offer a 360-degree view of all your financial transactions. As a result, it makes financial reporting more manageable and helps you make informed financial decisions.