Single-entry vs double-entry bookkeeping

One of the decisions you make when starting a business is whether to keep single-entry or double-entry books. Either way, the ATO expects you to keep records that explain all your transactions, generally for 5 years. So, which is the best bookkeeping system for your business? Below are the two entry systems, the pros and cons of each, and how they affect your financial reporting.

What is single-entry bookkeeping?

Single-entry bookkeeping records each transaction once, usually as money in or money out, much like a cash book. It can suit very small, simple businesses with few transactions, no stock and no credit terms.

With a single-entry system, you record income received and expenses paid. 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 cash book contains details like:

• Date
• Transaction description
• The value of the transaction, either an expense or income
• Balance

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

Straightforward

Single-entry bookkeeping is simple to keep, which suits owners without accounting training. There are no debits and credits to learn.

Cost-effective

Many owners keep single-entry records themselves, so the direct cost is usually lower than maintaining a full double-entry ledger.

A spreadsheet or simple app is often enough.

Easy to work out profit

A single-entry cash book shows receipts and payments. To estimate cash-basis operating profit, separate operating income and relevant expenses from loans, owner contributions and drawings, and capital spending. For example, a $10,000 loan receipt increases cash and creates a liability; it creates no revenue or profit. Total cash movement alone is not a profit measure.

Can suit small service businesses

If you run a small service business with no stock and few transactions, single entry can be enough to start with, because there is no inventory to track.

Disadvantages of single-entry bookkeeping

No built-in check

Single entry has no built-in check. Nothing forces each record to balance against another, so the quality of the books depends entirely on the discipline of whoever keeps them.

Hard to track assets and liabilities

Single entry doesn’t track what the business owns and owes, such as equipment, vehicles, loans, GST collected but not yet paid, or wages and super owed. That matters more as the business grows.

It’s an incomplete accounting system

Single entry is considered incomplete because it doesn’t include accounts like inventory, accounts payable and accounts receivable. You can produce a basic cash profit and loss, but not a balance sheet.

Generally, a single-entry system doesn’t reflect the actual financial health of the business.

Hard to detect errors

In a double-entry system, total debits must equal total credits, so some errors show up as an imbalance. Single entry has no such check, so mistakes can compound without anyone noticing.

What is double-entry bookkeeping?

A double-entry bookkeeping system records every transaction in at least two accounts: one or more accounts are debited and one or more are credited, for the same total. At any point, total debits equal total credits.

It rests on the accounting equation, which stays in balance after every entry:

Assets = Liabilities + Equity

Assets are what your business owns, liabilities are everything it owes (including wages and super owed through payroll), and equity is the owners’ stake in the business.

A simple example: you invoice a client $1,100 including $100 GST. The entry debits accounts receivable $1,100, credits sales $1,000 and credits GST payable $100. Debits ($1,100) equal credits ($1,100). When the client pays, you debit the bank account $1,100 and credit accounts receivable $1,100. Cloud accounting software such as Xero runs on a double-entry general ledger and makes these entries for you behind the scenes.

Advantages of double-entry bookkeeping

Catches more errors (but it isn’t fraud control on its own)

Because debits must equal credits, a double-entry system catches errors such as one-sided or mistyped entries. It doesn’t catch everything: a transaction posted to the wrong account, or left out entirely, still balances. And no recording method prevents fraud on its own. That takes controls such as separating who approves and who pays, regular bank reconciliations and a monthly review of the accounts.

Complete accounting system

Double entry covers every type of account (assets, liabilities, equity, income and expenses), so you can produce a full set of financial reports straight from the ledger.

Systematic and consistent

Double entry follows fixed rules for recording each type of transaction, so the books are consistent from month to month and from one bookkeeper to the next.

Generate a trial balance

A double-entry system lets you produce a trial balance, a list of every account’s balance that checks total debits equal total credits. The profit and loss statement and balance sheet are then prepared from it, so you can monitor growth and assess revenue and expenses.

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

More expensive

Double entry needs a full ledger, which in practice means accounting software and, often, a bookkeeper. That costs more than a simple cash book.

Complex

Double entry takes knowledge of debits, credits and account types to keep correctly, although accounting software handles much of it.

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

Number of entries

With a double-entry system, each transaction has at least two entries, with equal debits and credits. 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 the 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

This is where the entry system is often confused with the accounting basis. Single entry practically means cash basis: revenue when received, expenses when paid. Double entry can be kept on a cash basis or an accruals basis (revenue when earned, expenses when incurred); most businesses that use double entry keep accrual books. The basis you report on for tax is a separate question for your tax agent.

Conclusion

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. For most growing businesses, double entry is the better choice because it gives a complete view of what the business earns, spends, owns and owes. As a result, it makes financial reporting more manageable and helps you make informed financial decisions.

Book a discovery call to talk through your bookkeeping with Visory.