In the world of accounting, there are two different systems commonly used by businesses, large and small, to record financial transactions. They are single entry and double entry bookkeeping. Both systems “get the job done”, but it depends on what your personal preference dictates. However, unless you are a small business with simple transactions, double-entry bookkeeping will be the most beneficial for you and your business finances.
Single entry bookkeeping is similar to a checkbook register where only a single line transaction is recorded, reflecting the credit or debit of cash. This easy way to keep track of your money is less expensive and can be maintained in less time and effort. Single-entry bookkeeping only takes into account cash, accounts receivable, accounts payable, and tax paid records. More detailed records such as assets, liabilities, inventory, expenses and income are not kept, leading to an inadequate representation of your financial records. This is where double-entry bookkeeping comes into play.
Double-entry bookkeeping, which has been around since the 15th century and is the basis of generally accepted accounting principles, is a bit more complicated. Instead of a single transaction in a column, double entry makes two entries for each transaction. A credit entry is made for the income contributed to the company and a debit entry is made for each transaction paid. In the end, these two inputs will offset each other so that both sides add up to zero. With this in mind, double-entry bookkeeping offers the following advantages over single-entry bookkeeping:
1. A check against an accounting error, including theft, is automatically provided when transactions are posted and the total amount of debit entries equals the total amount of credit entries.
2. The preparation of financial statements can be created with ease due to the accurate and continuous calculation of profit (credit) and loss (debit).
3. With both entries recorded (sales and purchases) you can track who owes the business money and who the business owes money to more easily.
4. The financial situation of the company is clearly illustrated and can be quickly accessed for effective business planning.
5. With a higher degree of required entries, double-entry bookkeeping takes a strict approach creating detailed records of all assets so your business doesn’t lose sight of any revenue.
6. Double-entry bookkeeping takes into account internal transactions, such as entry adjustment, providing more accurate information at the end of the fiscal year.
7. Missing important data is never a problem because each transaction is recorded twice in two separate columns.
Although profits have been greatly reduced due to the introduction of computerized systems, double-entry bookkeeping will continue to be more practical when it comes to detecting fraud and errors. Whether you’re a one- or two-entry bookkeeper, as long as you keep your financial records right, keep crunching those numbers and getting the results you want.