In the world of bookkeeping, there are two different systems commonly used by businesses, big 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’re a small business with simple transactions then double-entry bookkeeping will be the most beneficial to you and your company’s financials.
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 simple way of keeping track of your money is less expensive and can be maintained in less time and with less effort. Single-entry bookkeeping only takes into account records of cash, accounts receivable, accounts payable and paid taxes. More in depth records such as assets, liabilities, inventory, expenses and revenues are not maintained, thus leading to an inadequate portrayal of your financial records. This is where double-entry bookkeeping comes into play.
Double-entry bookkeeping, which has been around since the 1400’s and is the basis of general accepted accounting principals, is a little more involved. Instead of only one transaction in one column, double-entry makes two entries for every one transaction. A credit entry is made for revenue brought into the company and a debit entry for every transaction paid. In the end, these two entries will offset each other so that both sides will add up to zero. With this in mind, double-entry accounting provides the following advantages over single-entry bookkeeping:
1. A check against a bookkeeping error including theft are automatically provided when transactions are recorded 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 company money and who the company owes money to more easily.
4. The company’s financial position is clearly illustrated and can be accessed quickly for effective business planning.
5. With a higher degree of required entries, double-entry bookkeeping has a strict approach creating detailed records of all assets so that your company doesn’t lose track of any income.
6. Double-entry bookkeeping takes internal transactions such as entry adjustment into account which provides more accurate information at the end of the fiscal year.
7. Omission of important data is never a problem because each transaction is recorded twice in two separate columns.
While the benefits have been reduced greatly due to introduction of computerized systems, double-entry bookkeeping will still be more practical when it comes to detecting fraud and errors. Whether you are a single or a double-entry bookkeeper, as long as you’re maintaining your financial records correctly, then continue crunching those numbers and getting the results you desire.