June 2, 2022 | 4-minute read (676 words)
Many new business owners are surprised to find that one of the first decisions they’ll need to make is whether to employ single-entry or double-entry bookkeeping, also sometimes referred to as single-entry or double-entry accounting.
Other owners simply establish a system for paying vendors and recording income as quickly as possible, unaware that it’s in the best interest of their business to choose a bookkeeping method.
But the longevity of the business rides on establishing and following good accounting processes. Choosing between a single-entry or double-entry bookkeeping system will have consequences for every facet of your business.
That means it’s important to get informed about the differences between the two bookkeeping systems, which we’ll delve into below.
How single-entry bookkeeping works
With single-entry bookkeeping, only one entry is made for every transaction, similar to the act of balancing your checkbook. Each entry is recorded as either a positive or a negative amount using a two-column ledger, with one column assigned for revenue and the other assigned for expenses.
The reason it is dubbed “single entry” is, you guessed it, because there is only a single line per transaction. In the ledger, you record transactions such as cash, taxable income and tax-deductible expenses in the single-entry bookkeeping system.
Single-entry bookkeeping is most commonly used by newer or smaller firms that don’t have a large volume of business coming in. Since it only records one entry for each transaction, it is best-suited for companies with uncomplicated financials. However, it is not the best for many businesses, as we will explain below.
How double-entry bookkeeping works
With double-entry bookkeeping, every account has two columns, and every transaction is located in two accounts. That means two entries are required for every transaction: a credit in one account and a debit in the other.
Double-entry bookkeeping is best for bigger, more complex businesses that need to track accounts such as inventory, accounts payable and accounts receivable. While single-entry bookkeeping can be used to calculate net income, it can’t be used to create a balance sheet or to follow the asset and liability accounts.
The benefits of double-entry bookkeeping are that it offers transparency as to your business’s financial health, it lets you identify and fix mistakes quickly and it makes it easier to spot profitable and less profitable facets of the company.
Who should use single-entry bookkeeping?
Single-entry bookkeeping is ideal if yours is a small-sized business that has limited activity and no money to invest in tools and inventory. To reiterate, it is most advantageous for businesses with a small number of transactions and simple financial tracking requirements, as outlined below.
The benefits of single-entry bookkeeping:
It’s budget-friendly – Small businesses may not have the financial resources or need to hire a full-time accountant, making single-entry bookkeeping a desirable choice. It also appeals to startups that find it useful for tracking earnings and losses in the early stages of their business.
It entails no software – Single-entry bookkeeping requires only a pencil and paper. This saves help small businesses versus needing to purchase expensive accounting software and keeping it up to date.
It lets you easily monitor cash flow – Small businesses and startups that use single-entry bookkeeping can easily see money coming in and going out. This helps owners spot errors and areas of concern in their finances quickly.
Recap: Single-entry versus double-entry bookkeeping
In single-entry bookkeeping, each financial transaction has only one entry, which is recorded in a cash journal. It only maintains a record of cash, taxable income and expenses. It is a simple method that comprises three steps:
• Recording the previous balance.
• Keeping track of revenue and expenses.
• Calculating the final balance.
In double-entry bookkeeping, each account has two columns, and each transaction is recorded in two accounts as a debit or credit. Revenue, expenses, assets, liabilities and equity are all tracked in accounts. Advantages include the ability for the business owner to precisely compute profit and loss; easily spot errors or fraud; and create financial statements directly from the books.