The first step in accounting is bookkeeping, which is also one of the most critical steps.
Bookkeeping is organizing, categorizing, and keeping an organization’s financial records in order. Keeping track of the financial health of an organization means keeping track of transactions and storing financial paperwork.
Most businesses do their bookkeeping electronically, either with a simple spreadsheet or more complex, specialized software. One of the most important first things you need to decide when starting a new business is whether to use double-entry or single-entry bookkeeping.
It’s a hard choice with pros and cons for people who aren’t accountants. Learning more about bookkeeping and managing money would be the best way to decide which is best for your business.
This article will talk about double-entry and single-entry bookkeeping and give you the information you need to decide which is best for your business.
what is double-entry bookkeeping?
Double-entry bookkeeping is a way of keeping track of money that uses two types of accounts, debits and credits, to record all transactions. When you post a transaction, you can use a different number of debits and credits, but the total monetary value of the debits and credits must be the same.
You log these transactions in your business’s general ledger with debits on the left and credits on the right. The accounting equation that double-entry bookkeeping is based on makes it easier to find mistakes.
Assets = Liabilities + Equity
Imagine, for example, that you sold all your assets for cash and used that cash to pay off all your debts. The amount of cash you have left over is your equity balance. This equation is balanced because of double-entry bookkeeping.
If the two sides of this equation don’t match up, there’s likely a mistake in the books. If you don’t catch mistakes in your books, your decisions will be based on incorrect information, which causes more problems down the road.
Double Entry written by Jane Gleeson-White, has been used since the Renaissance and perhaps even before. It is still the most common accounting method that follows the Generally Accepted Accounting Principles (GAAP).
benefits of double-entry bookkeeping
Even though it might be easier to set up your business with single-entry bookkeeping, double-entry bookkeeping has a lot of benefits:
1.finding mistakes and fraud
Bookkeepers can quickly find and fix mistakes with double-entry accounts. Total debits and total credits must add up to zero for each transaction. Most accounting software will give you an error message if your debits and credits don’t balance. When you notice things that don’t make sense, you can fix them immediately and avoid future problems.
2.profit and loss
It’s easier to figure out profit and loss because transactions for income and expenses are written out.
3.Financial statements
When you use double-entry bookkeeping, all the information you need is already in the books so you can make financial statements right from the books.
Double-entry gives a complete picture of all of a business’s financial transactions. This makes financial reporting more accessible and operations more evident.
how to do double-entry accounting
To use a double-entry bookkeeping system, you need a chart of accounts and five types of accounts: asset, liability, equity, income, and expense. Remember these rules about debits and credits:
- A debit entry adds to the accounts for assets and expenses.
- A credit entry adds to liabilities, equity, and income accounts.
The total number of debits and credits in a journal entry can differ. The total amount of money that debits and credits add up must be the same. Start by writing each entry in your journal using the rules above.
After you’ve posted your journal entries, you or your bookkeeper can review the activity by creating a trial balance, which lists each account and its current balance. If everything goes smoothly, the total debits and credits on the trial balance should be the same. With software like QuickBooks, your books can be checked automatically to see if they add up.
what is single-entry bookkeeping?
You use single-entry bookkeeping to keep track of your checks and deposits in your cheque book. In a single-entry business, you only record income and expenses once.
If it sounds a lot easier than double-entry, that’s because it is. In a single-entry system, all transactions are recorded in a single log. This method should be used to keep track of assets and debts.
Single-entry businesses only keep track of the date, amount, and name of each transaction. The only rule is that the transaction log must have enough information for tax reporting.
Only some businesses use single-entry as a way to keep their books. It is sometimes called an “incomplete” financial system because it only keeps track of the money coming in and going out of a business. Because of this, single-entry is much more likely to lead to mistakes and fraud than double-entry. It also makes managing money less precise and accurate.
advantages of single-entry bookkeeping
To set up or use single-entry bookkeeping for your own business, you don’t need any training or knowledge of accounting. All you need is a record of what your business has done with its money. You won’t need to spend money on bookkeeping services or software since an Excel sheet is all you need.
how to do single-entry bookkeeping
Setting up a spreadsheet with three columns; Date, Transaction Description, and Amount – is the easiest way to do a single entry.
In the top row, write down the beginning balance for the time you’re keeping track of. Then write down the date, a description, and the amount of each transaction. Outflows are shown in parentheses, and inflows are shown without parentheses. Just figure out the remaining balance at the end of the accounting period.
You can also make this system more complicated by adding two columns, one for income and one for spending.
should you use double entries or single entries?
Some businesses, like those owned by the public, are required by law to follow GAAP principles and use the double-entry system. Private businesses that use accrual accounting must also use double-entry accounting. If a startup wants to raise money in the future, it should use double-entry bookkeeping immediately.
Investors will want to see a complete set of financial statements based on professional bookkeeping, and you’ll need to build your pitch deck on solid financial projections. With single-entry bookkeeping, you can’t do that.
Double-entry bookkeeping must be used by any business that does anything other than cash transactions. For example, if your company buys or sells on credit, you’ll need to set up a double-entry system.
single-entry bookkeeping is an option if you are:
A solopreneur or sole proprietor. A cash-basis accountant with only cash transactions.
A small business with few physical assets and few employees.
Keep in mind that you won’t be able to make a complete set of financial statements, even though you’ll be able to prove income tax reporting and figure out the net income. This will make it harder for you to get investments in the future, and you may have to change your accounting system at some point.
conclusion
Even if your business is small, the best long-term plan is to start with double-entry bookkeeping. Building the structures that help you grow and scale will give you access to investment opportunities, make financial management more effortless, and help you make better financial decisions.
At Countick, we have a team of expert bookkeepers who use industry-leading software to minimize mistakes. Try Countick now if you want to keep better books.
