When you came with a new business, one in every of the primary stuff you got to choose is that accounting method to use. Whether to opt for the double-entry bookkeeping or single-entry bookkeeping.
It will appear to be a tricky decision for those who are not from an accounting background. Both accounting systems have their pros and cons. Until you are already well-versed in accounting and money management, it will be laborious to understand that one to settle on for your business.
In this blog, we will make a case for double entry bookkeeping and provide you the data you would like to choose that is correct for your business.
What is Double-entry Bookkeeping: An Overview :
Double-entry bookkeeping is an accounting method during which the financial transactions are recorded in two forms of accounts – debits and credits. Once you record the transaction, the number of debits and credits used will differ; however, the net amount of debits should equal be to credit.
You will record these transactions in every section of the business’s ledger. You’ll see debits on the left-hand side and credits on the right in double-entry bookkeeping.
Double-entry bookkeeping makes it simple to notice errors amid the accounting equation it depends upon. This equation asserts that:
(Assets = Liabilities + Equity)
Assets are everything an organization owns, and on the other hand, liabilities are what an organization owes, plus equity is the owner’s stake and owner’s contributions into the business. For instance, let’s assume that you just sold all of your assets for money and used the money to pay off all of your liabilities. The leftover money would be your equity balance. Double-entry bookkeeping keeps it balanced.
If both sides of the equation are out of balance, this can be a good sign of error in the financial books. In case bookkeeping errors are not detected, you end up making decisions for your business based on faulty reports. This would lead to unsettled cheques or bank charges in the future.
Double-entry bookkeeping has been in practice for ages, and it is still the commonly used accounting technique that complies with GAAP (Generally Accepted Accounting Principles).
While it’s fascinating to build your business set-up more manageable by choosing single-entry bookkeeping, however, double entry bookkeeping contains ample advantages:
- Fraud and Error Identification
Double-entry bookkeeping permits bookkeepers to spot and fix errors immediately. Each transaction action should balance total debits and total credits. Most accounting software systems provide a reflective message when debits and credits are out of balance. Once you establish things that are not adding up, you can instantly troubleshoot them and get rid of any future problems.
- Profit and loss
It is simpler for you to spot profit and loss as revenue and expenses transactions are listed accurately.
- Financial statements
While using double-entry bookkeeping, you’ll prepare financial statements directly from the books, as all the required data is previously recorded.
A double-entry bookkeeping system offers a 360-degree outlook of financial transactions of the business, by making reporting of financial transactions easier and providing transparency in operations.
Implement double-entry bookkeeping:
You have required a Chart of Accounts and five account categories: Liability, Assets, Equity, expense, and Income, to implement double-entry bookkeeping. Follow these debit and credit rules while using this technique:
- An increase in assets and expense accounts is a debit entry.
- An increase in liability, equity, and income accounts is a credit entry.
- The total debits and credits will be different in a specific journal entry.
- The total amount for debits and credits should be equal.
You or your bookkeeper will examine the activity by completing a trial balance, listing every account and the current balance within the budget while journal entries were posted. If everything goes effectively, the total balance of debits and credits ought to be equal. Accounting Software systems like QuickBooks will automatically verify to determine if your books are adding up.
Single-entry Bookkeeping: An Overview
The single-entry bookkeeping method involves the practice of recording checks and deposits in one register. For the businesses that are using the single-entry technique, they record financial gain and expenses once, therefore the name.
If it sounds easier than a double-entry bookkeeping system, yes, it is. In a single-entry bookkeeping system, all the transactions are recorded in one log. This method does not record assets or liabilities. Businesses using a single-entry bookkeeping system are solely recording the date, name, and amount, of every financial transaction. The remaining obligation is that the transaction log should contain enough data for taxation.
As an accounting method, only a few businesses practice single-entry bookkeeping. It’s generally represented as ‘incomplete.” It solely records one side of a business’s transactions i.e., inflows and outflows. This makes single-entry more exposed to fraud and encounters more error than double-entry as well as reduces the clarity and accuracy of business’s management of finances.
Bookkeeping has quite a few drawbacks as mentioned already, however, the method positively hold many advantages and, plus it beholds simplicity. You do not have to be a proficient accountant to implement or do online bookkeeping for your own business. All you would like could be a record of your company’s transactions.
You also are not required to invest in any accounting software or outsourcing accounting services, because a mere excel sheet would be enough.
Implement single-entry bookkeeping
The most uncomplicated way to doing single-entry bookkeeping is to initially setup spreadsheet with three columns: Date, Amount, and Transaction Description
Record the initial balance for the amount you’re accounting for in the top row. Then record every group action with the date, amount, and description. Amounts under brackets indicate outflows and amount which are non-brackete are indicate inflows. Lastly, simply calculate the remaining balance.
You can conjointly add a bit of quality to the present system by introducing two columns, for revenue and expenses each. This can still be thought of to be a single-entry bookkeeping system, as every translation is recorded once.
Double-entry bookkeeping vs. Single-entry bookkeeping: what must you Use?
Some businesses, as well as publicly owned firms, are responsible for following GAAP principles legally. Thus they need to use the double-entry bookkeeping system. Personal firms that use accrual based accounting, they too have to use double-entry bookkeeping.
Any startup that’s considering funding rounds within the future ought to implement double-entry bookkeeping as before long as attainable. Investors can wish access to an entire set of financial statements designed off skilled accounting, and you’ll get to build your solid money projections. Single-entry Bookkeeping won’t permit you to try to do that.
Any business that handles something aside from money transactions has to use double-entry bookkeeping. For example, if your company buys or sells on credit, you would like to implement a double entry bookkeeping system.
Single-entry bookkeeping is applicable if:
- You are a solopreneur or sole proprietary.
- You have solely money transactions designed off cash-basis accounting.
- Few physical assets and few workers.
Keep in mind that whereas you will be able to prove taxation coverage and calculate profit, you would not be able to generate an entire set of financial statements. Single-entry bookkeeping system may limit your ability to get investors on board and may end up leading you to change your accounting systems at some point in future.
Starting with double-entry bookkeeping, even if your business is small, is that the best long set up. Building the foundation that supports growth and stay measurable can open up many chances for investment, organized financial management, and permit you to create wiser decisions for your company.