There are two main systems used by businesses when discussing bookkeeping: single entry and double entry. While both systems are quite adequate, choosing which one to use in your business is for the most part, up to personal preference. That being said, unless your business is small, and only handles simple transactions, double entry bookkeeping will provide the most benefit.
Single entry bookkeeping is much like a register on your statement, where only single transactions are recorded in the form of a cash debit or credit. Keeping the books in this manner is less time consuming, and less expensive. However, single entry bookkeeping only makes a record of cash, accounts receivable, accounts payable, and taxes. More in depth transactions are not recorded, which could lead to only a partial accounting of your finances.
Double entry bookkeeping makes use of generally accepted accounting principles (GAAP), and is a bit more involved. Rather than having just one transaction in a column, there are two entries. A credit entry is made for all income, and a debit entry is made for each expense. These two entries will offset each other so that both sides tally to zero.
Double entry bookkeeping therefore provides the following advantages over single entry bookkeeping:
- It provides verification that errors have not been made, including a check that there has been no theft, when all transactions are properly recorded.
- Financial statements can be prepared easily because of the accurate calculations that figure profits and losses, When both entries are made, the company can easily pinpoint areas where money is owed, or who owes the company money.
- The company can easily view their financial standing, and can more simply prepare for the future.
- There are more required entries, double entry bookkeeping creates detailed records of all assets within the company, so that income is never overlooked.
- Double entry bookkeeping also tracks internal transactions, which helps to provide more detailed information for reporting at the end of the fiscal period.
There is never the problem of omitting data that is important because every transaction is logged twice, in separate areas. As you can see, there are a number of key benefits to utilising the double entry bookkeeping system. Just about every type of business in every industry can make use of this method, and yield exceptional results.
*Article originally posted in our old bookkeeping blog.