Good and transparent accounting is the bedrock of any successful business. Keeping your books straight is a major priority whether you like it, or not. Somebody’s got to do it!
But an important question you need to answer is: which is best: single-entry or double-entry bookkeeping? It’s a crucial decision but one which needs to be made on the basis of your needs.
Let’s examine the two types of bookkeeping and find out which works best for your business.
Single-entry bookkeeping is a good approach for small businesses. Ideal for enterprises with limited complexity, each transaction is recorded as a single item, tracking considerations like cash, taxable income and expenses which can be deducted at tax time.
Maintaining two columns – one for expenses and one for income – records the transaction as a single item, distinguished by inflow and outflow.
As we said at the beginning, single-entry books work best for small, uncomplicated businesses with limited transactions and thus, complexity. Unfortunately, it doesn’t allow you to track assets and liabilities and to develop a balance sheet.
This is the type of bookkeeping most businesses use, whether small or large. With this style of keeping the books, each transaction is recorded as both credit and debit, creating 2 accounts for each item.
For example, when paying a bill, your cash account goes down according to the amount owed (debit). The second entry then notes that the amount owed has been paid, recording it as a credit.
Double-entry allows tracking of liabilities and assets, as well as allowing you to keep tabs on profits and losses. This sets the scene for producing accurate financial statements, which can be prepared directly from your bookkeeping efforts, making it easier to detect errors.
If you have investors, then double-entry bookkeeping offers greater accountability and transparency. That’s why most accounting software is rooted in the double-entry system (QuickBooks and Quicken, for example).
Still confused? That’s OK! Following is a cheat sheet that breaks down the most significant aspects of double-entry accounting.
These increase assets, decreasing liabilities or equity
Increase expense account
Revenue is decreased
Always record these on the left
Increase liabilities or equity, decreasing assets
Reduce expense account
Revenue is increased
Always record these on the right
Which Is Right for Your Business?
If your business is small, simple and has no inventory, you may be just fine with single-entry bookkeeping. But most businesses will find that the double-entry method offers more insight and control for the little bit of extra effort it takes to maintain.
You get a 360-degree view of your business with double-entry that the single-entry method can’t offer. Being able to produce financial statements from your books is the most obvious advantage here. But you’ll also be able to see how profitable you are and where you may be underperforming or spending money on items which aren’t serving the health of your business.