Double Entry Bookkeeping Or Single Entry Bookkeeping?
Any business needs to keep track of their finances, and bookkeeping is how it is done. Bookkeeping allows business owners to organize assets, revenue, expenses, and other monetary matters. It is also an effective way to find errors and other losses. Two common ways exist in order to do these duties that are quite different. These are double entry bookkeeping and single entry bookkeeping.
As transactions are recorded in the double entry bookkeeping method, two or more accounts are affected at the same time. These transactions are recorded as a series of credits and debits. When balancing the books, all of the credits are added together as well as all of the debits. The sum of the positive credits from one account are then compared to the sum of the negative debits from another. The books are considered balanced if they match. By recording the amount of a transaction twice, an error checking system is created.
Because each transaction has an equal and opposite effect on one account from another, positive and negative signs are assigned to credits and debits respectively. One account is increased at the same rate another is decreased. These records are kept in books called ledgers. Because double entry bookkeeping involves at least two accounts being affected by the same transaction, each account receives its own ledger. This constitutes a sort of financial proofreading process. As one credit or debit amount is recorded in one ledger, the opposite action of the same amount must be recorded in another. By entering the number twice, it is ensured that the books will balance when all of the figures are tallied.
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You are probably aware that double entry bookkeeping takes some skill and is not for the inexperienced. Training and capability are necessary. This is more than enough for a fairly small business, though. This where the simplicity of single entry bookkeeping comes in. It is easy enough that a small business owner can most likely take care of balancing the books by themselves. Because it is such a basic method of bookkeeping, however, it is applicable only to the smallest businesses. Because there is not an abundance of transactions, single entry bookkeeping tallies only the bare minimum of records such as cash, accounts receivable, accounts payable, and taxes. And because it doesn’t require an extensive staff, it saves small business owners a fair amount of money.
Nearly all businesses record their finances using double entry bookkeeping. It is the smaller, more simplistic businesses that can get by with single entry bookkeeping. Either way, bookkeeping is a necessary practice for any business hoping to remain profitable.
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