When you start out your journey as a small business, choosing a bookkeeping method might feel like a daunting task. Picking the right bookkeeping method should be one of the first financial decisions your business makes and, if you don’t like the accounting side of things, this could prove difficult.
It is imperative for any business to keep track of every financial transaction that occurs on a day-to-day basis. Bookkeeping helps your business to see where money is coming and going and enables the process of accounting. Analysing these financial statements helps you make business decisions that track a course for the growth of your company.
Here are some key differences between single and double-entry bookkeeping methods.
What is the Single-Entry Bookkeeping Method?
The Single-Entry method is exactly what it sounds like! For every financial transaction made, you make just one entry into the general ledger. These entries tend to be records of incoming or outgoing cash and expenses that may be tax deductible. A Single-Entry ledger tends to have just two columns – one for income and another for expenses.
Single-Entry bookkeeping is ideal for a new business that deals with fewer transactions than a larger business. Single-Entry systems also deal solely with cash transactions and do not take into consideration assets of liabilities. This means Single-Entry books may give a less accurate representation of the financial standing of a business. As your business grows, double-entry Bookkeeping can help give more accurate understandings of profit, loss and the financial position of your business.
What is the Double-Entry Bookkeeping Method?
Like Single-Entry, the Double-Entry Method, put simply, is also what is sounds like. Instead of entering each financial transaction once, they must be entered twice. These transactions are entered into the account in the form of both a credit and debit transaction. As such, two entries are made for every transaction.
Imagine you have just paid an electricity bill for the building you lease. The electricity bill came to £200 for the month. You would enter this into the ledger into your expenses account as a utility expense. Your books should reflect your accounted debited for £200 under a row assigned to the account ‘Utility Expense’. As well as this, your book would also show that your ‘Accounts Payable’ has been credited £200. The entry has been recorded twice. In the first case, the debit demonstrates that your expenses have increased. Your ‘Accounts Payable’ would be credited £200 to demonstrate this obligation to pay.
As complicated as the Double-Entry Method may seem, it helps you keep a detailed track of all financial transactions, including asset and liability accounts. It also helps you to make more accurate predictions of your business’ growth and use this information to make informed business decisions.
How to choose which method is best for your business
Making a decision on which method you use will rely on business size and the volume of daily transactions.
The first step to making this decision involves an honest assessment of the size of your business. The single-entry bookkeeping method is ideal for new business’ as you don’t require accounting expertise to manage your records. You can complete this kind of bookkeeping in an Excel spreadsheet which would save you money on accounting software.
On the other hand, the single-entry method is comparably inaccurate and provides an incomplete assessment of your daily financial transactions. Furthermore, it can’t really be used by potential lenders or investors as the method doesn’t allow for an accurate assessment of the current financial situation of your business. Unlike double-entry, single-entry might not protect you from inputting errors or fraud.
The double-entry bookkeeping method is a much more universal practice, ideal for small and larger businesses alike looking to keep track of their financial health and also identify areas of growth. Though it can be complicated if you choose to attempt it yourself, you have a more dynamic record of how your business is behaving – including where it may improve. Inputting errors and fraud are much easier to detect and you have the capability to produce financial statements that give an accurate summary of your business’ financial data.
Whilst both systems have their merits, the double-entry bookkeeping method provides a stable backbone for any business.
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