Running a business can be an exciting and scary prospect. There are a lot of decisions that need to be made. One of those is whether to use single-entry or double-entry bookkeeping. For those not well-versed in accounting practices, deciding between the two might be difficult. It is not always clear which one will be right for your business. We’ve simplified it by breaking down the differences between double-entry and single-entry bookkeeping and listing out the pros and cons of each.
As skilled and expert bookkeepers, Rooks’ team is dedicated to helping you scale up your business with our financial insight and accurate, accrual basis accounting. Why not schedule your introductory call with us now?
What is double-entry bookkeeping?
Double-entry bookkeeping refers to a way that transactions are recorded using two accounts: Debits and Credits.
In this system, debits must equal credits. That means, if you purchase supplies at Staples for $100, you debit supplies expense for $100 and credit cash/assets for $100.
There are five types of accounts that businesses keep track of using a double-entry system, including:
The accounting equation that is the foundation of double-entry bookkeeping is:
Assets = Liabilities + Equities.
So, in the above example, assets would be +$100 because of the supplies purchased while liabilities would be +100 because we reduced the cash balance by $100. The equation should always balance or the books are incorrect.
Benefits of using double-entry bookkeeping
There are several benefits to using the double-entry bookkeeping method, such as:
- It provides a more accurate representation of the Profit and Loss statement. This is because the revenues and expenses are recorded at the correct time. Investors, banks, and buyers prefer the double-entry system as it is a more comprehensive look at the company’s financial position.
- Tracing historical records to identify fraud and mistakes is easier because there is a better audit trail. This makes it less likely that errors will make their way into other financial documents.
- You can also easily prepare a Balance Sheet and Cash Flow statement because assets, liabilities, and equities are being properly tracked.
Who should use double-entry bookkeeping?
Double-entry bookkeeping is an ideal system for a company of any size. Some businesses and organizations are legally obligated to use double-entry bookkeeping because they have to follow GAAP (generally accepted accounting principles). However, the system is also a good fit for business owners who are having trouble keeping track of their financials.
The double-entry method can be the best choice for businesses that are seeking to borrow money or fundraise. It can also help fast-growing businesses or those that are well-established to keep accurate records.
How to implement double-entry bookkeeping?
Getting started with double-entry bookkeeping doesn’t have to be complicated. Companies that use accounting software such as Quickbooks Online, can access the tools needed to easily implement a double-entry bookkeeping system.
Businesses that want to seamlessly transition to double-entry bookkeeping can also outsource to a firm such as Rooks Bookkeeping.
Using a trusted process, companies are able to easily transition to Rooks making double-entry bookkeeping a reality. Moreover, as a full-service company, Rooks can handle your account reconciliations, payroll, accounts receivables, accounts payable, and sales tax filings.
You’ll also be able to integrate with your favourite accounting apps like Quickbooks, Receipt Bank, Stripe, and more. You’ll rest easy knowing your finances are in one place and up-to-date.
What is single-entry bookkeeping?
Single-entry bookkeeping is a simpler way of tracking transactions and recording them all in one register. This method only keeps track of revenues and expenses when cash is paid or received. It does not record assets, liabilities, or equities. Very few businesses use this method as it is not in compliance with GAAP. It also fails to provide the financial data needed to make the best decisions.
Who should use single-entry bookkeeping?
While most businesses benefit more from using double-entry bookkeeping, solo-preneurs may find single entry bookkeeping more affordable. Businesses with little to no assets where owners usually pay for expenses from their own pockets. Single-entry bookkeeping may also fit for projects that have a small budget.
How to implement single-entry bookkeeping?
Due to its simplicity, it is easy to get started with single-entry bookkeeping. All you’ll need is a journal to record entries. This can be created in Excel with columns for date, description, and amount.
Single-entry bookkeeping can also be outsourced on freelance platforms like Upwork. Finding a contractor to do the work shouldn’t be too difficult because it is such a simple task.
Best Bookkeeping Method for Your Business
Bookkeeping is essential for any business and there are really only two choices. Companies will need to decide between double-entry and single-entry bookkeeping. However, only double-entry bookkeeping provides an accurate view of the company’s financial position. The double-entry method can also prevent errors from being transferred into other financial journals or documents. Most importantly, double-entry is the only one that is compliant with GAAP.
At Rooks, we have built a team of dedicated bookkeepers that are well-versed in double-entry bookkeeping for any business. When you need reliable and accurate records, contact Rooks.