The first type of bookkeeping method we are going to discuss is known as a single-entry. It is a simple form of accounting for financial activities in a business (or even a household). This method has been used for centuries and existed long before the double-entry method. Unlike the double-entry method, which we will discuss in more detail next, the amounts do not need to be reflected on the debit and credit sides of accounts.
This bookkeeping way is kind of like cash accounting. All it does is look at the cash coming in and out, and all business transactions are just recorded in a physical journal or simple program, like Excel, in chronological order. A great example of this would be your bank statement. You can look at all the transactions made during a specific period and see if money was going into your bank account (deposits) or out of it (expenses and withdrawals).
Maintaining one’s accounting books this way is considered much simpler by many, but there are many disadvantages to it. For example, if a business would like to attract investors, they will be unable to properly evaluate and analyze your company. If a company chooses to do bookkeeping this way, it does not account for expenses or revenue that occurred in a different period. Since a company would be recognizing expenses when they happen, it makes it really hard to run a business.
Moreover, you cannot tell right away how much you have in each account, whether it is inventory, cash, money your customers still have to pay you, or expenses you need to pay or have already paid. For these reasons, the single-entry method is only suitable for start-ups and very small businesses that do not have many financial transactions on daily basis.
A double-entry system is one of the fundamental methods of systematizing information in an organization’s financial workflow. It allows you to reflect the data most accurately. To be honest, no one has come up yet with a better way to reflect business transactions than the double-entry method. This method is used by most businesses and usually computerized, which makes it less time-consuming and more accurate. When tax time comes, getting the taxes filed is less painful.
At its core, the double-entry accounting system requires one to record any transaction while reflecting its effect on all the accounts that are associated with it. So when an entry is made to an account, a corresponding and opposite entry is made to a different account. In other words, one can see right away what a business gained and what it gave in return. Thus, the ability to see at a glance the paths of income and outflow of resources provides many advantages for specialists seeking to improve the economic condition of the company.
Advantages of using this bookkeeping system:
- Includes information on changes in business assets and/or liabilities in equivalent amounts;
- Controls the flows of funds, as well as the ways of their appearance;
- After reflecting on the sources from which the funds come, it becomes possible to indicate where they were used, i.e. where they go in the future;
- Makes it possible to trace the transactions and their correctness by checking the debits and credit.
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Author: Charles Lutwidge