Startup founders are so invested in the creativity, growth and smooth running of their businesses that they often lose sight of accountancy technicalities that are limiting their growth. There are different types of accounting for different sizes and industries of companies. The most common bookkeeping techniques are single-entry and double-entry bookkeeping. If your company has the requirements of double-entry yet to keep operating on single-entry, it limits the growth of your business and prevents you from carrying out essential accounting processes.
It might seem like a tough call for non-finance people here, but you don’t need to worry. This article discusses the basic operations of both methods so you can make a well-informed decision for yourself.
To understand the popularly used double-entry bookkeeping, we first need to know what single-entry bookkeeping is. How was it insufficient, that we needed another more complex type of bookkeeping.
As the name states, in single-entry bookkeeping, there is one entry for each transaction. There usually is one column, where positive values denote incoming cash, while a negative amount is outgoing cash. Single-entry bookkeeping can use separate columns for debit and credit as well. But, one transaction is only entered once in either one of the columns.
Since single-entry bookkeeping only deals with transactions, it operates on cash basis accounting. If you’re not aware of the differences in cash-basis and accrual accounting, take a pause and head over to this article.
A single-entry book records taxable income, tax-deductible expenses and cash. The only details you can see from this bookkeeping are these.
- Transaction date
- Transaction description
- Transaction value: this can be placed in either an income (credit) or expense (debit) column
- Balance: a running tally of cash on hand
Example of Single-entry bookkeeping
|Starting balance for the day
|Electricity bill for the month
|Daily product sales
|Ending balance for the day
You can see in the cash record above, that every transaction is mentioned once though in two separate columns. It is not easy to analyze your yearly sales tax or electricity bills from this combined ledger.
While having a record of these transactions is a good first step toward better managing your cash flow, this type of recording doesn’t make clear the impact each transaction has on your business.
Shortcomings of Single-entry bookkeeping
This is a simple method but falls short to manage finances for bigger companies.
- Can not generate a balance sheet or income statement
- Insufficient control for public companies
- Hard to track liabilities and assets
- Can not manage a large number of payments
- Hard to spot fraud or errors in your accounting
- Provides no insights about the business’s financial position
Is Single-entry bookkeeping adequate for your business?
Despite these shortcomings, this simple method is sufficient for a few small companies. In fact, founders with no background in finance or accounting and no resources to hire an accountant, often prefer this system as it’s easier to understand. If your company meets the forthcoming attributes, single-entry bookkeeping would work well for you.
- The company uses cash basis accounting, not accrual accounting.
- The firm has few financial transactions per day.
- The company does not sell on credit.
- The firm has a few employees.
- The company owns a few valuable business-supporting physical assets. \
- The company is privately held or operates as a sole proprietorship or partnership.
- Does not need not publish an Income statement, Balance sheet, or other financial statements.
Pubic companies and large-scale companies that need to show their financial position and reports can however not practice this method. This is why, we need a system that counts in assets, liabilities, expenses and income, so we can better evaluate how much customers or suppliers owe the business or how much you owe them. Additionally, it would also provide a clear monthly and yearly analysis of your finances.
This system uses both debits and credits to record and manage financial transactions. This system primarily works on this simple equation:
Assets = Liabilities + Owner’s Equity
To understand this equation, you should first know these terms:
Assets: Anything you own
Liabilities: Anything you owe
Revenue/income: What your business earns
Expenses: The cost of doing business
Owner’s equity: Reflects your current ownership level
Double-entry bookkeeping keeps this equation balanced. If the two sides of this equation are out of balance, this indicates an error in the books. Such errors lead to decisions based on faulty information. That could cause bounced checks or bank charges.
Steps to practice double-entry bookkeeping
Step 1: Create a chart of accounts for posting your financial transactions.
Step 2: Enter all transactions using debits and credits.
Step 3: Ensure each entry has two components, a debit entry and a credit entry.
Step 4: Check that financial statements are in balance and reflect the accounting equation.
Example of double-entry bookkeeping
|Purchase of a computer
This might seem confusing, but let’s see what’s actually happening here. Double-entry bookkeeping has multiple accounts: Revenue, Cash, Liabilities and Assets. When we record the sales revenue of $500 in the debit column, it increases the balance sheet of “Cash”. And when we enter the same transaction in credit, the income statement account “Revenue” increases. This transaction increases your cash and revenue.
Similarly, the purchase of a computer added to the debit column increases assets (technology expense assets). The same transaction in the credit column decreases the cash account. This transaction increases your business’s technology assets yet decreases your cash.
Debits always increase asset or expense accounts and decrease liability or equity accounts. Credits always decrease asset or expense accounts and increase liability or equity accounts.
Benefits of double-entry bookkeeping
Now, why would someone want to learn and implement this complex and confusing technique when they have the simple cash edger like option of single-entry bookkeeping. Firstly , for growing and larger businesses that need to provide accurate financial reports, this is a necessity. Some features that make double-entry bookkeeping necessary for all businesses:
- Delivers a complete financial picture
- Facilitates generation of financial statements
- Helps companies make better financial decisions
- Reduces bookkeeping errors
- Focuses on Revenues, Expenses, Assets, Liabilities, and Equities.
- Preferred by Investors, Banks, and Buyers
- Supports scaling and growth of business
|Supports cash accounting
|Supports accrual accounting
|Monitors assets, liabilities, and equity
|Error checking built-in
|Generates financial statements
Why go through so much trouble when you have Metric?
You might have understood the basic functioning of double-entry bookkeeping through this article, but if like me you don’t have a financial background, practicing this system yourself itself is a headache. If you try to create a bussiness ledger manually, you would be taking help, referring to account books and internet, and end up wasting a ot of your preciosu time on something that’s a piece of cake for an accountant.
he best way to get started with double-entry accounting is by using accounting software or app. These days accounting apps are deveoped keeping in mind bussiness owners not accountants. Thus accounting apps like Metric are easily understadable by everyone. Metric allows you to get your business up and running in no time, while reducing errors and eliminating out-of-balance accounts.
If you’re a small growing business, Metric helps you eep accounts in balance, reduce the possibility of error, and help you produce accurate financial statements. These statements would be crucia when you start pitching for investors or try for bank loans. Subscribe to Metric and take the burden of accountancy and bookkeeping off your shoulder.