What is Double-Entry Bookkeeping? How is it Different From a Single Entry?

A business involves interaction between a lot of people. These include customers, vendors, and stakeholders, to name a few. With many entities come just as many money transactions. Thus, keeping track of all these can be quite tough. Bookkeeping is just about any method by which a business records its financial transactions.

Therefore, it organizes all the cash inflow and outflow in a single place. However, there are two main methods of bookkeeping. These are double-entry bookkeeping and single-entry bookkeeping. Both these methods, both single and double-entry accounting, have their unique features.

What is Single-Entry Bookkeeping?

You record your business transfers in a single system in just one account. Therefore, this account reflects all the changes that take place. For example, this account shows a reduction when you make payment. On the other hand, the account will show a higher amount when your business receives money. Hence, this system shows only the debits and credits. It does not recognize any other type of account or differentiate between them.

What are the Features of a Single-Entry System?

The single-entry system is fairly easy to use. This can be linked to the features below:

1. Actual Bills

These are an important part of the single-entry system. This is because they show the details of each transfer. In this way, they make the system more accountable and easy to use.

2. Maintaining A Cash Book

The primary aspect of this bookkeeping is that only one cash book is maintained. This merges both business and personal money transfers.

3. Accounts

It involves the maintenance and manage the personal accounts of those who credit and debit money from and to the business. This helps understand the details of their money transfers related to the business better.

4. Rules

This system does not have any strict rules to play by. Hence, all you have to do is record how much money came in and went out. From there, you can figure out the profit and the loss. However, while making the system flexible, this feature also makes the system dynamic. Hence, it changes from industry to industry. It can also change from one particular firm to another.

5. Approximations

When it comes to approximations of profit or less, this type of system falls short. This is because the accounting data available to it is limited. It only has the data recorded in the bookkeeping system. Thus, with only such data, it will not be able to tell you your overall profit or loss.

6. Statement 

You can calculate the various financial aspects of your business using the data that you see in this system. However, as it does not consider different types of accounts, you cannot make the balance sheet. Instead of this, the system uses a statement of affairs.

How to Maintain a Single-Entry System?

Maintaining this type of system is fairly simple. You can do it very easily using the following steps:

1. First, check how much money you have for your business currently. Enter this value. For example, assume that you have $10,000 initially. So you enter this value along with the details and date.
2. Next, add anything you receive for the business. This is your profit, so you have to add it to the money that already exists in your bank. This money would usually come from your customers. For instance, assume that you receive $2000 from a customer. You should add this amount to your initial amount, which is $10,000. Thus, the total amount would be $12,000.
3. Then, subtract anything you spend from your business account. It does not matter if you invest back in your business or spend on inventory. This amount has to be removed from your existing amount of money. Thus you have to subtract it. Usually, this would be in the form of utility payments. Suppose you have to pay $3000 for various expenses in the example. You have to record each of these expenses along with the date and details. Then, reduce the amount. So, after these transfers, the amount of money left with you would be $9000.

Finally, here is how your book would look, based on the example given above:

Date	Details	Credit	Debit	Amount
1st Feb	Initial Amount			$10,000
2nd Feb	Payment from client	$2000		$12,000
3rd Feb	Electricity		$1500	$10,500
4th Feb	Salary		$1500	$9000

Advantages of Single-Entry System 

This system of keeping your records comes with certain advantages. These are as follows: 

1. Simple To Use

This system is fairly straightforward. It does not have any complex rules that you have to follow. Hence, it is very easy to use. You just have to keep a record of your money transfers without worrying about any other details. Also, you do not need any training or course before using this system.

2. Inexpensive

As this system is not riddled with complexities or technical terms, anyone can use it. You can even see how much your business gained or lost in terms of money over some time. And, you can do this without any prior knowledge in accounting. Hence, you do not need any skilled staff for the same.

Even if you hire someone to manage this system, you would be paying them significantly less because the work is not difficult. Also, you do not need to hunt for qualified experts. In this way, this system is helpful to small firms. 

What is Double-Entry Bookkeeping?

In a double-entry accounting system, you have to maintain two accounts. The principle behind this is that each transfer would have opposing effects in two different accounts. These would also be equal in value. In simple words, the debit in one account would balance out the credit in another. Therefore, when you add up all the debts, it must be equal to the addition of all the credits. Thus, it uses the following equation:

Assets = Liabilities + Equity

Source: myaccoutingcourse.com 

How to Use Double-Entry Accounting?

Double-entry bookkeeping may seem complex and full of rules. However, it can come in very handy. Also, you would be able to use the system fairly easily once you get the hang of it. You can follow the following steps to use it:

1. Remember the starting amount. For example, suppose you have $ 5,000 for your business initially.
2. Now maintain two accounts – and note down the cash transfers and the details of each transaction. You can classify them as debits and credits. 
3. For example, you receive $500 from a client. Then, you pay $1000 for electricity and $1500 as salaries. When you add up the debit and credit, you will see that $3000.

You can see it illustrated clearly with the help of the following table:

Account	Debit	Credit
Cash	$500
Client Payment		$500

Account	Debit	Credit
Electricity Bill	$1000
Cash		$1000

Account	Debit	Credit
Salaries	$1500
Cash		$1500

If you add up both the debit and credit columns of all three tables separately, you will notice that the values are identical.

What are Some Things Used in Double-Entry System?

Unlike bookkeeping, single-entry bookkeeping, journal, ledger, trial balance, and financial statements are used in this system. Each of these has been explained in detail as under.

1. Double-Entry Journal

A journal keeps the records of money transfers organized. Usually, this has to be done in the order of events, that is, the dates have to be mentioned. Also, it does not have to take care of the debits and credits and go into the details of balancing them.

However, each entry would go to two accounts in a double-entry one. Also, in a journal, you would have to write details of each transaction. So, you would explain the transaction, its purpose, etc.

2. Ledger 

This is where the final inputs go. Further, if your journal does not use separate entries, you would have to organize them in the ledger. Also, this would be balanced according to the formula. The formula creates a link between the debit account and credit account in that they are equal. You would be able to get your company’s financial situation from the given link.

It is the principal book, and it does not contain any details. Also, some ledgers can differ from others because they have an opening balance. This is carried forward from the previous financial year.

3. Trial Balance

A trial balance is a sheet that comes after the ledger. It compiles the balance of all the ledgers in one area. For this purpose, there are two columns in the trial balance sheet: debit and credit. The total of these would end up being equal. Usually, your business would need a trial balance at the end of a period, for example, a month. The equality of both the debit and credit columns would ensure no calculation mistakes.

Thus, they help maintain the accuracy of your account. However, if an entry mistake is not mathematical, this method will not detect it. For example, if you enter into the wrong column, both columns would be balanced, thus escaping the trial balance sheet. However, your accounts would still be wrong.

4. Financial Statements 

This is the final part of the system. They function as reports that consider all the financial activities that took place. Moreover, they help assess the performance of your company. To provide these statements, you have to use data from the balance sheet.

Further, you would be able to quickly tell the company’s financial health from the financial statements with help of the best financial management software. It is a tool commonly used by analysts to make estimates. Also, the government uses this while auditing.

Double-Entry System Vs. Single-Entry System 

While single-entry and double-entry accounting are both for maintaining a firm’s financial transactions, they are not the same. The difference between single and double-entry systems can be explained as under.

1. The Number Of Entries

This is the most obvious difference between the two systems, as their names suggest. The single-entry system uses only one account, so it has only one entry per money transfer. Therefore, it is also less complex, especially for someone new to keeping accounts.

On the other hand, in double-entry, you need to maintain two accounts, one for debit and one for credit. These accounts then tally with each other. If they do not tally, you have made a mistake in the entry somewhere or the other.

2. Recorded Entities

Single-entry has a simple principle. It records everything based on cash flow. This cash flow is divided into two categories – income and expense. In this way, it maintains the financial records of the business. Also, the cash need not necessarily be physical money. It can be in the form of electronic transfer or any other method.

On the contrary, double-entry uses a different form of keeping records known as accrual accounting. It uses 5 different things, 3 of which are in addition to what single-entry uses. These additional accounts are assets, equities, and liabilities. In this way, it is more detailed.

4. How do They function?

Both systems are different in the way they function. Usually, smaller companies use the single-entry method. Hence, they record the income when they receive it. Also, they write down the expense when they pay it. This is slightly different from the way double-entry functions. In double-entry, companies record income the moment they earn it. Also, write down the expenditure when they owe money.

5. Complexity 

With several rules to follow and two different accounts to maintain, the double-entry system is much more complex than the single-entry one. Hence, they need experts to handle them.

Further, the double-entry system has equations to balance. On the other hand, the single-entry principle only has one principle it follows. Therefore, the double-entry system requires you to be a little more organized and systematic.

How is Double-Entry Bookkeeping Better Than Single-Entry?

There are several reasons why double-entry might be considered superior. If you keep track of your expenses and income separately, you can’t make mistakes in the numbers. A Double-entry system is better because it prevents you from using the same account for two things.

For example, if your company is making a trade, you can’t use your cash account as a trading account. If you do, your online accounting system will end up with a negative balance. It also prevents you from undertaking businesses that are unrelated to your business. If you have duplicated accounts across multiple companies, you can’t use them to hide any business activity.

Advantages of the Double-Entry Method

Here are some advantages of a double-entry system over a single-entry system:

1. Recording method

By keeping two sides of a transaction, the double-entry method records the credit and debit of the transaction simultaneously. This helps the merchant keep track of the cash, and it is easy to prepare financial statements.

2. Accuracy

As there are two entries of all transactions, it is highly unlikely that a mistake or error be made. It increases accuracy, and the merchants can maintain a good financial record.

3. Auditing

It is easier to audit the records if they are double-entry as it is easier to prepare the balance sheet and profit and loss account. If a merchant wants to audit his accounts, he will be able to prepare the accounts accurately and in a short period. A third-party auditor will also prepare the merchant’s accounts and reports according to the merchant’s instructions.

4. Analysis

With two sides to a transaction, it is easier to check the balance of accounts at the end of the period. The accounts can be analyzed and compared by a simple glance.

5. Taxation

Double-entry system is used as a basis for taxation. This taxation system was developed during the Renaissance, in the 15th and 16th centuries, when the merchants started recording their transactions in a book rather than on merchandise.

Disadvantage of Single-Entry System

Single-entry bookkeeping is great for a small business, and it works well for small businesses. But as a business grows, it’s not enough. As a small business grows and its income and expenditures become more complicated. This is because double-entry is necessary for accurate financial reporting.

Here are some of the problems with single-entry bookkeeping:

• It is difficult to track business performance and make good decisions based on those performance results.
• It is difficult to prepare useful financial statements.
• It’s very difficult to find errors in your financial records because they’re not cross-checked.

A good double-entry system counters all these points. Experts and regulators agree that single-entry bookkeeping is not good for business purposes.

For this reason, you should use double-entry bookkeeping no matter what type of business you run. Therefore, you should adopt double-entry bookkeeping if running a complex or high-risk business. It is also good for growing businesses that cannot rely on simple books to generate accurate financial information.

Conclusion

Bookkeeping is a critical business activity. You should remember that you would eventually have to switch to double-entry even if your business is small at the moment. That said, if you have any trouble maintaining your records, you could consider getting help from an expert.