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Arguably one of the most important aspects of creating a thriving and fiscally responsible business is concise bookkeeping.
However, if you’re anything like me, just the thought alone is enough to send your head into a spin!
While it can be a time-consuming and expensive task if you don’t know the basic ins and outs, equipping yourself with the knowledge of how it works is a key first step.
There are two primary types of accounting that currently exist in today’s modern world: single-entry bookkeeping, which is frequently used by small businesses and sole traders, and double-entry – more aimed at medium-sized businesses and above.
So, what is single-entry bookkeeping?
In this article, I’ll walk you through both single-entry bookkeeping and the double-entry method, providing you with all the necessary information to understand both.
We’ll also go over the difference between the two, how to determine which one will best suit your business needs, and also look at the pros and cons of each one so you can make an informed choice.
- Single-entry bookkeeping makes the tracking of financial transactions quick and easy.
- It’s considered the go-to option for small businesses and freelancers alike.
- Single-entry accounting records income and expenses without the complexity of double-entry systems.
- While the system offers quick financial insights, it may not provide the same in-depth level of analysis as double-entry methods.
Understanding Single-Entry Bookkeeping: Definition and How It Works
Recent scientific discoveries have revealed that single-entry bookkeeping has existed for over 7,000 years, despite only being recognized as a profession for less than 150 years.
It’s considered a simple accounting system where each transaction is recorded only once, either as income or expense.
This approach streamlines accounting by eliminating the need for dual entries and only requiring you to track cash flows, checking accounts, and business-related expenses.
In short, it provides a quick insight into a business’s financial status without the finer (and sometimes unnecessary) details.
Who Uses The Single-Entry System?
Single-entry bookkeeping is a popular choice for small businesses, as it is easy to use and less complicated.
This tool eliminates the need for specialized accounting knowledge, allowing business owners to easily monitor their finances.
However, it’s not just for small businesses. A large number of freelancers, non-profit organizations, and smaller charities consider single-entry bookkeeping their preferred choice.
Example of Single-Entry Bookkeeping System
What’s the difference between single-entry & double-entry accounting?
|Keeps a record of all incoming and outgoing finances.
|Ensures that all financial activities are accounted for, including assets, liabilities, equity, revenue, and expenses.
|One entry system
|Two entries per expense
|Is more susceptible to errors.
|Reduced likelihood of containing errors
|The system’s capabilities are limited to producing a basic profit-and-loss statement, offering little other insight.
|The system allows for a comprehensive assessment of a company’s financial well-being.
|Best Suited For
|Sole proprietors, freelancers, and smaller businesses with little in the means of assets, inventory, or liabilities.
|Small businesses to medium-sized businesses with significant assets, liabilities, or inventory.
Pros and Cons of Single-Entry Systems
|Single-entry systems are simple and straightforward to grasp.
|Single-entry systems only track cash transactions, providing a narrow view of a business’s financial health.
|Compared to double-entry systems, single-entry systems are less time invasive.
|Single-entry systems have a higher risk of errors as compared to double-entry systems, where debits and credits must balance.
|For those on a tight budget, single-entry accounting software and tools can be a more cost-effective and easy-to-use option.
|As a business grows, its financial transactions become more complex and a single-entry system doesn’t offer the same adaptability as a double-entry system.
|The flexibility of Single-entry bookkeeping allows for easier changes or adjustments to the books which can be vital in some industries.
|Single-entry bookkeeping may be simple, but it cannot provide a thorough assessment of your tax obligations for the financial year. Tax authorities refuse to accept single-entry accounts for taxation, citing this reason.
How to Get Started with Single-Entry Bookkeeping
Whether you’re a business owner or freelancer, single-entry bookkeeping provides you with a straightforward and uncomplicated way to monitor your financial transactions.
While there are a number of fantastic software options available, many small business owners swear by the tried, true, and tested method of keeping a cash book or journal.
A cashbook tracks all the key information of your finances in one place in a single-entry format.
You’ll need to include the date, description, and type of transaction (whether it is income or expense), and then finish it off with your running balance.
Regardless of whether you choose to opt for a single or double-entry system, it’s always important to factor in that both have their advantages and disadvantages.
While single-entry is great for small businesses and even non-profit organizations, its scalability is limited.
If you’re a small business experiencing unprecedented growth or forecasting that for the future, it may be best to consider a double-entry system from the get-go
What are the rules of single-entry bookkeeping?
The one overarching rule of single-entry bookkeeping is that you should always start with the previous balance before documenting and calculating the income and expenses.
What are the three types of single-entry systems?
There are three types of single-entry accounting systems to consider:
– Pure Single Entry System: In this system, only personal accounts like debtors, supplies, or customer accounts are maintained.
– Simple Single Entry: where personal accounts and cash books – meaning the main register for all transactions – is maintained.
– Quasi Single Entry System: where personal accounts – along with cash books and subsidiary books – are maintained.
Can you switch from single-entry to double-entry bookkeeping?
Yes, it’s possible to switch from single-entry to double-entry bookkeeping. However, making the switch may require certain adjustments in the recording of transactions.