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Single entry vs Double entry Accounting Explained

Jun 23, 2022 5 min
Single entry vs Double entry accounting

Single entry vs Double entry Accounting Explained

Reading Time: 5 minutes

Single entry vs. Double entry Accounting — does it really matter? Yes, it does.

If you are a person who pays great attention to details without leaving anything out of sight, then your accounting method would mean a lot.

For those who do not know about single-entry or double-entry accounting, we’ll ease you into both. However, this will also be a good read if familiar but in a dilemma of which is best for your business.

What is single-entry accounting?

It’s a simple and direct way of recording business transactions in a company’s cash book. Each entry is made one at a time by subtracting expenses or adding income, then calculating what’s left in a determined period.

Still lost? This example should put things in perspective.

You own a company called Beta-Dan-Tesla. At the start of your accounting month, you make sales of 2 cars at $50,000/car. This sale is recorded as an income for that particular date.

The next day, Beta-Dan-Tesla makes a payment of $5,000 in rent, which is entered into the cash book and subtracted from the company’s total cash. Suppose your expenses for this term are as follows:

DateDescriptionNoteTransaction valueTransaction valueAccount Balance
Expense (Debit)Income(Credit)
01.03.2022Starting Balance of Company$100,000
05.03.2022Sales2 Beta-Dan-Tesla$100,000$200,000
06.03.2022Rent$5,000$195,000
07.03.2022Ending balance$195,000

The table shows cashbook entries with specific dates, helping you keep track of your expenses and income. At the end of your accounting week, there’s a balance of $195,000.

Under single-entry accounting or bookkeeping, expenses are recorded at purchase, while revenue is recorded at the sale.

Pretty simple and straightforward, isn’t it? There’s more!

Now that you know the basics,

Is it fit for your business?

The answer depends on the size of your business needs.

Single-entry bookkeeping is prevalent amongst small businesses that do not have loads of transactions and very few employees. Some things to consider are:

  • Are transactions recorded on “Cash basis accounting” over “Accrual accounting”? 
  • Do you sell on credit or installment plans (meaning amounts are paid in full immediately).
  • Do you have a few physical assets like buildings, equipment, and vehicles?

These questions will help you decide if a single-entry accounting method is suitable for you. Although it best fits small businesses, that doesn’t mean there aren’t advantages–simplicity is the most effective form of sophistication.

You should know, though!

There are limits to what a business can achieve with single-entry bookkeeping. We’ll look at the;

Disadvantages

  • Limits with Arithmetic Accuracy
  • Can’t measure business performance
  • Lack of Control over the Assets
  • Difficult to detect errors and fraud
  • Unacceptable to Tax Authorities

Limits with arithmetic accuracy: Because the single-entry bookkeeping system doesn’t require a trial Balance, it’s challenging to check for arithmetical accuracy.

Can’t measure business performance: For a business whose success is measured in terms of profits and losses, the Single Entry System possesses a limitation. Its inability to reveal the actual profit or loss figures limits you from assessing the actual performance of your business. 

Also, it fails to provide a comparative analysis, which hampers the adequate measure of your current year’s performance with that of the previous year.

Lack of Control over the Assets: Since you do not prepare real or nominal accounts, keeping a detailed track of assets is challenging. This gives room for misappropriation and embezzlement of assets.

Difficult to detect errors and frauds: Using a single-entry bookkeeping system doesn’t allow you to follow the rules of proper accounting–the books of accounts fail to reveal the clear financial picture of your business. This gives room for undetectable errors and fraud.

Unacceptable to Tax Authorities: Generally, tax authorities do not accept Single Entry Systems because these books are not maintained by following universally and lawfully accepted accounting principles. You’ll have challenges working with the single-entry system.

Having presented a good case for single-entry accounting, we’ll look at double-entry accounting.

What is double-entry accounting?

Unlike Single-entry accounting, the double-entry accounting system records each transaction twice–as a debit or credit. The simple rule for double-entry ensures that any amount recorded as a debit must be equal to that recorded as a credit.

A double-entry accounting system is an accounting system that works on the basic accounting equation:

Assets=Liabilities + Owner’s equity.

Following the earlier example used in single-entry accounting, here’s a presentation of the same data in a double-entry accounting system.

DateDescriptionAccountDebitCredit
05/03/2022Sales(2 Beta-Dan-Tesla)Cash$100,000
Revenue$100,000
06/03/2022Paid rentRent$5,000
Cash$5,000

The table above shows us how each transaction entry has a debit and credit. This approach is different from single-entry.

So, the logical question would be,

What is the basic rule of double-entry bookkeeping?

Every transaction entered in your journal involves a debit entry in one account and a credit entry in another. You should put the debit entry for a transaction on the left side of the general journal, while the credit entry will be on the right side of the journal.

Under the double-entry system, revenues must always equal expenses.

Knowing the stated basic rule is excellent. However, you should ask yourself a valid question:

How do I decide whether double-entry accounting is right for my business?

The first important thing to note is that the double-entry accounting system is the Generally Accepted Accounting Principles (GAAP) complaint. Its financial records show prospective investors that your company has followed standard accounting practices.

The typical accounting method for public companies is double-entry accounting, which meets GAAP requirements. However, if you run a relatively small business, these questions can help you decide whether double-entry accounting is proper for your business:

  • Does your business own or hold inventory?
  • What’s your company size?
  • Do you manage a robust chart of accounts?
  • Are there plans to apply for loans, or do you owe monies?
  • Do you plan to use an automated accounting system?

Positive answers to the questions above mean your business requires double-entry accounting.

Having highlighted single-entry and double-entry accounting, we’ll draw a simple comparison to give you a clearer picture of your choice.

Single entry vs. Double entry

While single-entry has its perks when discussing Single entry vs. Double Entry, there are advantages double-entry has over single entry.

  • Recording method.
  • Error detection.
  • Company size.
  • Preparation of financial statements.

Recording method: Unlike the single-entry accounting system, investors, banks, and buyers prefer the double-entry system because it gives them a complete financial picture of an organization.

Error detection: It’s easier to detect errors in the double-entry because debits and credits must always be the same. If there is a variance between them, then there is an error. There is no method for error correction or detection in a single-entry system.

Company size: As earlier stated, the single-entry system is best-fit for small businesses, whereas all sizes of businesses can use the double-entry system.

Preparing financial statements: The single-entry system lacks adequate financial reporting or forecasting data. Bigger organizations rely on these reports to track their performances over time. As a result, double-entry accounting is easily preferred as it captures the required detailed information.

So, what next for you?

Keeping accurate financial records of your transactions is essential for your business’s growth. Tasks such as preparing a budget, checking for tax compliance, and evaluating business performances; can help your decision-making. 

There are many accounting software out there; however, you can choose to work with one that takes away the stress of upgrade fees and keeps your business in the loop of accounting technological advancements.

Double-Entry by Akaunting helps minimize errors and increases the chance of having balanced books. Be it single-entry or double-entry, you are covered.

Check out our webpage to get started!