Bookkeeping is an essential element of accounting and finance, referring to the process of recording the daily activities and operations of a given business. Utilizing tools such as cash books and ledgers, bookkeeping is intimately intertwined with matters of finance, producing records crucial in the generation of accurate financial statements.
Requiring that individuals or accounting software take record of all transactions occurring within the average business day, bookkeeping is essentially a means of maintaining order and providing accountability, enabling businesses to compare and contrast recorded figures and their daily cash in flow and out flow.
Bookkeeping will take two primary formats, namely single entry accounting and double entry accounting.
Single Entry Accounting
Single entry bookkeeping is quite simplistic in its approach and hence common among individuals and small businesses. With this format of bookkeeping, each debit or credit recording is made just once. Entries are presented on a single line as either positive or negative including the date, the amount and type of transaction, and a basic description of the transaction in question.
Single entry accounting primarily purposes to record revenue and payments, scrutinizing and presenting the money moving in and out of a given account. It focuses upon a transaction only as a debit or credit. Single entry bookkeeping is a simplistic means of keeping an eye on one’s accounts, business or personal, and is just as easy to maintain without assistance from a skilled third party.
This same simplicity however can present as a failing, with single entry accounting essentially lacking in the detail required to track transactions across multiple accounts, and is susceptible to human error.
Double Entry Accounting
Double entry bookkeeping utilizes two sides of a record to document transactions, with debit entries assigned to the left side of a given account while credit entries are assigned to the right. The double entry mechanism emphasizes the recording of an entry in two places, usually categorized under five types of accounts, namely: Liabilities (referring to what the business or individual owes), Assets (what the business or individual owns), Equity (the remnant funds once liability obligations have been met), Expenses (costs that the business or individual meets for necessities such as utilities) and Revenue (money a business or individual earns through transactions such as the sale of products or services).
With all transactions accurately documented, double entry mechanisms aim to balance both sides of the record, crediting one account where another is debited, the result of a sum of all transactions being zero, in the process producing a balanced record; a failure to achieve a balanced result usually speaks of the possible presence of entry errors.
The difference between Single Entry Accounting and Double Entry accounting
These two bookkeeping mechanisms vary rather starkly in structure and purpose, the most distinct differences including the following:
- Single entry bookkeeping requires entering a record once, whereas double entry bookkeeping necessitates the inputting of an entry on two sides, once each in the debit and credit column of a given account.
- Double entry bookkeeping utilizes the concept of balancing whereas single entry does not.
- Double entry accounting is essential in the generation of a business’ profit and loss statement whereas single entry bookkeeping is not.
- Additionally single entry bookkeeping will not play a role in the creation of a company’s trial balance or the preparation of tax documentation, basically inconsequential in determining the financial position of a company, all the purposes for which double entry bookkeeping is used.
At the end of the day a comparison of these two accounting mechanisms will aim to highlight the various attributes that elevate one method over another. Though one might argue that a determination of which of the two is ‘better’ is fairly irrelevant, instead being encouraged to select that bookkeeping method most appropriate for the situation at hand.
Certainly either system presents its own share of pros and cons. While single entry bookkeeping is the simplest of the two, easy to execute and manage, it is highly lacking in detail, ignoring transactions and providing no checks against clerical errors.
This is the opposite of double entry bookkeeping, which includes as many details as possible, uses balancing to check on records, presenting results which most accurately ascertain the financial position of a business entity. This is clearly the superior of the two, if you are willing to overlook the considerable expenses and difficulties involved, especially with hiring competent staff to accomplish the time consuming endeavor.
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