Difference between single entry and double entry bookkeeping

Double-entry bookkeeping is a method of recording transactions where for every business transaction, an entry is recorded in at least two ... Books LearnMore Home / AccountingDifferencebetweensingleentryanddoubleentrybookkeepingGuides| 4minread |1comments ReadingTime:4minutesWhatissingle-entrybookkeeping?  Single-entrybookkeepingisasimpleandstraightforwardmethodofbookkeepinginwhicheachtransactionisrecordedasasingle-entryinajournal.Thisisacash-basedbookkeepingmethodthattracksincomingandoutgoingcashinajournal. Howdoesthesingle-entrysystemwork?  Insingle-entrybookkeeping,youmaintainacashbookinwhichyourecordyourincomeandexpenses. Startwithyourexistingcashbalanceforagivenperiod,thenaddtheincomeyoureceiveandsubtractyourexpenses.Afteryoufactorinallthesetransactions,attheendofthegivenperiod,youcalculatethecashbalanceyouareleftwith. Atypicalcashbookwillhavethefollowinginformation: Date:Thedateonwhichthetransactiontakesplace Description:Abriefnoteonthetransaction Transactionvalue:Thevaluecanbeeitherincoming(debit)oroutgoing(credit) Balance:Runningtotalofhowmuchcashyouhaveinhand  Inthefollowingexample,supposeyou’reabusinessownerrecordingthedebitandcreditentriesforallofthetransactionsthattakeplaceinaweek. 1.Let’sassumeyouhavea$5000cashbalanceatthebeginningofthefirstweekinJune.Sothiswillbeyourfirstentry. 2.Ontheseconddayoftheweekyoupayyourrent,whichis$1000.Sincethisisanexpense,yousubtractthisamountfromyourcashbalance.Thisleavesyouwith$4000. 3.Yourcustomerpaysaninvoicefor$500,whichisincome.Sothisamountisdebitedtoyouraccountand raisestheaccountbalanceto$4500. 4.Youbuyofficefurniturefor$1500.Soyousubtractthisamountfromtheexistingbalance.  5.Attheendoftheweek,youareleftwith$3000incash.     Whatisdouble-entrybookkeeping? Double-entrybookkeepingisamethodofrecordingtransactionswhereforeverybusinesstransaction,anentryisrecordedinatleasttwoaccountsasadebitorcredit.Inadouble-entrysystem,theamountsrecordedasdebitsmustbeequaltotheamountsrecordedascredits.  Howdoesthedouble-entrysystemwork?  Thekeyfeatureofthissystemisthatthedebitsandcreditsshouldalwaysmatchforerror-freetransactions.  Thedouble-entrybookkeepingsystemworksonthebasicaccountingequation,whichisasfollows: Assets:Themoneythatthecompanyowns Liabilities:Anythingthatthebusiness owes Owner’sequity:Owner’sinvestmentinthecompany Income:Moneythebusinessearnsbysellingitsproducts Expense:Moneythecompanyspendstorunthebusiness  Youshouldalwaysrememberthateachsideoftheequationmustbalanceout.Thisishowwearriveattheterm“balancingthebooks.”Asmallexamplewillhelpyouunderstandthisequation.  Letustakethesameexamplethatweusedabove,butthistimeusedouble-entrybookkeeping.Assume youarerecordingdebitandcreditentriesforthetransactionsthattakeplaceinaweek,usingdouble-entrybookkeeping.  Thestartingbalancefortheweekis$5000.Inoneweek,youpayyourrent($1000). Youpurchasesomeofficefurniture($1500).  Meanwhile,ExcelTechnologiespaysaninvoicewithavalueof$500. Ifyoulookatallthreetransactions,youcanobservethattotalcreditandtotaldebitarethesame:theybothaddupto$3000. Whatdocumentsareusedtorecordentries? Insingle-entrybookkeeping,theincomeandexpensesforthetransactionsarerecordedinacashregister,whereasthedouble-entrysystemstartswithajournal,followedbyaledger,atrialbalance,and finallyfinancialstatements.  Journal:Thisisanaccountingbookwherethetransactionsarerecordedsequentially,inchronologicalorder.Itneednotbebalanced. Ledger:Thisisabookoffinalentrieswherethetransactionsaredividedandrecordedinseparateaccounts.Itmustbebalanced. Trialbalance:Thisisabookkeepingworksheetthatreflectsthecreditanddebitbalanceofallledgeraccounts.Oneoftheimportantfeaturesofthetrialbalanceisthatitmaintainsthearithmeticaccuracyoftransactions. Financialstatements:Theseareacollectionofsummary-levelreportsthatreflecttheorganization’sfinancialresults,position,andcashflow.  Howisdouble-entrybookkeepingbetterthansingle-entry?  Thedouble-entrysystemhasseveraladvantagesoverthesingle-entrysystem: Recordingmethod:Single-entrybookkeepinggivesaone-sidedpictureoftransactionsrecordedinthecashregister. Indoubleentry,changesduetoonetransactionarereflectedinatleasttwoaccounts.Thedouble-entrysystemispreferredbyinvestors,banksandbuyersbecauseitgivesthemamorecompletefinancialpictureofanorganization. Errordetection:Indoubleentry,debitsandcreditsmustalwaysbethesame.Ifthatisnotthecase,thenthereisanerror.Thismakesiteasytospoterrorsandensurethattheyarenotcarriedforwardtootherjournalsandfinancialstatements.Insingleentry,thereisnomethodforerrorcorrectionordetection. Companysize:Thesingle-entrysystemisonlyappropriateforsmallenterprises,whereasthedouble-entrysystemcanbeusedbyallsizesofbusinesses,includinglargeones. Preparationoffinancialstatements:Theinformationrecordedinasingle-entrysystemisn’tadequateforfinancialreportingorpreparingprofitandlossstatements.Biggerorganizationsrelyonthesereportstotracktheirperformance,sotheyneedtheextrainformationcapturedbydouble-entryaccounting. Runyourbusinesswithease Bookkeepingisanimportantactivityformaintainingaccuratefinancialrecords.Yet,manysmallbusinessesfailtoimplementitwithefficiency.Bookkeepingcanhelpyouprepareabudget,checkfortaxcompliance,evaluateyourbusinessperformanceandhelpyouwithdecision-making.Webetyouhavethoughtaboutgettingalloftheseoperationsinplaceforyourbusiness. ZohoBooksfollowsdoubleentrybookkeepingasitissuitableforbusinessesofallsizes.Double-entrymethodofrecordinggivesacompletepictureofyourfinances,protectsyourbusinessfrommanualdataentryerrorsandautomaticallygeneratesfinancialstatementsformanagersandaccountantsfordecision-making.  Checkoutourcloud-based,double-entrybookkeepingsoftware andfindouthowitwillbesuitableforyourbusiness. 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