Bookkeeping is crucial to the success of any business because it reflects how the business is performing financially. Business owners use the data from bookkeeping to make sound decisions regarding investments, financing, and operations. The data also gives some direction when it comes to planning, strategizing, and setting a baseline for revenue and income targets. That’s why it’s so important to use the most efficient and effective type of bookkeeping method for your business.
What is bookkeeping?
Bookkeeping is documenting every transaction that occurs within a business. This entails individual entries in journals or ledgers that summarize each transaction. Financial statements are then prepared from these journals and ledgers and summarize the income and expenses of a business for a specific timeframe.
What are the 2 popular types of bookkeeping?
There are two types of methods that are most commonly used in bookkeeping. These include single-entry bookkeeping and double-entry bookkeeping.
Single entry is the most simple bookkeeping method and involves making only one entry for every transaction. Since there is only one entry, there is usually no record of liabilities or assets. The records will mainly consist of the cash flowing into and out of the business.
Single-entry bookkeeping is used by businesses that use the cash-basis accounting method since cash sales and expenses are tracked for the business at the time they are incurred. Hence, the transactions that are recorded are only those that have an impact on the cash account. The only records maintained are cash inflow & outflow, sales, and purchases, along with a daily summary of cash receipts and a monthly summary of disbursements.
Pros and cons of single-entry bookkeeping
|Most simple type of bookkeeping||More prone to error and fraud|
|Less expensive to maintain||Lacks detailed records|
|Great for entrepreneurs or service-based businesses||Does not reflect an accurate valuation of the financial standing of the business|
|Only have to make one entry||No records of assets and liabilities|
|Do not need a professional for this type of bookkeeping||Not enough details to forecast current and future financial status|
|Harder to track where revenue and expenses are going since entries don’t link transactions to their appropriate accounts|
Single entry bookkeeping is ideal for smaller businesses such as entrepreneurs and service-based businesses that have fewer transactions and bring in lower revenue. It’s great for businesses that don’t deal with complex transactions.
While single entry is the simplest method of bookkeeping, double entry is the method most commonly used. With double entry, there are two entries for every transaction since there is something gained in a debit and something lost in a credit.
Double-entry bookkeeping is typically used by companies with more complex transactions such as businesses that buy inventory on credit and produce revenue from accounts receivable. These businesses also use the accrual method of accounting.
Pros and cons of double-entry bookkeeping
|It is an accurate assessment of a business’s financial performance||Much more complex than single entry bookkeeping|
|The profit and loss is more accurate and detailed with the double entry system||Maintaining a double entry system is more expensive than a single entry system|
|The use of the trial balance with the double entry system gives you a better idea of whether the books are accurate||It takes more time to record transactions in the double entry system than it does in the single entry system|
|Not only does the company have a record of every transaction, but it also shows the impact it has on a second account|
|Financial statements are more accurate and meaningful with the double entry system|
|There is a paper trail for costs and revenue since accounts link to each other|
|Double entry is a better method if audited|
Double-entry bookkeeping is ideal for businesses who use the accrual method of accounting and have a large number of and complex transactions. This type of bookkeeping is particularly useful for businesses that buy inventory on credit and generate income from accounts receivable.
Other types of bookkeeping systems
While single entry and double entry are the two most popular types of bookkeeping, there are also two other types of bookkeeping systems. These include computerized bookkeeping systems and virtual bookkeepers.
There are also computerized bookkeeping systems. To use these programs, you don’t need a strong understanding of the single-entry or double-entry bookkeeping process. The computer programs provide prompts and walk you through the programs. There are many programs on the market ranging from those that can be downloaded on the computer, accessed online, or stored in the cloud. The automation of the computerized systems provides accuracy and efficiency.
If you’re not comfortable doing your own bookkeeping, then you can use virtual accounting services. This is a cost-effective method over using a CPA or an in-house bookkeeper. Virtual bookkeepers either accept electronic versions of invoices and receipts and then email the financial reports back to the business owner or share software that both the bookkeeper and business owner have access to. If the latter is the case, then the virtual bookkeeper can enter the data, organize it, generate reports, and reconcile accounts.
Frequently Asked Questions
There are 4 types of bookkeeping systems. These include single-entry bookkeeping, double-entry bookkeeping, computerized bookkeeping systems, and virtual bookkeepers.
No, accounting methods refer to cash-based and accrual-based methods while the two most popular bookkeeping methods refer to single-entry and double-entry bookkeeping.
In order to choose the best financial process for your business, it’s important to understand the different types of bookkeeping systems. An efficient bookkeeping system is crucial to the success of a business since it measures the financial performance of the business. It also provides the data needed to make the most effective strategic decisions and serves as a goalpost for revenue and income goals.
Caryl Ramsey has years of experience assisting in different aspects of bookkeeping, taxes, and customer service. She uses a variety of accounting software for setting up client information, reconciling accounts, coding expenses, running financial reports, and preparing tax returns. She is also experienced in setting up corporations with the State Corporation Commission and the IRS.
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