You may have heard about the double-entry accounting method to keep track of a business’s finances.
But do you know there’s another method called single-entry bookkeeping that has been commonly used since the 1400s?
In this article, we’ll tell you in more detail about this ancient bookkeeping method with some easy-to-follow examples so that you can understand it.
What is single-entry bookkeeping?
Single-entry bookkeeping is a very simple way to record financial transactions. The bookkeeper literally just needs to enter each transaction as a single entry in a journal. You don’t need to classify the nature of transactions as an expense or an income. Everything is recorded the same way with one entry to the log.
With the single-entry bookkeeping system, you mostly record incoming and outgoing money to the cash book and you track assets and liabilities separately.
Due to its simplicity, this method is great for new small businesses. According to an IRS report, many individuals and small enterprises opt to use single-entry bookkeeping to keep track of their finances. However, the IRS doesn’t allow businesses with annual gross sales of more than $5 million to use this method.
Examples of single-entry bookkeeping
At its most basic form, a typical single-entry journal will have the following information:
- Transaction date: the day the transaction is made
- Transaction description: detailed information about what the transaction is about
- Transaction value: the amount of the transaction
Below are a few examples of how the single-entry bookkeeping system is used in real situations.
Suppose you are a bookshop owner. Your main financial transactions are to buy and sell books, so this is what your cash book would look like with the single-entry bookkeeping method:
Pretty straightforward, isn’t it ?
The journal is just like a cash diary where you jot down each transaction in a single line, and there’s no requirement for professional knowledge—everyone and anyone can do it!
Now, let’s check another example where the bookkeeping system gets a bit more complicated.
The following cash book shows more details than Example 1.
It still contains the basic information like the date the transaction occurred, a short description, etc., but on top of that, it also displays whether the money is coming in or out (income or expense) and the bank balance, which changes with each new transaction.
We’re going to use the same bookstore scenario so you can see the differences more clearly:
Normally, after finalizing the closing balance on the cash book, businesses usually compare and cross-check the cash book with the bank statement to ensure every entry was correctly recorded.
In this case, the bookstore will find out that there’s a $500 check that hasn’t yet been cleared and $150 cash that hasn’t been deposited yet.
So in such a case, the business would create a bank reconciliation sheet as follows:
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- The 5 Most Common Bank Reconciliation Problems for Small Businesses
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You may also include a reference column to keep track of invoice numbers and a reconciliation column on the far right to mark if you’ve reconciled (matched) the entry to your bank statement.
Also, you can break down each column into smaller categories. For example, with expenses, you can split it into different kinds such as cost of goods sold (COGS), advertising costs, and delivery fees.
The image below will show you what a super detailed single-entry bookkeeping system looks like:
Image. Super detailed single-entry bookkeeping system, from Beginner-Bookkeeping
What are the pros and cons of the single-entry bookkeeping system?
If you are wondering whether a single-entry bookkeeping system is suitable for your business, check out some of the pros and cons of this method below!
Pros: Why should you choose the single-entry bookkeeping system?
- Easy to implement: even individuals who have little to no experience with accounting can easily get used to and master this recording system.
- Cost-saving: you don’t need to buy accounting software to perform complicated tasks or hire a bookkeeping professional.
Cons: Why should you avoid the single-entry bookkeeping system?
- Insufficient data: as the data you record with single-entry bookkeeping is very basic (only cash in and cash out), you won’t have enough data to prepare proper financial statements or strategize timely policies.
- Tax issues: due to the fragmentary nature of the data recorded with the single-entry system, many types of companies using this method aren’t acceptable to tax authorities.
- Bookkeeping mistakes: unlike double-entry bookkeeping, where you always need to maintain the balance between debits and credits, the single-entry system doesn’t need to self-balance. This means errors can arise and be carried forward without anyone noticing, which may lead to severe consequences in the future.
If you have a very simple sole proprietorship—one that doesn’t have any inventory, doesn’t have any debts, and not many accounts to keep track of—single-entry bookkeeping could be a good choice for you. However, if your business is any more complicated than that, consider using a double-entry bookkeeping system to have more complete and accurate financial data.
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