These are words that those in the accounting/bookkeeping fields hear all the time. Those who are starting a business might be wondering which is the best way to handle their books. Here is a little bit of clarification as to what the difference is between the two. The final decision is yours.
Most people use the Single Entry Bookkeeping to keep their check registers. This is the most known bookkeeping method out there. Every transaction is written on a single line (thus the name Single Entry Bookkeeping). There is plenty information here when you are running a household account. For small businesses operating as a sole-proprietor or partnership that operate on a Cash Basis (vs Accrual), this type of bookkeeping is good. There is a disadvantage to using Single Entry Bookkeeping for most businesses. The website, www.business-care-analysis.com, states the disadvantage of single entry bookkeeping very nicely, “Single entry accounting provides insufficient records and insufficient control for public companies and other organizations that are required to file audited financial statements such as the income statement or balance sheet. Nor can it—by itself—give owners and management crucial information for evaluating the company’s financial position.” Another disadvantage to Single Entry Bookkeeping is that errors aren’t found until a bank reconciliation is completed.
However, when running a business, it is much easier to obtain the necessary information for the financial statements when using Double Entry Bookkeeping. Every transaction with this method has a debit and credit entry. For someone who is very familiar with Single Entry Bookkeeping and just starting out with Double Entry Bookkeeping, the Double Entry Bookkeeping can be confusing. For example, when debiting from an asset account, it appears as an increase. When I first started out with Double Entry Bookkeeping, it took me quite a while to wrap my head around the process. By debiting one account and crediting another account for each transaction, this ensures less errors by keeping the accounting equation in balance. The Accounting Equation is: Assets=Liabilities+Equity. Double Entry Bookkeeping keeps track of a variety of aspects in account: asset, liability, equity, revenue and expense. I will give the definitions according to the Merriam-Webster Dictionary. Asset is something that is owned by a person, company, etc. Liability is something (such as the payment of money) for which a person or business is legally responsible. Equity is the value of a piece of property (such as a house) after any debts that remain to be paid for it (such as the amount of a mortgage) have been subtracted. Revenue is money that is made by or paid to a business or an organization. Expense is the amount of money that is needed to pay for or buy something. Bottom line is that the Debit column will equal the Credit column. There is a Chart of Accounts used in Double Entry Bookkeeping.
For now, there is a lot to digest in this blog. I will blog more about account at a later time. So be sure to check back in about another month.