7 benefits of double-entry bookkeeping
In the world of accounting, there are two different systems commonly used by businesses, large and small, to record financial transactions. There are one-sided and two-sided accounting. Both systems “get the job done” but it depends on your personal preference. However, unless you are a small business with simple transactions, double-entry bookkeeping will be most beneficial to you and your company’s finances.
Single-entry accounting is similar to a checkbook register where a transaction is recorded on only one line reflecting the credit or debit of cash. This easy way to keep track of your money is cheaper and can be maintained in less time and with less effort. Single-entry accounting only considers records of cash, receivables, payables, and taxes paid. More in-depth records such as assets, liabilities, inventory, expenses and income are not maintained, resulting in an inadequate representation of your financial records. This is where double-entry bookkeeping comes into play.
Double-entry bookkeeping, which has been around since the 1400s and is the basis of generally accepted accounting principles, is a bit more involved. Instead of just one transaction in one column, double entry makes two entries for every single transaction. A credit entry is made for revenue entered into the company and a debit entry is made for each paid transaction. Eventually, these two entries will cancel each other out, so the sum of both sides will be zero. With this in mind, double-entry bookkeeping provides the following advantages over single-entry bookkeeping:
1. A check for accounting error, including theft, is provided automatically when transactions are recorded and the total of the debit entries equals the total of the credit entries.
2. The preparation of financial statements can be created with ease thanks to the accurate and continuous calculation of profit (credit) and loss (debit).
3. With both records recorded (sales and purchases), you can more easily track who owes the company money and who the company owes money to.
4. The financial status of the company is clearly illustrated and can be accessed quickly for effective business planning.
5. With a higher degree of mandatory records, double-entry bookkeeping takes a strict approach to creating detailed records of all assets so that your company doesn’t lose track of any revenue.
6. Double-entry accounting takes into account internal transactions as adjusting entries, which provides more accurate information at the end of the fiscal year.
7. Missing important data is never a problem because each transaction is recorded twice in two separate columns.
Although the benefits have been greatly reduced due to the introduction of computerized systems, double-entry bookkeeping will still be more practical when it comes to detecting fraud and errors. Whether you’re a single or double entry accountant, as long as you keep your financial records right, you can keep crunching those numbers and getting the results you want.
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