What is the Difference Between Single Entry and Double Entry Bookkeeping?

Bookkeeping is a part of the process of maintaining accounting records. It is divided into two parts: a single entry system and a double-entry system. Usually, small sole proprietorship and partnership businesses do not use a double entry bookkeeping system. Cash and credit transactions are the only ones they need to keep track of. They will, however, want to know the performance and financial status of their company at the end of the accounting period. The accountants have various difficulties as a result of this. Most small firms are focused on quickly setting up a system to pay vendors and record income and are unaware that they must choose between single entry and double entry bookkeeping. So, in this article, let's learn about the differences between single entry and double entry systems and why they are used in recording business transactions.

What is the Single Entry System in Accounting?

The single entry system in accounting is an accounting method in which each accounting transaction is recorded with only one entry in the accounting records. It is mostly used for entries in the income statement and is concentrated on the results of the commercial enterprise. The term 'preparation of accounts from incomplete records' indicates the issues that arise when accounts are prepared from incomplete transactions.

Basics of Single Entry System of Accounting

•  Single entry bookkeeping is akin to handling your chequebook and is most likely to work for you if your firm is small and uncomplicated with a low volume of activity. 
•  When you employ single-entry accounting, you keep track of transactions such as cash, tax-deductible expenditures, and taxable revenue.
•  A single entry system is distinct because each transaction is recorded with only one entry, similar to your check register. 
•  Entries are entered as positive or negative values in one column. 
•  You can keep a two-column ledger with single-entry bookkeeping, one for revenue and one for expenditures. 
• Each transaction is recorded on a single line, therefore, it is still termed as single-entry.
• The single entry system is an incomplete accounting system used by small business owners with a modest number of transactions. 
• Only personal accounts are opened and maintained by a business owner in this accounting system.      

Sometimes auxiliary books are kept, and sometimes they aren't. Because the business owner does not open real and nominal accounts, it is impossible to prepare a profit and loss account or a balance sheet to determine the business organisation's exact profit or loss or financial position.

 Large, complex businesses should avoid this sort of bookkeeping. It does not keep track of accounts like inventory, payables, or receivables. Single-entry bookkeeping can be used to determine net income, but it cannot be used to create a balance sheet or monitor asset and liability accounts. Instead of debiting and crediting a series of books as in double-entry bookkeeping, transactions are recorded as a single entry.

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Types of Single Entry Accounting System

The various forms of single entry bookkeeping methods are listed below:

• Pure Single Entry: Only personal accounts are kept in this system, which means no information about cash and bank balances, sales and purchases, and so on is available. This approach exists on paper and has no practical use due to its failure to offer even basic information like cash, etc.

• Simple Single Entry: Only personal accounts and a cash book are maintained in this system. Even though these accounts are handled on a double-entry basis, postings from the cash book are made only to personal accounts, with no other accounts in the ledger. Cash collected from debtors or money paid to creditors is stated on the issued or received bills, depending on the situation.
• Quasi Single Entry: Personal accounts, a cash book, and a few auxiliary books are all here. Sales, Purchases, and Bills are the three primary auxiliary books handled under this system. Discounts, which are entered into personal accounts, are not kept in a separate record. In addition, there is some limited information about a few key elements of expense, such as labour, rent, and rates. In reality, this is the way that is most commonly used to replace the double-entry system.

Example of Single Entry bookkeeping 

A limited company uses a single entry bookkeeping system to keep track of its finances. The financial transactions during May are listed below.

Also Read: What Is Safety Stock?

What is Double Entry System of Bookkeeping?

The accounting system of double entry accounting, often known as double entry bookkeeping, mandates that every company transaction or event be documented in at least two accounts. The accounting equation is based on the same premise. 

Every debit must be matched with an equal amount of credit. To put it another way, debits and credits must be equal in each accounting transaction and totalled.

Basics of Double Entry System of Accounting

For their accounting needs, most firms, including small enterprises, use double-entry bookkeeping. Each account has two columns, and each transaction is split between two accounts in double-entry accounting. Each transaction has two entries: a debit in one account and a credit in another.

 The system is complete, accurate, and compliant with Generally Accepted Accounting Principles (GAAP) due to a two-fold effect. Every transaction is recorded according to a detailed method. The technique begins with preparing source documents, then moves on to the diary, ledger, and trial balance, and finally to the preparation of financial statements. 

Because this system performs a full-fledged recording of transactions, there are fewer chances of fraud and embezzlement. Errors are easily recognised. Due to the two-fold nature, the accounts can also be reconciled. The use of a Double Entry System of accounting to record transactions is also recommended by tax laws. However, this process is time-consuming as compared to a single-entry system.

The accounting equation that underpins the double-entry system is as follows:

Assets = Liabilities plus Equity

• Assets are the resources that a company owns.
• Liabilities are obligations that a company owes to another party.
• After all obligations and liabilities have been paid, the sum owing to the business's owners is called equity.

Types of Double Entry Accounting System

 You need to know about various accounts if you want to master the art of double entry bookkeeping. These sorts of accounts are the deciding factor behind the types of double-entry accounting. 

The following accounts are taken into consideration when recording transactions under the double-entry system:

• Asset: This account keeps track of all of a company's assets. Cash, accounts receivables, equipment, and inventory accounts are examples of asset accounts. When there is an influx of assets, the asset account increases, and when assets are removed, the asset account declines.
• Liability: The liabilities account reveals all of the money the company owes to other businesses. Accounts Payable and Notes Payable are two examples of liability accounts. Liabilities grow as a corporation borrows money and buys goods and services on credit. In contrast, as liabilities are paid off, the account balance decreases.
• Capital: The equity account captures the owner's capital and additional investments and profits into the business. When a corporation suffers losses, the equity account is depleted, as is the case when the owner draws cash for personal use.
• Income: The amount earned by a firm from the sale of goods or the provision of services is referred to as income or revenue. It also includes other sources of revenue, such as rent, commissions, interest, dividends, and so forth.
• Expense: Expenses refer to all costs incurred or money spent by a company to generate revenue. It's worth noting that an expense occurs when the benefits of the money spent are depleted within a year. When a benefit lasts more than a year, it is referred to as Expenditure.

Golden Rules of Accounting

The golden rules of accounting are the following debit and credit rules under the Double Entry System of Accounts: 

Difference between Single Entry and Double Entry System

 The differences between single entry and double entry system are listed below: 

Example of Double Entry Bookkeeping

Here are a few examples of transactions that require Journal Entries. Make a note of the entries in A Limited's books.

A Limited Purchases Goods worth Rs. 25,000 from B Limited on Credit:

A Limited pays for the goods the following month

A Limited pays cash for machinery valued Rs. 50,000

A Limited was paid Rs. 30,000 in rent for the building

Also Read: Business Budget: What is it & Why is it important?

Conclusion

Whether you're starting from scratch or wanting to upgrade your start-up’s current bookkeeping system, having a proper bookkeeping system is necessary. So, whether you use a single-entry or double-entry bookkeeping system (also known as single-entry or double-entry accounting) it has ramifications for how you handle the rest of your finances. When you choose single-entry bookkeeping instead of double-entry, you limit your company's growth and hinder yourself from performing critical accounting functions. However, this process is easier for small or medium-size companies than large companies, where double entry bookkeeping is preferred.  

To do easy accounting for your small or medium business, you can use the Khatabook app. This app lets you develop business reports, manage the accounting processes, do secured payments and even send automatic payment reminders.