written by Khatabook | December 20, 2021

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.

Did you know?

Byjus’s is the most valued startup in India with a valuation of $16.5 billion.

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 EntryPersonal 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.

A Limited

Date

Particulars

Amount (Rs.)

01-May-2021

Opening Balance

1,50,000

03-May-2021

Payroll Expenses

(35,000)

05-May-2021

Purchases

(40,000)

07-May-2021

Taxes Paid

(15,000)

10-May-2021

Rent Paid

(25,000)

21-May-2021

Sales

50,000

29-May-2021

Interest Received

5000

31-May-2021

Closing Balance

90,000

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: 

Account

Rules

Effect

Personal Account

Debit the Receiver; Credit the Giver

Debit = Credit

Real Account

Debit what comes In; Credit what goes Out

Debit = Credit

Nominal Account

Debit all Expenses; Credit all Incomes

Debit = Credit

Difference between Single Entry and Double Entry System

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

Single Entry System

Double Entry System

A single Entry System is a bookkeeping system in which only one part of a transaction is recorded, such as debit or credit.

A double entry system is a method of recording transactions in which both sides of a transaction are recorded.

This sort of bookkeeping is not for tax purposes. To put it another way, it is not accepted by the tax authorities.

This method of bookkeeping is acceptable for tax purposes. To put it another way, this method is accepted by the tax authorities.

If you use a single-entry bookkeeping system, you won't be able to prepare a trial balance.

In the case of a double-entry bookkeeping system, a trial balance can be prepared.

 We can't accurately determine the company's financial status using the Single Entry System of Bookkeeping. 

We accurately determine the company's financial status using the Double Entry System of Bookkeeping.

The single entry bookkeeping system is an inadequate accounting system since it does not record all financial transactions. Instead, it only tracks personal accounts such as debtors, creditors, and cash.

 The double entry bookkeeping system is a full accounting system since it records all financial activities and categorize them into personal, real, and nominal accounts. 

While keeping books of account under it, there is a considerable chance of workers committing frauds and errors.

While keeping books of account under it, there is a reduced danger of workers making frauds and errors.

Because it is not maintained to a specific standard, only the business owner can utilize it.

Because all books are kept in standard formats, this system can be used by any involved parties.

 This system is only appropriate for small businesses. 

It's appropriate for any business.

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:

Particulars

Debit (Rs.)

Credit (Rs.)

Purchase A/c

25,000

 

B Limited A/c

 

25,000

A Limited pays for the goods the following month

Particulars

Debit (Rs.)

Credit (Rs.)

B Limited A/c

25,000

 

Cash A/c

 

25,000

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

Particulars

Debit (Rs.)

Credit (Rs.)

Machinery A/c

50,000

 

Cash A/c

 

50,000

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

Particulars

Debit (Rs.)

Credit (Rs.)

Cash A/c

30,000

 

Rent Received A/c

 

30,000

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.

FAQs

Q: What are the benefits of double entry bookkeeping?

Ans:

The main benefits of double entry bookkeeping are as follows: 

  • Accounting Records Accuracy: You may simply pull data to construct financial statements or reports when you use double-entry bookkeeping. Important elements are not overlooked, making any mistakes easier to notice. With accurate records of financial assets kept in double-entry accounting, keeping track of who owes the company money or needs to be paid off is simple.
  • Accounted For Assets And Liabilities: Unlike other types of bookkeeping, entries in double-entry bookkeeping can include both an organisation's assets and liabilities. You can document all transactions as either a cost or revenue with single-entry accounting, but double-entry bookkeeping provides you with assets, liabilities, and taxes — the components of a balance sheet. A balance sheet is an important aspect of record-keeping since it accounts for both an organisation's assets and liabilities.
  • Setting up A Trial Balance: The convenience of preparing a balance sheet and income statement, which produces a trial balance of all your ledger accounts based on your financial requirements, comes with double-entry accounting. An income statement, which includes financial expenditures and revenue, allows you to examine where your organisation is in terms of growth and impact. Because sales and purchases are recorded as entries in the ledger, top management can easily see which areas demand greater investment and how expenses can be cut efficiently.
  • Ease in Top-Level Decision Making: Double entry accounting discloses critical information about a company's financial status, allowing business owners, creditors, and management to consider this information when making decisions. The primary benefit of double-entry bookkeeping is that it provides a systematic method for tracking every financial transaction component in chronological order. It also accounts for input adjustments so that accurate data is available at the end of the fiscal year.

Q: What are the benefits of using a single entry system?

Ans:

The following are some of the advantages of a single entry system: 

  •  When compared to a double-entry system, a single entry system is simpler and less expensive to maintain. 
  • In comparison to the double-entry system, no professionals are required to maintain such an accounting system.
  • For new enterprises, this form of accounting system is preferable.
  • Through a daily cash receipt summary, the system captures the daily flow of income and expenses.

Q: Which is preferable: single or double entry?

Ans:

When compared to single entry accounts, the double-entry system is the more effective technique of recording accounts. In today's world, double entry bookkeeping is the most common, expected, and effective data entry method.

 As per the principles of Generally Accepted Accounting Principles (GAAP), all big organisations must use double entry accounts instead of single entry accounts to keep track of accounts in all companies. 

Q: Who makes use of a single-entry bookkeeping system?

Ans:

For new firms, single entry bookkeeping is ideal. Single entry accounting is also advantageous for businesses with a small number of transactions and simple financial tracking requirements. Using the single entry method is also an excellent way to begin learning how to handle your finances.

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