Have you been handling your small business books on your own? Many entrepreneurs and very small businesses track income and expenses in what is known as single-entry accounting. But as you grow, you should consider the value of switching to double-entry accounting. What do these terms mean? Here's a short guide to how this change will help you.
How Does Double-Entry Accounting Differ from Single-Entry?
In single-entry accounting, each transaction to enter into the books is recorded by itself and independent of any other transactions. So, if you deposit a check from a customer for $500, you increase cash by $500. It's easy to see why this is the simplest method of accounting for most beginners.
However, double-entry accounting requires that each transaction have two sides: a debit and a credit. For that check, you might debit (increase) cash by $500. However, if that customer is paying an established invoice already entered into accounts payable, you would then credit (reduce) accounts payable due by $500. While this may sound confusing, the additional work comes with many benefits.
What Are the Benefits of Double-Entry Accounting?
Why add dual-sided entries into your books? The primary reason is to increase accuracy. This happens on several levels. First, you have the ability to balance the books. If you only enter the $500 cash received, you can easily make an error and accidentally record $550 instead. Your cash account is now wrong, but there's little way of catching this. However, with two balanced entries, that error is much harder to make.
In addition, double-entry accounting makes your overall finances more clear. How? It includes both positive and negative changes for every transaction. The addition of $500 from that customer means unpaid invoices are $500 lower. However, single-entry accounting doesn't require the second adjustment. The result could be that some accounts are correct while others do not reflect your real financial status.
Finally, as your business grows, it may eventually be required to use double-entry accounting. Due to its accuracy and transparency, double-entry accounting is mandated for businesses that are publicly traded. It may also be required by lenders evaluating your credit, by potential investors or business partners, and by your industry.
Where Should You Start?
Could your business be improved by better, more accurate bookkeeping? Then it may be time to make the switch. And the best place to start is by consulting with a bookkeeping service that can help you learn more about this system, choose software, and decide how and when to transition your books. Call today to start making your small enterprise ready for a profitable future.
For more information, contact a local company, like HolyOak & Co.Share