When you’re thinking about how to balance your books, you might be trying to decide between double-entry or single-entry accounting. These two hallmark approaches to business finances help document every financial transaction.
But the two strategies are distinctly different. They differ in complexity and thoroughness, among other aspects.
Your business’s perfect system is out there. Let’s explore which pick is best for you.
Jump to:
- What is double-entry accounting?
- What is single-entry accounting?
- Single-entry accounting vs. double-entry accounting
- How does the double-entry system work?
- Advantages of the double-entry system
- Disadvantages of the double-entry system
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What is double-entry accounting?
To understand double-entry accounting, let’s first discuss the terms “credit” and “debit.” A credit is something that has exited an account. But a debit refers to an item that’s added to an account.
So with this in mind, double-entry accounting is a system where every transaction affects two accounts. Businesses should define these accounts beforehand — otherwise, you could end up with quite a complicated mess. This declaration is called a “chart of accounts.” Some examples might include cash, rent and supply accounts.
In this accounting system, every debit entry begets a corresponding credit entry, and vice versa. This pairing ensures that every aspect of a business is properly accounted for.
Let’s say you purchase supplies worth $1,000 using cash. This would affect both your cash and supplies accounts. Your supplies account would record a debit of $1,000 because it now has an added asset, and the cash account would have $1,000 credits since it now has that much less.
So this setup can be rather complex, depending on how many accounts and transactions you’re dealing with. But it keeps a better, clearer history of your business finances, which can be really helpful in the event of an audit. It’s often a favorite for larger businesses or those who have a lot more financial movement.
SEE: Best Accounting Software for Multiple Businesses for 2023
What is single-entry accounting?
Single-entry accounting is a more straightforward system. In this alternate approach, each transaction affects only one account. It’s similar to maintaining a checkbook register, where you record events in a sequential fashion.
Let’s go back to our previous example, where you spend $1,000 on supplies using cash. With a single-entry accounting system, you’d record the charge in just one place alongside any other business transactions. There’d be no need to debit and credit two separate ledgers like you would with double-entry accounting.
This style of accounting is ideal for low-volume businesses wanting an easy system. In particular, sole proprietors are ideal candidates for single-entry accounting since you’re the only person who needs to understand the books.
SEE: Best Accounting Software for Small Businesses in 2023
Single-entry accounting vs. double-entry accounting
The primary difference between single-entry and double-entry accounting is the number of accounts each transaction affects. In single-entry accounting, each transaction involves only one account. But in double-entry accounting, each transaction affects two accounts out of multiple. Your specific situation determines which is the better bet.
| Accounting method | Top advantages | Top disadvantages | Best for |
|---|---|---|---|
| Double-entry | Comprehensive and more accurate and thorough | More complex and requires careful attention to multiple accounts | LLCs, corporations and business owners needing highly detailed financial records |
| Single-entry | Simple and easy to understand | Doesn’t provide a full financial picture and is difficult to audit | Sole proprietors and new businesses with low volume |
Single-entry vs. double-entry: Which one should you use?
Single-entry accounting is simpler and easier to maintain. It’s preferable for tiny businesses or sole proprietors with minimal transactions. However, it does not provide a complete picture of a business’s financial position. As a result, it’s ill-advised for businesses needing richly detailed financial statements. Likewise, this system is inadequate if you oversee many assets or liabilities, such as accounts payable and large amounts of inventory.
Double-entry accounting, on the other hand, provides a complete and accurate picture of a business’s financial position. It helps track financial transactions, manage inventory and prepare statements. However, it’s more complex. A better understanding of accounting principles is a must-have with this one, so this strategy may feel cumbersome if you’re a solopreneur or just starting out.
How does the double-entry system work?
As we’ve already covered, in the double-entry accounting system, each transaction affects two accounts and is recorded as a debit in one account and a credit in another account. Debits and credits must always be equal to keep things properly balanced. So let’s dig into this a bit further.
This system builds on the “accounting equation.” This fundamental term is how businesses calculate their basic financial picture and is outlined like this:
Assets = Liabilities + Owner’s Equity
The intricacies of this equation are beyond this article’s scope. But as you can tell, the left side of the formula is intertwined with the right side. This equilibrium is a crucial theme in the double-entry strategy.
Let’s demonstrate this system via another example. Say a business owner snags a new computer for $1,000 in cash. In this transaction, the asset account “Computer” is increased by $1,000, which represents the computer’s value. The cash account loses $1,000, which represents the money spent. This is how the debit and credit balance each other out.
For comparison, a single-entry system would only decrease the cash or main account by $1,000. No separate computer account would exist. This imbalance makes it difficult to understand the business’s overall value.
Don’t worry if this feels like a lot of work. If you can’t yet bring in an accountant, accounting software can help you easily nail down this complex system.
Advantages of the double-entry system
Complete and accurate financial information
The double-entry system provides a complete and accurate picture of a business’s financial position. It helps in tracking all financial transactions, managing inventory and preparing financial statements. And capable accounting software, like QuickBooks, can help you manage these tasks like a champ.
Error detection
The double-entry system helps detect errors and fraud. If the accounting equation isn’t balanced at any point, then a problem has occurred. For comparison, a single-entry system doesn’t sport similar checks and balances.
More easily prepared financial statements
A double-entry system makes it easier to prepare financial statements as all necessary information is readily available. You won’t have to manually follow the money since a “to” and “from” paper trail is readily documented.
Compliance with accounting standards
The double-entry system is widely accepted and complies with international accounting standards. This standardization keeps your books more audit-proof and ready for potential investors.
Disadvantages of the double-entry system
Complexity
The double-entry system is more complex compared to the single-entry system. It requires a thorough understanding of accounting principles, and each transaction mandates careful analysis to determine which accounts are affected and whether they should get a debit or credit. This complexity may feel challenging for beginners or small business owners who do not have a strong accounting background.
Time-consuming
All of these debits and credits make the double-entry system time-consuming. It may seem fairly quick to record this extra data. But if you have lots of money flowing, even a few extra seconds per transaction can add up quickly. And small business owners are usually short on time and resources. Therefore, this accounting system could make entrepreneurial life even more complicated for those just starting out.
Increased chance of errors
Due to the complexity of the double-entry system, there is an increased chance of making errors while recording transactions. Mistakes can occur in identifying the accounts affected, determining whether to debit or credit an account and calculating the amounts, among other possibilities. These errors can ironically make this “safer” system more inaccurate than the single-entry alternative.
Final thoughts
Double-entry accounting is a system where every transaction affects two accounts. It helps maintain accurate and detailed financial records. Plus, this procedure provides a complete and accurate picture of a business’s financial position, among other benefits. But given its complexity, it’s only ideal for growing or heavily regulated companies.
Meanwhile, the single-entry system is an easier pick for folks craving simplicity. This alternative isn’t as robust, thorough or accurate. But it makes life much easier for smaller entities needing a quick and hassle-free way to balance the books.
