Accounting or bookkeeping is one of the most fundamental parts of a successful business. Choosing an accounting method should be one of the first decisions when beginning a business and should be appropriate to the type of business as well as goals of the business in the future. Four important terms to learn whether beginning a business or just learning about bookkeeping are, Cash Method, Accrual Method, Single Entry and Double Entry.
Under the cash method of accounting money is accounted for on the books only when it is actually received or paid out. A payment is recorded when the actual payment is received by the company, not when the transaction is made or shipment occurs.
(Most appropriate for sole proprietors, businesses with no inventory, small service companies.)
Under the accrual method, the records of expenses and receipts are recorded on the transaction date, not the date that actual cash or compensation changes hands. Sales would be entered on the books when the invoice is generated, regardless of whether payment has been received. Expense payments would be recorded on the date that product or services are ordered.
(Most appropriate for large businesses, corporations, businesses with inventory and businesses that sell on credit.)
Single entry is a simple record of transactions where the bookkeeper enters only one entry for each transaction. Transactions are entered either as revenue or expense.
Examples of single entry accounting:
- A personal checkbook register
- A single column or double column spreadsheet for a business listing only revenue or expenses
Single entry accounting is mostly used for individuals, sole proprietors, or small businesses accounting models where only tax records and profit analysis is required.
The double entry system provides a more complete financial picture to a business. In addition to revenue and expenses, debits and credits are also recorded. The additional records allow for reconciliation and balancing transactions. When recorded together, debits and credits must equal out in order to reconcile.
Benefits of Double Entry
- Double entry is the standard in business accounting
- Can be used with both the cash method and the accrual method
- Double Entry is the method utilized by most accounting software
- Provides a more accurate picture of sales and expenses for reporting purposes