What are the two kinds of bookkeeping?
Traditional bookkeeping was performed using one of two systems. Accountants and bookkeepers used the systems to manually calculate company books and present financial statements in accordance with federal regulations. The two main systems still exist in today’s digital era, but it’s much easier to perform bookkeeping tasks for your company on the computer than by hand. Many business owners opt to do their bookkeeping or outsource the duty to off-site accounting professionals.
Learning the types of bookkeeping systems is essential in identifying which one to adopt and use in keeping the records of business transactions. By studying the different types of bookkeeping systems, you will be able to determine the most appropriate to the business or client that you serve.
In this article, you will be introduced to single-entry bookkeeping, double-entry bookkeeping, manual bookkeeping and computerised bookkeeping. Additionally, you will also learn the available tools on computerised bookkeeping.
Bookkeeping is one of the most important processes in the accounting cycle. It is also one of the most commonly availed accounting services. In layman’s term, it is the process in which the transactions, both income and expenses, of a business is recorded in the books of the company.
It would be impossible to do any accounting if one were to skip this step. This is because, through bookkeeping, the company is able to gather the critical information needed to paint a picture of how the company is doing.
The history of bookkeeping has been traced as far back as 2600 BC when Babylonians used clay slabs and styluses to record their daily biddings. However, some speculate that it had existed even before 8000 BC when the kings of Jericho used informal records of their properties.
Only two types of bookkeeping are mostly used around the world. One is the single entry system, and the other is the double-entry system. Let us discuss the differences between the advantages and the disadvantages of them both.
What is Bookkeeping?
Bookkeeping involves the recording, on a daily basis, of a company’s financial transactions. With proper bookkeeping, companies are able to track all information on its books to make key operating, investing, and financing decisions.
Bookkeepers are individuals who manage all financial data for companies. Without bookkeepers, companies would not be aware of their current financial position, as well as the transactions that occur within the company.
Accurate bookkeeping is also crucial to external users, which includes investors, financial institutions, or the government – people or organizations that need access to reliable information to make better investments or lending decisions. Simply put, the entire economy relies on accurate and reliable bookkeeping for both internal and external users.
Importance of Bookkeeping
Proper bookkeeping gives companies a reliable measure of their performance. It also provides information on general strategic decisions and a benchmark for its revenue and income goals. In short, once a business is up and running, spending extra time and money on maintaining proper records is critical.
Many small companies don’t hire full-time accountants to work for them because of the cost. Instead, small companies generally hire a bookkeeper or outsource the job to a professional firm. One important thing to note here is that many people who intend to start a new business sometimes overlook the importance of matters such as keeping records of every penny spent.
Bookkeeping is a task concerned with the recording of financial data relating to business operations in a significant and orderly manner. It envelopes all the procedural aspects of accounting work and embraces record-keeping function. There are different types and methods of bookkeeping which are practised in managing books of accounts.
Objectives of Bookkeeping
Understanding the bookkeeping objective will help us to understand the methods and types easily.
Absolute recording of transactions
It is concerned with a complete and permanent record of all transactions in a systematic and logical manner to show its financial effect on the business.
Determining the financial effect on the business
It is concerned with the combined effect of all the transactions made during the accounting period upon the financial position of the business as a whole.
What is the Double Entry System?
The double entry system uses the simple accounting equation “Assets=Liabilities+Capital.” One of the main principles behind the double-entry system is the “two-fold effect.” The two-fold effect states that for every value received (debit), there must be a value given up (credit).
An accountant must have the skill necessary to determine which elements are affected by a business transaction, and the effect or effects of the transaction on said elements.
Double-Entry Bookkeeping System is the standard method of record-keeping normally used by most businesses, bookkeepers and accountants.
The procedure of a double-entry bookkeeping system is more detailed and complex than a single-entry bookkeeping system. It introduces the concept of debit and credit, which means that for every transaction there is something received (debit) and given up (credit), as such, a recorded transaction affects two or more accounts.
The benefit of a double-entry bookkeeping system is that it has a process to ensure accurate and complete recording of business transactions. It is a reliable source of financial information and fair valuation of the condition or performance of a business.
Our topic on bookkeeping will be based on the double-entry method system; you will learn more about it in the next articles.
History of The Double Entry System
Benedetto Cotrugli first mentioned the double-entry system in his book “Of Trading and the Perfect Trader.” Cotrugli’s book was able to elaborate on some of the fundamental principles that are used in modern-day bookkeeping.
In 1494, Luca Pacioli, famously known as “the Father of Modern Day Accounting,” expounded Cotrugli’s work to create the basic blueprint of the bookkeeping system used today.
Advantages and Disadvantages of the Double Entry Method
The double-entry method, though preferred, is not a perfect system. There are instances that a single entry is preferred more than them. Listed below are some of the advantages and disadvantages of the double-entry method:
- It allows the company to create and understand financial statements more efficiently.
- The business is able to keep a record of every transaction that happens and the effect of it on every element.
- It uses the trial balance, which makes the accuracy of the books easier to monitor.
- It makes the comparison of one period to another easier.
- The matching principle allows a company to determine the correct profit and loss of the company with greater detail.
- It is harder to understand for beginners.
- The cost to maintain is higher for a double-entry system than a single one.
- More time is spent to record each transaction.
What is the Single Entry System?
The single entry system is the most basic type of accounting. Unlike the double-entry system, the single entry method does not need a trained professional for it to be done. With it, the bookkeeper only needs to record transactions in a one-sided manner.
This means only the effect on a single element is recorded for every transaction. For example, only the effects on the cash account are recorded for all the transactions conducted by the business. It is way easier than the double entry. However, it carries many more disadvantages than the latter.
Single-entry Bookkeeping System is commonly used for small businesses with very little or minimal transactions. It is often referred to as a simple, practical and informal way of recording. Usually, it only maintains a record of cash disbursement, cash receipts, sales and purchases. All the rest of the accounting records, such as inventory, equipment, capital, etc., are only recorded in the form of memorandum or notes.
The books or records maintained in a single-entry bookkeeping system are a daily summary of cash receipts, as well as a monthly summary of cash receipts and disbursements, which represents the revenue and expense, respectively.
Unlike the double-entry bookkeeping system wherein one transaction affects two accounts, in a single-entry bookkeeping system, a transaction only affects one account. Example, a cash sale is recorded only as an increase in cash receipts or deposits with no corresponding sales account.
However, the simplicity of a single-entry bookkeeping system is prone to error and incompleteness because it lacks a detailed recording system compared to a double-entry bookkeeping system. Although for tax purposes, it is an acceptable method of record-keeping for small and simple businesses, however, it may not provide a fair valuation of the relevant financial information of a business.
History of the Single Entry System
The single entry system dates back as far as accounting itself. Scientists have traced its origins way back in the ancient civilizations. Because of this, not much is known about the origin of it. However, it was the oldest method of accounting used by traders as early as 2000 BC. (5)
Advantages and Disadvantages of the Double Entry Method
As the “prototype” of modern-day accounting, the single entry lacks many features that can be offered by its modern counterpart. Nevertheless, it still has some advantages which make it a better choice for some smaller businesses.
- Easier to understand and apply for those without a background in accountancy.
- No skilled or trained professional is needed to be hired, making it cheaper to implement for businesses.
- The single entry method is. Hence errors are easier to neglect.
- It does not reflect the true profit and loss of the business.
- Fraud can be done with ease as there are no counterbalancing accounts to compare to.
Methods of Bookkeeping
After learning the two types of bookkeeping system, let’s now discuss the two methods of bookkeeping which are: manual and computerised.
Manual bookkeeping is the paper-based and traditional way of bookkeeping. Business transactions are recorded manually by hand using manual or paper book of accounts, such as journals books, ledger books and worksheets.
This method of bookkeeping is still widely used, especially by small businesses with less complex transactions. Many opt to manual bookkeeping because it is cheaper and easier to maintain. However, the recording process is more tedious than computerised bookkeeping.
Computerised bookkeeping is a new and innovative way of recording business transactions. With the use of accounting and bookkeeping software, the bookkeeping process has been made easier, faster and more convenient.
Keep in mind that principles and concepts of traditional bookkeeping processes are still implemented and followed in computerised bookkeeping. It only eliminated the tedious tasks involved in manual bookkeeping; thus, it made recording and reporting of business transactions a lot faster and easier.
Some small businesses do not use computerised bookkeeping because it is more expensive than a manual system, and because they don’t want to go through the technical training involved in computerised bookkeeping. However, most businesses use computers because of convenience, reliability and efficiency.
The Difference Between Bookkeeping And Accounting
Besides, bookkeeping focuses on the day to day financial activities of a business. A sole proprietor or bookkeeper needs to know how to enter all the day to day financial transactions into the bookkeeping system.
Accounting is the pulling together of the bookkeeping results by an Accountant into standardised annual financial statements. These are not usually required for sole proprietorships or sole traders unless you want to borrow money – the lender may want to see a proper set of accounts.
These year-end financial statements must align with national accounting standards governed by the accounting standards boards within each country.
Experienced Accountants are well trained and knowledgeable in the country’s tax laws and accounting standards. They can tweak the business accounts prepared by the bookkeeper to get the best tax advantages within a legal framework.
Is Bookkeeping Easy To Do?
It can be easy to do with a bit of patience, practice and consistency whilst learning. Things only go off track when shortcuts are taken, or when dis-organization reigns or when laziness sets in (possibly caused by wanting to put the bookkeeping in the “too hard basket!”).
The person performing the bookkeeping should set regular times to stay on top of the recording of the income and expenses, and the filing, and the debt collecting… so things don’t get ‘out of control’.
If you’re self-employed and you struggle with this side of the business outsource it to a bookkeeping provider.
Professional bookkeepers can provide several options to suit different budgets. Because they are also self-employed, you don’t have to worry about processing their wage, or finding a desk, computer and space in your office for them.
Other Kinds of Bookkeeping
Many small-business owners use bookkeeping software to keep track of financial activities. Programs such as Quickbooks and Sage — formerly Peachtree — use the double-entry bookkeeping system, but you won’t necessarily need to be well versed in the method to use the software. These programs are relatively user-friendly and prompt you to enter information to complete and post your transactions. Various versions of the software exist, ranging from basic to professional capacities, and you can purchase the software in desktop, online or cloud versions.
If the whole idea of single-entry and double-entry bookkeeping methods makes you queasy, you might benefit from virtual bookkeeping services. A virtual bookkeeper eliminates the need for expensive CPA fees or an in-house bookkeeping employee. Most virtual bookkeepers accept your sales invoices, expense receipts and payroll ledgers electronically. The bookkeeper posts your transactions to appropriate journals and ledgers, and emails you a copy of your reports. Virtual bookkeepers are typically CPAs or degreed accountants who tend to have lower fees than private CPA firms.
What Is Bookkeeping Automation
Advanced bookkeeping automation is becoming more of a thing now – it’s done by machine learning software that has artificial intelligence capabilities.
This means a small business’ bookkeeping can be done quickly and easily by machine without paying an actual bookkeeper. However, you must still pay fees for this automated software and its management by humans.
Well, it is possible.
Professional self-employed bookkeepers would do well for themselves to take on a strong consulting and specialist advisory role to their clients, stuff that a machine cannot do because the day to day time-intensive bookkeeping recording is going to be all done by machine eventually.
It’s keeping an accurate record of all the financial activities of a business, and at the very least helps the self-employed person track their income and expenses to be able to file their tax returns and fulfil their tax obligations.
Bookkeeping is a necessity to all businesses and can be done using the single-entry or double-entry type in manual spreadsheets or automated software.
Bookkeeping is a respectable career choice providing the opportunity to become self-employed or may give you encouragement to do further studies and work towards becoming a Chartered Practicing Accountant and open your Accounting practice.
To wrap things up, the choice between the single entry system and the double-entry system lies with the owner of the business. No matter which method you use, remember to consult a professional to avoid making any errors that may adversely affect your business.