What are the two kinds of bookkeeping?
One of these two methods was utilised in the practice of traditional bookkeeping.
The systems were utilised by accountants and bookkeepers to manually calculate corporate records and provide financial statements in compliance with federal rules.
In this day and age of digital technology, the two primary techniques are still in use; however, it is much simpler to complete bookkeeping activities for your firm on the computer as opposed to by hand.
A significant number of proprietors of businesses choose either to perform their own bookkeeping or to contract it out to specialists in the accounting industry.
It is vital to gain an understanding of the many types of bookkeeping systems in order to determine which one should be adopted and utilised in the process of maintaining the records of business transactions. You will be able to evaluate which bookkeeping system is best suitable for the company or client that you serve if you familiarise yourself with the many types of bookkeeping systems.
You will become familiar with single-entry accounting, double-entry bookkeeping, manual bookkeeping, as well as computerised bookkeeping, as you continue reading this text. In addition to this, you will also gain an understanding of the tools that are accessible for computerised bookkeeping.
The accounting cycle consists of a number of different operations, one of the most essential of which is bookkeeping.
In addition to that, it is one of the accounting services that is requested the most frequently. In terms that are more understandable to the average person, this refers to the method through which a company’s transactions, including its income and expenses, are documented in its books.
If one were to miss this stage, then it would be impossible to perform any kind of accounting. This is due to the fact that the company is able to obtain the essential information required to portray an accurate picture of how the company is functioning thanks to its bookkeeping practices.
Bookkeeping can be traced all the way back to 2600 BC, when Babylonians employed clay slabs and styluses to record their daily biddings. This is the earliest evidence of the practise. However, there are many who believe that it existed much earlier than 8000 BC, when the kings of Jericho made use of informal records to keep track of their assets.
Only two different approaches to bookkeeping are utilised on a regular basis across the globe. The first method is known as the single-entry system, and the second method is known as the double-entry method. Let’s have a conversation about the contrasts between the benefits and the drawbacks of both of these options.
What is Bookkeeping?
Bookkeeping is the process of recording, on a daily basis, the monetary transactions that occur within an organisation. Companies are able to track all of the information in their books, which enables them to make important decisions regarding their operations, investments, and financing when they have proper bookkeeping.
Bookkeepers are individuals who are responsible for managing all of a company’s financial data. Companies would not be aware of their current financial condition or the transactions that take place within the organisation if bookkeepers were not present to record and maintain track of these things.
External users, such as investors, financial institutions, or the government, are some examples of individuals or organisations that require access to reliable information in order to make more informed decisions regarding investments or lending. Accurate bookkeeping is essential to the success of these external users.
To put it more succinctly, the entire economy is dependent on bookkeeping that is accurate and trustworthy for both internal and external users.
Importance of Bookkeeping
A reliable measurement of an organization’s success can be obtained through accurate bookkeeping.
In addition to this, it gives information on general strategic decisions and acts as a benchmark for its goals regarding revenue and income.
To summarise, once a company is up and operating, it is absolutely necessary to devote more time and resources to the maintenance of accurate records.
Because of the high costs involved, many smaller businesses choose not to employ accountants on a full-time basis.
Rather than doing their own bookkeeping, most small businesses opt to hire a bookkeeper or contract the work out to a professional agency. One issue that should be brought to your attention in this regard is the fact that many people who have the intention of beginning a new business often ignore the significance of certain matters, such as the necessity of maintaining detailed records of every single penny that is spent.
Bookkeeping is the process of documenting financial data that is relevant to business operations in a meaningful and organised manner. It is an activity that is concerned with bookkeeping.
It includes not just the record-keeping role but also every procedural part of the accounting activity.
When it comes to handling books of accounts, there are many distinct types and procedures of bookkeeping that can be implemented.
Objectives of Bookkeeping
Once we have an understanding of the bookkeeping purpose, it will be much simpler for us to comprehend the many methods and types.
Transactions that are recorded in absolute detail
It is concerned with keeping a thorough and permanent record of all transactions in a methodical and logical manner in order to show the monetary effect that these transactions had on the company.
Finding out how much of a financial impact something will have on the company
It is concerned with the influence that all of the transactions that took place during the accounting period had on the overall financial situation of the company.
What exactly is meant by the term “Double Entry System”?
The straightforward accounting equation “Assets = Liabilities + Capital” is utilised by the double-entry system. The “two-fold effect” is one of the fundamental ideas that guide the operation of the double-entry system. The two-fold impact argues that there must be a value given up in exchange for every value that is taken into account (a debit) (credit).
An accountant needs to have the knowledge and skills necessary to evaluate which aspects of a business operation are impacted by a particular transaction, as well as the effect or effects that operation has on those aspects.
The Double-Entry Bookkeeping System is the conventional form of record-keeping that is generally utilised by the vast majority of companies, bookkeepers, and accountants.
A double-entry bookkeeping system has a procedure that is both more extensive and more complicated than a single-entry bookkeeping system’s procedure. It explains the concept of debit and credit, which indicates that for every transaction, there is something received (a debit) and something given up (a credit), and as a result, a recorded transaction affects two or more accounts.
A method that ensures the correct and comprehensive recording of business transactions is one of the benefits of using a bookkeeping system that uses double entries. It is a trustworthy source of financial information and a reasonable evaluation of the state or performance of a company.
The double-entry approach will serve as the foundation for our discussion on bookkeeping; further information about this system will be presented to you in the next parts.
History of The Double Entry System
In his book “Of Trading and the Perfect Trader,” Benedetto Cotrugli made reference to the double-entry system for the very first time. The book written by Cotrugli was able to provide a more in-depth explanation of some of the essential ideas that are utilised in contemporary bookkeeping.
In the year 1494, Luca Pacioli, who would later become regarded as the “Father of Modern Day Accounting,” elaborated on Cotrugli’s work to develop the fundamental framework for the bookkeeping system that is in use today.
Advantages and Disadvantages of the Double Entry Method
Even though it is the method of choice, double-entry bookkeeping is not a foolproof approach. There are some circumstances in which a single encyclopaedia entry is more desirable than all of them. The following is a list of some of the benefits and drawbacks associated with using the double-entry method:
- the organisation is able to generate and comprehend financial statements in a more effective manner.
- the company is able to keep a record of every transaction that takes place as well as the impact that transaction has on each and every component.
- because it uses the trial balance, it is much simpler to keep an eye on whether or not the books are accurate.
- it facilitates the process of contrasting one time period with another.
- a business can identify the correct profit and loss of the company in greater detail using the matching concept. This allows for greater accuracy.
- It is harder to grasp for rookies.
- When compared to a single-entry system, the expense of maintaining a double-entry system is more expensive.
- There is an increase in the amount of time spent logging each transaction.
What is the Single Entry System?
The most fundamental method of bookkeeping is known as the single-entry system.
The difference between the double-entry technique and the single-entry approach is that the latter does not require the assistance of an experienced specialist. Because of it, the bookkeeper need simply record transactions in a single-sided fashion.
This indicates that the consequence of each transaction is only recorded with regard to a particular element at a time.
For all of the transactions that are carried out by the company, for instance, the only effects that are recorded are those that have an impact on the cash account. It is much simpler to use than the double-entry system.
On the other hand, in comparison to the latter, it has a significantly larger number of drawbacks.
The single-entry bookkeeping system is one of the most prevalent choices for usage in tiny firms that have very few or no transactions at all.
The term “simple,” “practical,” and “casual” are frequently used to describe this method of recording.
In most cases, the only records that are kept are those pertaining to cash outflows, cash inflows, sales, and purchases. Memorandums and notes are the sole forms in which the remaining accounting records, including those pertaining to inventory, equipment, capital, and so on, are ever documented.
The books or records that are kept in a bookkeeping system with a single entry include a daily summary of cash receipts as well as a monthly summary of cash receipts and disbursements, which, respectively, reflect the revenue and the expenses.
A transaction only has an impact on a single account in a single-entry bookkeeping system, in contrast to the double-entry bookkeeping method, which considers both of the accounts to be affected by a single transaction.
For instance, a cash sale is solely documented as an increase in cash receipts or deposits; there is no matching sales account recorded for the transaction.
The simplicity of a single-entry bookkeeping system, on the other hand, makes it more prone to error and incompleteness than a double-entry bookkeeping system. This is due to the fact that a single-entry bookkeeping system does not have a precise recording system.
Even while it is an appropriate technique of record-keeping for small and basic enterprises in terms of taxes, it may not provide an accurate valuation of the important financial facts pertaining to a company.
History of the Single Entry System
The history of accounting can be traced back to the use of the single entry system. Researchers have found evidence that it can be traced all the way back to prehistoric civilizations. Because of this, very little information is known regarding its history of it.
However, it is the technique of accounting that has been around the longest and was used by merchants as early as 2000 BC.
Advantages and Disadvantages of the Double Entry Method
The single entry, which is sometimes referred to as the “prototype” of modern-day accounting, is lacking in many elements that its contemporary equivalent is able to provide. Despite this, it nevertheless possesses a number of benefits, some of which make it the superior option for certain kinds of smaller enterprises.
- Those who do not come from an accounting background will find it simpler to comprehend and use this method.
- Because businesses do not need to hire a competent or trained professional, the implementation of this solution is more cost-effective for them.
- The approach with a single entry point is. As a result, faults are much simpler to ignore.
- It does not accurately reflect the profit and loss of the company as it actually operates.
- Because there are no counterbalancing accounts that may be compared to, committing fraud is simple and straightforward.
Methods of Bookkeeping
After going over the two distinct kinds of bookkeeping systems, the next step is to go over the two distinct approaches to bookkeeping, which are manual and computerised, respectively.
Manual bookkeeping is a form of bookkeeping that relies on paper and is more conventional.
Journal books, ledger books, and worksheets are examples of the types of manual and paper books of accounts that are utilised in the process of manually recording and handwriting business transactions.
This type of bookkeeping is still utilised by a large number of organisations, particularly smaller ones that handle fewer complex transactions.
Many people choose to keep their books manually since it is less expensive and requires less upkeep. On the other hand, the process of recording is more laborious than using a computer for bookkeeping.
The use of computerised bookkeeping is a contemporary and forward-thinking approach to the tracking of commercial transactions.
The task of keeping accurate books has been simplified, sped up, and made more simple thanks to the widespread adoption of accounting and bookkeeping software.
Bear in mind that the fundamental ideas and concepts underlying conventional methods of bookkeeping are nonetheless utilised and followed by the procedures of computerised bookkeeping.
It simply did away with the laborious duties that were necessary for manual bookkeeping; as a result, it simplified the process of documenting and reporting corporate transactions a lot quicker and simpler.
Some smaller companies choose not to utilise computerised bookkeeping because it is more expensive than using a manual system and because the technical training that is required to use computerised bookkeeping is something that they do not want to go through.
Nevertheless, computers are widely used in commercial settings due to their simplicity, dependability, and efficacy.
The Difference Between Bookkeeping And Accounting
In addition, the focus of bookkeeping is on the operational and financial aspects of a company from day to day. Anyone who is a lone entrepreneur or keeps their own books needs to be familiar with the process of entering daily financial transactions into the bookkeeping system.
Accounting refers to the process in which a Certified Public Accountant (CPA) compiles the results of accounting to produce standardised annual financial statements. These are not often necessary for sole proprietorships or sole traders, unless the business owner intends to take out a loan, in which case the lender may want a complete set of financial statements.
These statements of financial position at the end of the year need to be in accordance with the national accounting standards that are set by the accounting standards boards in each country.
Accountants with experience have received extensive training and are aware of the tax laws and accounting standards of the country. They have the ability to make adjustments to the business accounts that were created by the bookkeeper in order to secure the highest possible tax advantages while being compliant with the law.
Is Bookkeeping Easy To Do?
It is possible to accomplish it easily if you have some patience, put in some practise, and are consistent while you are learning. Things only get off track when shortcuts are taken, when disorganisation reigns, or when laziness sets in (which could be caused by wanting to put the bookkeeping in the “too hard basket! “).
So that things don’t become “out of hand,” the person who is doing the bookkeeping should schedule regular times to ensure that the recording of the income and expenses, as well as the filing and the collection of debt, are kept up to date.
If you are self-employed and find that you have difficulty managing this aspect of the business, you might consider hiring a bookkeeping service to assist you.
Professional bookkeepers are able to present clients with a variety of choices that are suitable for their particular financial constraints. Because they are also self-employed, you do not need to bother about processing their wage or locating a desk, computer, or space in your office for them to use. Both of these things are unnecessary for them.
Other Kinds of Bookkeeping
Bookkeeping software is used by many owners of small businesses in order to keep tabs on their companies’ financial activity.
Quickbooks and Sage, which was originally known as Peachtree, are two examples of programmes that employ the double-entry bookkeeping technique. However, in order to use these programmes, you do not necessarily need to have a strong understanding of the process.
You will be prompted to enter information in order to finish and post your transactions using these tools, which are not overly complicated to use.
There are several variants of the software available for purchase, with capacities ranging from fundamental to professional. These variants can be downloaded to a local computer, accessed online, or stored in the cloud.
If the thought of maintaining your books using single-entry or double-entry systems makes you uneasy, you could find that using virtual accounting services is beneficial.
The need for either pricey CPA fees or an in-house bookkeeping professional is eradicated by the utilisation of a virtual book-keeper.
The vast majority of virtual bookkeepers will accept electronic versions of your sales invoices, expenditure receipts, and payroll ledgers.
Your book-keeper will send you a copy of your reports through email after they have posted your transactions to the appropriate journals and ledgers.
The rates charged by virtual bookkeepers, who are often certified public accountants or accountants with degrees, are typically lower than those charged by private CPA firms.
What Is Bookkeeping Automation
The use of machine learning software that is equipped with artificial intelligence capabilities is helping to drive the trend towards advanced bookkeeping automation, which is becoming increasingly common.
This indicates that the bookkeeping for a small firm can be done swiftly and easily by a machine rather of having to pay an individual book-keeper.
Despite this, you will still be required to pay fees for both the automated software and the human management of it.
Now, this is certainly a possibility.
Because the day-to-day time-intensive bookkeeping recording is eventually going to be done entirely by machines, professional bookkeepers who are also self-employed would do well for themselves to take on a strong consulting and specialist advisory role to their clients. This is stuff that a machine cannot do, and it would be to the bookkeeper’s advantage to take on this role.
It involves keeping an accurate record of all of the financial activities of a business, and it provides the self-employed individual with assistance in tracking their revenue and expenses for the purpose of being able to file tax returns and meet their tax obligations.
Bookkeeping is a requirement for all types of organisations, and it can be performed manually using spreadsheets of either the single-entry or double-entry kind, or automatically using accounting software.
Bookkeeping is a respectable career choice that can provide you with the opportunity to become self-employed. Additionally, it can provide you with the motivation to pursue additional education and work towards becoming a Chartered Practicing Accountant so that you can open your own accounting practise.
To sum everything up, the decision regarding whether to use a single entry system or a double entry system ultimately rests with the proprietor of the company. No matter which approach you take, make it a point to seek the advice of an expert so that you can eliminate the risk of making mistakes that could have a negative impact on your company.