Double-Entry Bookkeeping Offers Major Benefits

Sound bookkeeping is a harbinger of financial success because it helps build a foundation of best practices.

Today’s accounting software allows small operations to enjoy the same bookkeeping standards used by large organizations, and offers a much simpler way of tracking revenue and expenses than the spreadsheets many small enterprises are using.

Although learning about new software can be daunting, understanding how accounting software functions makes that a very worthwhile task.

Data available from a sophisticated accounting system is especially important if your business is a corporation. Tax reporting for a corporate entity requires substantial detail. Moreover, satisfactory business management – even by a solo operator – requires informed decisions on profit utilization. You need solid guidance about when profits may be distributed to owners as dividends rather than used for expansion.

Single entry

A simple listing of revenue and expenses-such as on a spreadsheet-entails making a single entry for each transaction. Single-entry bookkeeping might work for someone with a low-volume sideline business. But entrepreneurs, who are committed to their businesses as their primary income sources for the long run, soon discover that the single-entry method may result in a series of small errors with enormous unintended consequences.

As the name implies, single-entry bookkeeping is characterized by having only one number recorded for each event. But, in fact, every business transaction has two impacts: an expenditure of cash is a simultaneous decrease of business funds and increase in something else (such as an expense category).

Single-entry bookkeeping can only reveal cash flow; it doesn’t track accounts on the balance sheet like inventory, accounts receivable, accounts payable, and debts-information growing businesses require.

Double entry

The value of accounting software is that it automatically accomplishes the heavy lifting of double-entry bookkeeping. You make one entry, but the system records two. Both sides of every transaction occur in the background, but you can easily find a single transaction in both accounts that were impacted.

When a check is recorded in the software, it appears to only reduce the bank account. But in this software entry, you also select how the funds were used, and that selected account increases.

To select the correct account, consider the purpose of the check: For example, did you increase an expense, add to inventory, or purchase equipment? Or did you increase the amount you’ve repaid on a loan, lowering the liability balance owed? These are debits, and the bank account shows a credit.

Similarly, entering a bank deposit involves selecting an account representing the source of money received-company revenue, sales tax collected for future remittance to the government, proceeds from a loan, or personal cash contributed by the business owner. These sources are, respectively, credits to accounts for income, sales tax payable liability, note payable liability, or paid-in capital. A debit is recorded to the bank account for the cash increase.

Understanding the double-sided nature of every transaction provides superior information on which to base decisions. And this will make you a very savvy entrepreneur.