Basic Accounting Concepts: Comparing Single Entry Bookkeeping and Double Entry Bookkeeping

Understanding some basic accounting concepts will help you decide which bookkeeping system you want to use in your small business.



First, you need to understand that the very basic definition of accounting is setting up a system of recording and summarizing financial transactions in such a way that they can later be analyzed or used to communicate with others.

There are two basic ways to record your financial transactions: single entry bookkeeping and double entry bookkeeping.

Single entry bookkeeping can used by small businesses where a balance sheet is not required for financial control or tax purposes.

Double entry bookkeeping is required for all businesses that must produce both a profit and loss account and a balance sheet.

To really understand the difference between these two bookkeeping systems, you must understand some basic accounting concepts.

The two most important basic accounting concepts:

1. The Basic Accounting Equation (Assets = Liabilities + Owner’s Equity)
2. Debit = Credit (Very important double entry bookkeeping rule! In a transaction - all debits MUST equal all credits.)

Let’s discuss the second one first. In basic accounting, accounts are set up to look like a “T” and are actually called T accounts –very imaginative huh?

'To debit' means to make an entity in the left-hand side of an account' and 'To credit' means to make an entry in the right-hand side of an account.

Important point! The words debit and credit have no other meaning in basic accounting concepts. Most people think a debit and credit as a positive or a negative. They are not either.

Now...back to rule number 2...Debits and credits must be equal for all entries in a double entry bookkeeping system.

A debit or credit will either increase or decrease the account balance...depending on what type of account you are working with. This table illustrates the entries that increase or decrease each type of account.

Basic Accounting Concepts -- Debits and Credits vs. Account Types:

Notice that for every increase in one account, there is an opposite (and equal) decrease in another. That's what keeps the entry in balance.

Remember...debits always go on the left and credits on the right.

Now to the first accounting equation: Assets = Liabilities + Owner’s Equity

What this really means is that, from a basic accounting perspective, your owner’s equity is the difference between what you own (Assets) and what you owe (Liabilities).

An example of this accounting equation you can hopefully relate to:

You buy a computer (an asset) for $5,000 dollars. If you borrowed $3,000 (a liability) and paid the balance with your savings, here is what the accounting equation would look like: $5,000 computer (asset) = $3,000 loan ( liability) + $2,000 (owner’s equity) in the computer.

Now keeping those two basic accounting concepts in mind...let us look at the difference between single entry bookkeeping and double entry bookkeeping systems.

Single Entry Bookkeeping

A small sole proprietorship or home-based business may not require a double entry system for recording business transactions.

However, if you have quite a few accounts receivable (money owed to your business by your customers) or accounts payable (money owed by your business), you may want to consider utilizing a double entry bookkeeping system.

It is easier for them to use a single entry method which is kind of like your check register. You just add the money coming in and subtract the money going out and keep a running balance

There are advantages and disadvantages of using a single entry bookkeeping system.

The main advantage is the simplicity. It involves the simplest form of keeping records of financial transactions.

Essentially you have two lists, one of income received and one of expenses incurred. This is beneficial for small business owners that have virtually zero accounting or bookkeeping knowledge.

The main disadvantage of single entry bookkeeping is limited ability to track your assets (what your business owns) and liabilities (what your business owes) It is also easier to make errors with. With double entry bookkeeping everything must balance.

Double Entry Bookkeeping

Double entry bookkeeping is require for all businesses that are required to produce a statement of its assets and liabilities (a balance sheet).

Take for example the purchase of the computer mentioned above. In a single entry system, you would simply subtract the purchase price from your running total.

In a double entry system you would debit your asset account (Office Equipment or whatever you named it) and credit either cash or accounts payable...depending on how you paid for it. See why a double entry system is best for tracking assets and liabilities?

Double entry bookkeeping systems have some a long way in the ease of using them. Most of the time you just have one entry to make and the program does the additional entries required to balance your transaction.

See this page for some tips on picking out an affordable user-friendly double entry bookkeeping system.

My Free Spreadsheets

This accounting package includes everything you will ever need to learn a good accounting foundation for your small business.

It covers over 30 topics and gives clear explanations and examples on various topics such as activity based costing, balance sheet, evaluating business investments, improving profits and accounting basics.

It also has accounting drills, cheat sheets, exams, crossword puzzles, word scrambles, and a wonderful accounting dictionary.

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