Bookkeeping is the process of accumulating, classifying, recording and organizing a financial transaction to facilitate day-to-day transaction of an entity for preparing financial statement.
We have two systems of bookkeeping to consider: single-entry and double-entry.
Based on your business size and complexity, you can use either single-entry or double-entry bookkeeping system.
Single-entry bookkeeping system
If you have a very small business with low volume of transaction, we suggest you to go for single-entry bookkeeping. In this type of bookkeeping, you are required to record your transactions based on your payments and receipts in a register, generally known as cash book. This means, only one entry is made for each transaction.
This system is used in schools, colleges, small clubs and societies. In these type of small sized organizations, bookkeeper will record financial transaction in a small cash book by entering cash receipts on the left-hand page and cash payments on the right. At the end of the period, a receipts and payments account is prepared by taking summary of the cash book I.e head wise abstracts of receipts and payments.
In single-entry system, the cash and bank balance at the beginning of the financial year heads the receipts side, known as opening balance of the year.
The cash and bank balance at the end of the year is the balancing figure between total receipts including opening balance and total of payments. Its known as closing balance of the year.
In a complex system, you can not get track of transactions if you are following single-entry system of bookkeeping.
For instance if you buy or sell in credit, your cash book will not disclose the amount of money still owing to suppliers or by customers. This means you can’t find account wise balance such as accounts payable, receivable, inventory details, balance sheet and other asset and liabilities.
Due to its limitation, all most all organization irrespective of its size uses double entry bookkeeping system.
Double-entry bookkeeping system
In double-entry bookkeeping, you are required to post two entries for each transaction i.e. a debit is made to one account and credit is made to another.
This means each financial transaction of an entity is entered in two separate accounts I.e. one entry will be on the debit (left) side in one account while the other entry will always be on the credit (right) side of the second account involved.It recognizes the giving and receiving aspects separately.
Double-entry bookkeeping is based on the accounting equation i.e. total assets on one side is counterbalanced by the total of liabilities, invested capital and retained earnings. It can be stated this way:
Assets = Liabilities + Owner’s Equity
Assets – Liabilities = Owner’s Equity
If you want to keep track of your head wise expenses, assets and liabilities, then we suggest you to use double-entry bookkeeping instead of single-entry. In double-entry, you can easily calculate your organisations profit or loss and prepare financial statement at any point of time.
This system records both cash and credit transactions as they occur at their different times.