December 17, 2014
In the earlier post we discussed the basic process of Bookkeeping. While there is no set system that should be followed for bookkeeping (it’s just recording financial transactions and that can be made any which way) but businesses and other organizations use two common bookkeeping systems: Single-entry bookkeeping system and Double-entry bookkeeping system.
Single-entry bookkeeping is adequate for many small businesses and it uses only income and expense accounts, recorded primarily in a revenue and expense journal. Double-entry bookkeeping requires posting (recording) each transaction twice, using debits and credits.
A single entry recording system does not include debit and credit columns but instead simple entries for things like cash, tax paid, accounts payable and accounts receivable. Income and balance sheets can be created using the information in the single-entry books. Cash book is the primary bookkeeping record in single-entry bookkeeping, this is similar to a checking (cheque) account register but allocates the income and expenses to various income and expense accounts. Separate account records are maintained for petty cash, accounts payable and receivable, and other relevant transactions such as inventory and travel expenses.
The type of records kept may vary considerably, but generally include:
Double-entry bookkeeping is a type of Bookkeeping entry system, recording all the payments out, and payments in, of a business based on the notion that for each creditor there must be a debtor e.g. if someone sells something, someone else must buy it, or if someone is paid for a service, someone else must pay them for that service. For each transaction at least two entries are made into the ledger – one being a credit and one being a debit, hence the term ‘double entry’.
Keeping accurate entries for debits and credits makes accurate accounting much easier to prove by totalling the credit and debit columns which should be equal. If an error was made during the entry of data into either column it will be easy to find. Double entry bookkeeping also makes record keeping more orderly and is very useful when creating profit and loss statements, or equity, assets and liabilities statements.
Double-entry allows for accrual basis accounting, which is the generally accepted accounting method that all public companies must use for reporting.
Bookkeeping entry systems should be chosen based on the needs of the corporation and in accordance with the public guidelines