Business Bookkeeping : The Two Primary Methods Of Bookkeeping
Any business needs to keep track of their finances, and bookkeeping is how it is done. Bookkeeping allows business owners to organize assets, revenue, expenses, and other monetary matters. It is also an effective way to find errors and other losses. Two common ways exist in order to do these duties that are quite different. These are double entry bookkeeping and single entry bookkeeping.
As transactions are recorded in the double entry bookkeeping method, two or more accounts are affected at the same time. These transactions are recorded as a series of credits and debits. When balancing the books, all of the credits are added together as well as all of the debits. The sum of the positive credits from one account are then compared to the sum of the negative debits from another. The books are considered balanced if they match. By recording the amount of a transaction twice, an error checking system is created.
Each transaction in double entry bookkeeping has the equal and opposite effect from one account to another. To keep things straight, a positive sign is given to credits and a negative sign is given to debits. One account will increase at the same rate the other decreases. As these transactions occur, they are recorded in books known as ledgers. Each account for the business maintains its own ledger. As a result of entries being recorded in two separate ledgers, a sort of automatic proofreading process is taking place. As credit is being recorded in one ledger, a debit of the same amount is recorded in another. Entering this same number twice ensures that when all figures are tallied, the books will be balanced.
You are probably aware that double entry bookkeeping takes some skill and is not for the inexperienced. Training and capability are necessary. This is more than enough for a fairly small business, though. This where the simplicity of single entry bookkeeping comes in. It is easy enough that a small business owner can most likely take care of balancing the books by themselves. Because it is such a basic method of bookkeeping, however, it is applicable only to the smallest businesses. Because there is not an abundance of transactions, single entry bookkeeping tallies only the bare minimum of records such as cash, accounts receivable, accounts payable, and taxes. And because it doesn’t require an extensive staff, it saves small business owners a fair amount of money.
In today’s world, double entry bookkeeping is the method almost all businesses practice. Smaller businesses that don’t need to keep track of all those numbers use single entry bookkeeping. Whichever method is used, it is a necessary component of any successful and organized business.
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