Bookkeeping is the necessary practice of keeping records of a business’s transactions. It exists in order to organize assets, revenue, expenses, and other monetary elements as well as a way to detect errors and losses. There exist two common, yet different, methods every successful businesses uses in order to balance the books; 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.
Because each transaction has an equal and opposite effect on one account from another, positive and negative signs are assigned to credits and debits respectively. One account is increased at the same rate another is decreased. These records are kept in books called ledgers. Because double entry bookkeeping involves at least two accounts being affected by the same transaction, each account receives its own ledger. This constitutes a sort of financial proofreading process. As one credit or debit amount is recorded in one ledger, the opposite action of the same amount must be recorded in another. By entering the number twice, it is ensured that the books will balance when all of the figures are tallied.
As you can see by just scratching the surface, double entry bookkeeping requires skill and training. What, then, about rather small businesses that don’t produce adequate numbers to necessitate a team of experienced bookkeepers? Single entry bookkeeping is the solution for small business owners who can get by with recording transactions on their own. Bear in mind that single entry bookkeeping only works for businesses that experience low volumes of transactions because it records only the essential accounting information such as cash, accounts receivable, accounts payable, and taxes. Single entry bookkeeping is beneficial, though, because of how much cheaper it is to maintain.
Nearly all businesses record their finances using double entry bookkeeping. It is the smaller, more simplistic businesses that can get by with single entry bookkeeping. Either way, bookkeeping is a necessary practice for any business hoping to remain profitable.
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