Single and Double Entry Systems
An understanding of the basic concepts like meaning, characteristics, and classification of accounts used in the double-entry system and single-entry system.
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Introduction to the Single-entry system of bookkeeping
Under the Single Entry system, a business transaction affects only one account where the account’s value either increases or decreases depending upon certain event transactions. This system uses only personal accounts of debtors and creditors and only a cash book that records the receipts and payments of the cash transactions.
Generally, this system is beneficial only for small businesses as the number of transactions is less and maintaining single-entry cash-based bookkeeping is quite easy and has minimum requirements.
Characteristics of the single-entry system of bookkeeping
Proper vouchers or source documents
Vouchers refer to documents specially prepared for recording the transactions. A separate voucher is prepared for every transaction, and it specifies which account is to be debited or credited.
Use of cash-based bookkeeping
According to the single-entry system, only cash-based bookkeeping that tracks incoming and outgoing cash in a journal is maintained, but no other ledger is maintained. Businesses record cash-related transactions like invoices, receipts, and payments in the cash book.
Use of personal account
This system of bookkeeping uses only personal accounts for determining the credit sales and purchases during a period. Personal accounts of creditors and debtors are maintained, ignoring the nominal and real accounts.
Absence of fixed rules or principles
In this system of cash-based bookkeeping, there are no proper fixed rules or principles applicable for determining profits and preparing financial statements. Therefore, it is easy to maintain records as per this system.
Preparation of final accounts
Under this system, instead of a balance sheet, the statement of accounts is prepared as the proper information regarding real and nominal accounts is unavailable.
Advantages of the single-entry system
A very simple way to maintain records
There are no special rules to be followed while tracking incoming and outgoing cash in a journal, it is quite the simplest and easiest way to maintain a cash book.
Economical
Due to the limited number of financial transactions and the use of fewer books, no skilled professionals are required for recording any financial transactions of the business.
Disadvantages of the single-entry system of bookkeeping
Unsystematic and illogical
This system of recording financial transactions is unsystematic as there are no proper principles or rules while recording financial transactions.
Incomplete system
Every business transaction has two aspects of financial transactions, but this system records only one aspect. In this system, businesses only maintain a cash book, ignoring transactions that affect the real and personal accounts.
Lack of arithmetic accuracy
This system of bookkeeping is not reliable as it does not ensure arithmetic accuracy. In this system, the account balance sometimes fails, and it may lead to fraud and manipulation of accounts.
Unacceptable for tax purposes
This system is not acceptable for tax purposes due to a lack of proper records of financial transactions. As there is no proper maintenance of records, tax authorities do not accept this system for tax assessment.
Introduction to the double-entry system of bookkeeping
“Every business transaction that involves money has two aspects’’ and these two-fold aspects of a business transaction give rise to the double-entry bookkeeping system. A double-entry system is a complete system of recording the financial transactions of a business.
Under this system, preparing a profit or loss account and balance sheet can help in determining the actual financial position of the business.
Characteristics of the double-entry system
Affecting two accounts
A business transaction affects two accounts where one is debited and the other is credited. Certain transactions may affect more than two accounts but the amount that is debited or credited must be equal.
Following certain rules, while recording transactions
Various rules need to be followed while debiting or crediting the account. It does not mean that any account is debited or credited. Debits and credits are made following specified rules.
Preparation of trial balance
As one account is debited and the other is credited, all debits must be equal to all the credits. This ensures the arithmetical accuracy of the accounting records of the business.
Advantages of Double-entry System
Scientific system
This system of bookkeeping is more scientific because transactions are recorded according to specified rules.
A complete record of business transactions
Under this system, there are three accounts, i.e., personal accounts, real accounts, and nominal accounts that help record both aspects of transactions.
Preparation of trial balance
As per this system, arithmetical accuracy can be checked by preparing a trial balance as the debit amount must be equal to the credit amount.
Knowledge of the financial position of the business
Separate accounts are prepared for each transaction and businessmen can understand the financial position of their business at the end of the accounting period, so this system provides the true and exact financial position of the business.
Legal approval
Joint-stock companies, banks, and insurance companies are required to maintain their accounts as per the double-entry system. Books maintained through this system are reliable as per the companies and various other acts.
Disadvantages of the double-entry system
Less economical
As there are a large number of books that need to be maintained under this system, some specialised professionals are required, which makes this system less economical.
Difficult to apply rules
It is quite complex to apply the rules of debit and credit. Proper financial knowledge, training, and education are required to have command over the rules of this system.
Types of errors that are not disclosed
In this system, only arithmetic accuracy can be checked by preparing a balance sheet. However, errors of omission, commission, principle, and compensation are not disclosed by this system.
Conclusion
An analysis of both the systems of bookkeeping reveals that the double-entry system is a systematic, scientific, and flexible method that is being used extensively in most countries.
The disadvantages of the double-entry system arise only due to the improper knowledge, inefficiency, and carelessness of the people who are responsible for making the records.