If you’re an entrepreneur, you need to prioritize bookkeeping from the start. Regardless of your industry or your business’ size, proper bookkeeping will help you remain financially secure while also promoting continued growth. You should understand which bookkeeping method is best for your business and how it effects the business financials.
You have two options from which to choose when doing so: single-entry bookkeeping and double-entry bookkeeping. This overview will explain the basic differences between the two, while also offering advice on how to choose which method is ideal for your business needs.
Understanding the Basics of Bookkeeping
Bookkeeping essentially involves tracking a business’s financial transactions and maintaining its financial records. When handling bookkeeping, your goal is to record all:
- Sales
- Payments
- Receipts
- Other such transactions
Proper bookkeeping allows a business owner to accurately and clearly understand their organization’s financial status. Benefits of this include:
- Making spending decisions based on thorough information
- Identifying reasons why a business might be losing money, and potentially coming up with strategies to avoid future losses
- Identifying areas for potential growth
Bookkeeping can also allow for easier compliance with all relevant tax codes. By investing in proper bookkeeping practices, a business owner could theoretically save a lot of money in the long run.
Single-Entry Bookkeeping
Single-entry bookkeeping is beginner-friendly. With this method, a business simply records a transaction as an expense or as income. That means a transaction is only recorded once.
Pros of this bookkeeping method include:
- Simplicity: As single-entry bookkeeping is less complex than double-entry bookkeeping
- Efficiency: Because this method of bookkeeping doesn’t involve a significant time investment
- An easy learning curve for someone who is new to bookkeeping
That said, there are certain disadvantages that may come with single-entry bookkeeping. Examples include:
- Providing a business owner with minimal financial information
- Failure to illustrate the full complexity of certain financial transactions
Further down, this guide will touch on various factors a business owner should account for before deciding what method of bookkeeping they should adopt. In general, though, single-entry bookkeeping is best for smaller businesses.
Double-Entry Bookkeeping
When a transaction is recorded via the double-entry bookkeeping method, it is recorded twice. You would record the transaction as a credit in one account. You’d also record it as a debit in another account.
For example, as a business owner, you may need to take out loans. When you do so if you’re using the double-entry bookkeeping method, you would record the transaction twice: once to illustrate that the loan has added to your available cash balance, and once to illustrate that you now owe your creditor the loan amount.
Advantages of double-entry bookkeeping include:
- Providing more thorough information about a business’s financial circumstances
- Allowing for more detailed records that could guard against fraud, lead to smarter business decisions, etc.
However, there are reasons a business owner might be reluctant to opt for the double-entry bookkeeping model. They include:
- A steep learning curve, as someone must possess a reasonably strong grasp of accounting practices to successfully manage a double-entry bookkeeping system
- A substantial time investment that could be overly burdensome on a small business owner who has many other tasks to attend to.
Again, you must account for various factors when deciding which type of bookkeeping method you should focus on. Typically, however, double-entry bookkeeping is ideal for larger operations.
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How to Choose the Right Bookkeeping Method for Your Business
Knowing that double-entry bookkeeping is usually best for a larger business while single-entry bookkeeping is preferable for smaller businesses can help you begin to make a decision regarding which is right for you. However, the size of a business is by no means the only factor that might influence this decision. Other factors include:
Growth Potential and Plans
Switching to a new bookkeeping method after growing accustomed to the other method, while not impossible, can be somewhat challenging once your operation is fully up and running. Consider this when choosing a bookkeeping method during your business’ early stages of growth.
Virtually all businesses start out small. Not all businesses stay small. Even if your business isn’t particularly large right now, if you believe it has the potential to become much bigger in the future, you may be better off practicing double-entry bookkeeping from the beginning. Doing so ensures you’re thoroughly prepared to track your business’ finances as it grows.
Your Knowledge and Resources
Perhaps your business is currently a one-person operation. Although there might come a day when you have the funds and resources necessary to hire someone to handle bookkeeping tasks for you, right now, this is a task you’ll be handling yourself.
If so, you need to consider your own familiarity with bookkeeping and accounting tasks when deciding what type of bookkeeping method would best serve your business. If you lack bookkeeping experience and have limited time to devote to this task, you should probably consider single-entry bookkeeping. On the other hand, if you already have bookkeeping or accounting experience, double-entry bookkeeping may be something you can manage on your own.
Your Industry
The nature of your business and the niche in which it operates can significantly influence the complexity of your financial transactions. For example, if you run a small gift shop in a relatively small town, odds are your transactions will always remain fairly simple. Additionally, even if your business succeeds, due to its inherently local nature, it’s unlikely to ever become a national or international enterprise.
On the other hand, maybe you’re running a new tech startup. Your transactions may naturally involve a certain degree of complexity if so.
Consider your industry when choosing between single-entry and double-entry bookkeeping. Your odds of making the right choice for your company may be much greater if you account for this critical factor.
Choosing a Bookkeeping Method for Your Business
This list of important factors to consider in deciding which bookkeeping method to adopt for your business is not all-inclusive, however, it lays a good foundation by pointing you in the direction of some of the basic and fundamental things to consider in aiding your decision. No doubt that there will likely be other things to factor in when making this decision, and it will be left to you to do the research to find out what these things may be. Or you could discuss this matter in greater detail with a financial expert if you’re struggling to determine which bookkeeping method will ideally serve you.