It’s virtually impossible to run a successful business if you ignore bookkeeping and the types of bookkeeping. This is true whether you run a thriving enterprise or a single-employee operation.

Do you own a business? Familiarizing yourself with the different types or methods of bookkeeping and understanding their differences can help you better determine which approach to bookkeeping will best serve the needs of your business.

Overview of Bookkeeping Methods

Single-entry and double-entry are the two types of bookkeeping the vast majority of business owners employ. The following overview covers the basics of each.

  • Single-entry bookkeeping: This form of bookkeeping is better suited to smaller businesses. Many compare it to balancing a checkbook. With this form of bookkeeping, a business records basic cash transactions, recording whether they are positive (involving money coming in) or negative (involving money going out). As the name implies, when a business employs a single-entry bookkeeping system, its records would only contain one entry for each transaction.

  • Double-entry bookkeeping: This form of bookkeeping involves recording all transactions twice. A transaction may be recorded as a credit in one account, with a separate entry recording it as a debit in another account. For instance, perhaps your business accepts a loan. You would add the amount of that loan to your cash account, recording it as an increase. The amount you now owe a creditor would also be recorded in the outstanding debts account.

Be aware that double-entry bookkeeping has existed for centuries. Although it is more complex than single-entry bookkeeping, some consider it to be a valuable bookkeeping method. Even when a business is relatively small, double-entry bookkeeping guards against errors and provides a more comprehensive financial picture than single-entry bookkeeping offers.

Single-Entry Bookkeeping: Pros and Cons

The benefits of single-entry bookkeeping include the following:

  • It is simple and fairly easy to understand.
  • It is not as time-consuming as recording two entries for every transaction.
  • The process of single-entry bookkeeping may be less costly than that of double-entry bookkeeping.

Disadvantages of this bookkeeping method include:

  • Offering very limited information about assets and liabilities.
  • Allowing greater room for error.

Double-Entry Bookkeeping: Pros and Cons

Reasons many business owners choose double-entry bookkeeping include:

  • Boosts accuracy.
  • Monitors a greater degree and volume of financial factors.
  • Offers more thorough information a business owner can refer to when making various business decisions.

Still, this method can also have some drawbacks for certain types of businesses. They are:

  • Double-entry bookkeeping is more demanding on a business, as it requires more time and greater financial investment.
  • Because double-entry bookkeeping is more complex, the process may require a greater understanding of accounting. That said, bookkeeping software can often simplify what might otherwise be a complicated task.

Choosing the Right Bookkeeping Method

No bookkeeping method is universally the better option for all businesses. It’s often the case that double-entry bookkeeping is superior to single-entry bookkeeping. In many potential scenarios, however, smaller business might benefit more from the single-entry approach. You need to account for numerous factors to determine which method is ideal for your business.

Factors to keep in mind when deciding what type of bookkeeping method to use include the following:

  • The Size of Your Business

This is critical. If yours is a medium-sized operation or larger, it’s almost certain that double-entry bookkeeping is the best option.

On the other hand, if your business is small, single-entry bookkeeping might be the better choice. This is particularly true if your budget is tight, you don’t have the funds necessary to hire a separate bookkeeper, and you don’t have the time to devote to double-entry bookkeeping.

In these circumstances, single-entry bookkeeping could satisfy all your needs while not placing unnecessary burdens on your money and overall bandwidth. However, it’s also worth considering what your long-term goals are as a business owner. If you plan on growing your business, at the very least, you should prepare to eventually make the switch to double-entry bookkeeping.

Single-entry bookkeeping might be sufficient now. This might not always be the case in the future. Plan accordingly.

  • Your bookkeeping knowledge

You may be able to justify hiring a bookkeeper if yours is a large or growing business. If you can hire a bookkeeper, you won’t need to account for your own understanding of bookkeeping methods when deciding what type of bookkeeping you should adopt.

That said, if you run a very small business and will be handling bookkeeping tasks yourself, you need to decide whether you possess the expertise necessary for double-entry bookkeeping. You might be better off keeping things simple and sticking with single-entry bookkeeping if you have minimal experience tracking a business’s finances.

Just remember that the right bookkeeping software could prove very helpful in this scenario. Even if you don’t have much bookkeeping experience, some tools may allow you to master double-entry bookkeeping with greater ease than expected.

  • Legal Requirements

Be aware that some companies are required by law to use the double-entry bookkeeping method. For example, per the generally accepted accounting principles (GAAP), if a business is traded publicly, it must track its finances through double-entry bookkeeping or accounting. Additionally, depending on your jurisdiction, businesses of a particular size may need to use this method.

Research this topic in greater detail to learn more about the legal requirements that might apply to your business. You may even benefit from consulting with an attorney if you wish to avoid any potential non-compliance issues. If there is any question regarding such legal requirements, consider erring on the side of caution and using the double-entry bookkeeping method.

Choosing Between Two Types of Bookkeeping

Deciding what type of bookkeeping method to embrace is one of the most significant choices you might make when running a business. No matter what method you eventually opt for, it’s important to remember that making this decision should be one of your top priorities, as consistent bookkeeping will help your business remain afloat.

The information here should help you make this decision with greater ease. By accounting for your business’ size and evaluating the pros and cons of both options, you’ll be able to choose the perfect accounting and bookkeeping system.