Business Bookkeeping Methods : The Basics Explained

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.

When using the double entry method of bookkeeping, two or more financial accounts are affected simultaneously by the same transaction. As the double entry bookkeeping method has evolved, it has become mainly a series of credits and debits. All of the credits related to one account are added together as are the debits from another account. A comparison is made of the two sums. If the negative sum equals the positive sum, then the books are balanced. Because two figures are compared, it helps to discover errors and discrepancies.

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.

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.

Most businesses are large enough that they utilize double entry bookkeeping. The smaller, less complicated businesses are the ones that are able to use single entry bookkeeping. Either type of bookkeeping is necessary for a business to remain successful.

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