Whether you’re creating a bookkeeping system from scratch or looking to improve your startup’s current approach, your choice of a single-entry or double-entry bookkeeping system (also known as single and double-entry accounting) has repercussions for how you handle every other aspect of your business finances. Using single-entry bookkeeping when you should be using double-entry can limit the growth of your business and prevent you from carrying out essential accounting processes.
However, most founders focus on setting up a system to pay vendors and record income as soon as possible and may not be aware they need to decide between single-entry vs. double-entry bookkeeping. In this article, you’ll learn what each of these approaches involves, how they compare, and which system best suits your startup’s situation.
What is single-entry bookkeeping?
Single-entry bookkeeping systems only track revenues and expenses—they do not monitor assets, liabilities, or owners’ equity. Without tracking assets, liabilities, and equity, you cannot generate the proper financial statements (P&L or income statement, balance sheet, and cash flow statement) which startup investors require.
With single-entry bookkeeping, you record each transaction once in your accounting log. You record the base essentials—date, description, and amount of each transaction—and keep a running total of your balance. The transaction amount will either be a positive value (reflecting income) or a negative value (reflecting expenses). Even if your log has separate columns for revenue and expenses, you only record each transaction once in the relevant column.
Below is an example of a single-entry bookkeeping system:
In this example, the business receives bills from vendors for the purchases they have made and records these expenses by simply decreasing the cash balance in their books. These transactions are only verified or reconciled when the business receives a bank statement.
Single-entry bookkeeping offers a simple way to keep track of cash payments: You can quickly set up a single-entry bookkeeping journal ledger in a simple spreadsheet or even on paper. However, it’s important to note that this method has significant limitations. Because single-entry accounting just records inflows and outflows of cash, it only supports cash basis accounting and not accrual accounting.
- Cash accounting books revenue and expenses when cash changes hands, whereas accrual accounting recognizes revenue and expenses when the associated goods or services are delivered.
- Accrual accounting allows you to track accounts payable, accounts receivable, and inventory—none of which are possible with single-entry cash basis accounting.
As a result of these limitations, single-entry bookkeeping is only a viable option for very small businesses that deal with a handful of transactions.
Learn more: 4 Reasons Startups Should Follow GAAP Accounting (and 2 Reason Why Some Delay)
What is double-entry bookkeeping?
In a double-entry bookkeeping system, you record two entries for each transaction—one in a debit column (which is always on the left side of the ledger) and one in a credit column (which is always on the right side of the ledger). Every transaction impacts at least two general ledger accounts: If you debit the balance of one account, you have to credit the balance of another account by the same amount.
The double entry system is based on the following accounting equation:
Assets = Liabilities + Equity
- Assets are resources owned by the business.
- Liabilities are obligations that the business has to pay another entity.
- Equity is the amount that would be due to the business’s owners after any debts and liabilities are settled.
Having a debit and a credit for each transaction ensures both sides of this equation balance. The accounting equation forms the foundation of the balance sheet and is an essential principle for accurate accounting.
Whether debits and credits increase or decrease the balance depends on the account type. A journal entry in the debit column records an increase to the balance in asset or expense accounts or a decrease to the balance in liability, equity, or income accounts. In contrast, a journal entry in the credit column records an increase to the balance in liability, equity, or income accounts or a decrease to the balance in asset or expense accounts.
For example, if a customer pays your business for a service, this results in a debit entry to the balance in the cash account (which is a type of asset) and a credit entry to the balance in your income account. The amount you debit and credit for each transaction must be equal: Differing amounts are an instant indicator of an error in your records.
Learn more: What You Should Know About Your SaaS Chart Of Accounts
Below is an example of a double-entry bookkeeping system:
In this example, when the business receives bills from vendors, these expenses are debited and Accounts Payable (which is a liability account) is credited, creating a new liability. When the payment for these bills is processed from the business’s bank account, the Accounts Payable liability created earlier is debited and the bank account is credited, showing a decrease in liability and a decrease in bank balance.
Double-entry bookkeeping enables you to build a more advanced accounting system: This approach supports accrual accounting and allows you to track accounts receivable, accounts payable, and inventory. It also allows a business to better evaluate its financial position. Because the double-entry system of bookkeeping is more detailed than single-entry bookkeeping, it can be more complex to set up.
It would be extremely difficult to build a double-entry bookkeeping system in an Excel spreadsheet. However, if you use accounting software like QuickBooks or Xero, these platforms are designed with a double-entry accounting system as standard and simplify much of the process with automation.
Learn more: 9 Advantages Of Accounting Software For Startups
Single-Entry Vs. Double-Entry Bookkeeping: Which should you use?
If you don’t have a finance background, it can be difficult to discern the advantages or disadvantages between a double-entry system vs. single-entry system. For the smallest businesses with the simplest accounting needs, a single-entry system might fit your needs. However, we strongly recommend that any businesses that intend to grow use double-entry bookkeeping.
Here is a quick at-a-glance view at the differences between single-entry and double-entry bookkeeping:
There are four key advantages of double-entry bookkeeping systems:
1. A double-entry bookkeeping system is essential to comply with GAAP.
To comply with generally accepted accounting principles (GAAP), you must be able to handle accounting processes like deferring revenue or accruing interest, and these processes are only possible if you use double-entry bookkeeping. Public companies are legally required to follow GAAP, but even if your business is a private company or just getting started, it’s good practice to implement GAAP processes as soon as possible.
As well as minimizing the risk of costly accounting errors, using double-entry bookkeeping to build GAAP-compliant systems indicates to potential funders that your business has the right financial foundation for growth.
2. A double-entry bookkeeping system gives a complete picture of your financial health.
Because single-entry bookkeeping only reflects your cash flow, it gives a limited view of your finances. It doesn’t take into account any expenses you haven’t yet paid or revenue you haven’t yet received, so you won’t be able to predict how these figures will impact your finances in the future.
Double-entry bookkeeping reflects both the debit and credit aspect of each transaction and tracks how they impact multiple accounts (including the cash account). As such, this system allows you to better understand the state of the business’s finances as a whole and identify possible trends.
3. A double-entry bookkeeping system allows you to generate key financial statements.
The profit and loss statement (P&L) or income statement, balance sheet, and cash flow statement are essential for assessing your business’s performance, conducting financial planning, and presenting financials to investors.
Unlike a single-entry system, a double-entry system includes the level of transaction detail you need to build these statements. For example, you need data on the business’s assets, liabilities, and equity to create a balance sheet: Double-entry bookkeeping records the debits and credits to each of these accounts separately.
4. A double-entry bookkeeping system makes it easier to detect errors and fraud.
Using double-entry bookkeeping, debits and credits have to match in your reports. If they’re out of balance, you must investigate the discrepancy to identify and fix the error. In single-entry bookkeeping, debits or credits are entered only once so errors can easily go undetected. This “failsafe” provided by double-entry bookkeeping helps ensure the accuracy and completeness of your financial records.
Because of these benefits, any accountant or finance firm will likely set up your business with a double-entry system of accounting. Transferring a business’s finances from single-entry to double-entry bookkeeping is not a complex process, but it can be time-consuming. Your accounting firm will have to review all your historical financial transactions in order to record them in the new format. To avoid these issues—and benefit from advanced bookkeeping as soon as possible—we recommend using double-entry bookkeeping from your startup’s earliest days.
Zeni Builds Bookkeeping Systems That Support Startup Growth
It is possible to build your own bookkeeping system—but the quickest, most effective way to create the right finance processes for your business is to work with a professional. At Zeni, our team of accounting professionals has seen the bookkeeping challenges that startups face countless times, so we created a finance service that helps businesses avoid common bookkeeping errors and build the financial foundation to grow.
Zeni is a modern finance firm that combines artificial intelligence and machine learning technology with human expertise to provide accounting, tax, CFO, and bookkeeping services for startups. Our team of seasoned finance professionals can work with your business to develop a GAAP-compliant double-entry bookkeeping system that is tailored to your needs. We can help set up your accounting software, build your chart of accounts, and stay on top of your daily record keeping with AI-powered processes that are 10x faster than manual bookkeeping.