Definitions and explanations:
Single Entry System:
The single entry system follows to record transactions with a single entry to update the accounting records of a business. The basis of these transactions is mostly the inflow or outflow of cash within and from the business.
In a double entry bookkeeping system every transaction updates two sets of accounts that are correspondent and opposite. Accounts are maintained for each head with two sides; a debit side and a credit side.
Difference between single entry system and double entry system:
1. Rules for recording transaction:
Single entry system does not propose any specific rules to record transactions while double entry system is formulated upon the dual nature of every transaction. Transactions are recorded based on the cash flows in a single entry system whereas transactions are assumed to have a debit and/or a credit nature in double entry system. Double entry system follows a DEAD CLIC Rule:
Single entry system runs on cash transactions, so it can be called as a cash based system where significance of transaction is determined by the incoming and outgoing of cash. The double-entry bookkeeping system follows several accounting concepts like matching concept, accruals concept, business-entity concept etc. In this way, double entry system not only considers cash transactions but also non-cash transactions like depreciation, revaluation etc.
3. Accounting trail:
In a single entry system, the basis of passing entries for any transaction is cash. The best trail in such a system is cash books and no other appropriate records are maintained for liabilities and assets. So, it makes difficult to track any assets of the business if lost or stolen and also single entry system fails to consider liabilities and provisions that may arise or can arise due to certain past events reliably. However, double entry system assumes the dual nature of every transaction. Proper t-accounts, a general ledger and books of original entry are maintained which makes it possible for a business to keep well-grounded and updated record of every financial aspect of business.
4. Financial reporting and statements:
As single entry system has no specific basis of calculation and updating records it becomes very difficult to extract meaningful financial results or reports from these records. Statement of Affairs method and conversion method are used to ascertain profit or loss in a single entry system. Double entry bookkeeping system provides a strong base to each and every transaction occurred during the business which ultimately leads to understandable and interpretable results from which financial statements like income statement, balance sheet, cash flow statement etc. are produced.
5. Accuracy of accounts:
The transactions and accounting records in a single entry system cannot be checked and verified as a single entry is passed for every transaction held which cannot be reconciled. However, in a double entry system, trial balance is made which is an arithmetical comparison of sum of all the debits and all the credits of business transactions to make sure both are equal. This check highlights a number of errors including casting error, error of partial omission etc. However, some errors like complete omission errors, commission errors, principal errors cannot be detected by trial balance.
All big organizations use double-entry bookkeeping system. Especially public listed companies because these companies are bound by international reporting standards to produce financial statements that reflect the financial health of the business. Single entry systems can be used by firms that do not offer accountancy services but other related services like tax, law, consultancy etc.
Single entry system versus double entry system – tabular comparison
A tabular comparison of single entry system and double entry system is given below:
|Rules of recording transactions|
|Transactions are recorded based on cash flows.||Transactions are recorded according to DEAD CLIC rule.|
|The inflow or outflow of cash is important.||Accruals, matching, duality, going concern, business entity concepts etc. are important.|
|No specific trail of business transactions exist.||Proper accounting trail including books, t-accounts etc. exist.|
|Financial reporting and statements|
|Financial records can be reported in most suited way. Conversion and statement of affairs methods are examples.||Proper financial reports like statement of financial position, statement of profit or loss or other comprehensive income are prepared.|
|Accuracy of accounts|
|Chances of error are high||Chances of errors is low. Errors are more traceable.|
|Usually small businesses adopt.||Larger companies especially|
Conclusion – single entry system vs double entry system
The option of using either a single entry or a double entry system depends upon the nature and size of the business. Small businesses usually opt for single entry systems because they cannot afford to buy sophisticated accounting software and/or hire accounting professionals. Such businesses may run on cash based systems and report accordingly. Larger companies have to use double entry book keeping systems as they are usually bound by legislation to report their financial results for transparency and many other purposes. These statements are primarily prepared for company’s shareholders but different stakeholders like government, lenders, and potential investors also use them according to their needs.