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| A few businesses choose single entry accounting instead of the more common double entry system. With single entry accounting, each financial event brings just one transaction in the system. This approach is similar to the way that individuals use a check register to manage a personal bank account. |
Single entry accounting (single entry system, or single entry bookkeeping) is a simple form of bookkeeping and accounting in which each financial transaction is recorded with a single entry in a journal or transaction log.
Contents
• Single entry systems: Examples
• Where single entry bookkeeping may be sufficient
• Single entry system advantages and disadvantages
• Where single entry bookkeeping may be sufficient
• Single entry system advantages and disadvantages
Single Entry Systems: Examples
The single entry approach is very similar to the check register that individuals use to keep track of checks, deposits, and balances for a single checking account: The amount of each cash inflow or outflow is recorded along with the transaction name or description. Tables 1 and 2, below, are examples showing how the single entry bookkeeping / accounting record might look for one day's transactions for a very small business (e.g., a small retail shop operating as a sole proprietorship).
| Date | Transaction | Amount |
|---|---|---|
| 1 June XX | Starting balance for day | $4,520.00 |
| 1 June XX | Electricity bill for month | ($149.80) |
| 1 June XX | Postage stamps purchased | ($43.00) |
| 1 June XX | Inventory purchased | ($624.15) |
| 1 June XX | Daily product sales | $1,040.25 |
| 1 June XX | Sales tax paid | ($83.22) |
| 1 June XX | Dailyservice revenues | $592.25 |
| 1 June XX | Bank acct interest received | $180.83 |
| 1 June XX | Customer refund paid | ($42.95) |
| 1 June XX | Ending balance for day | $5,390.21 |
| Table 1. The simplest form of single entry bookkeeping for one day's transactions for a small business. Funds received are positive numbers andfunds paid out are negative (in parentheses). | ||
| Date | Transaction | Revenues | Expenses | Balance |
|---|---|---|---|---|
| 1 June XX | Starting balance for day | $4,520.00 | ||
| 1 June XX | Electricity bill for month | ($149.80) | $4,370.20 | |
| 1 June XX | Postage stamps purch. | ($43.00) | $4,327.20 | |
| 1 June XX | Inventory purchased | ($624.15) | $3,703.5 | |
| 1 June XX | Daily product sales | $1,040.25 | $4,743.30 | |
| 1 June XX | Sales tax paid | ($83.22) | $4,660.08 | |
| 1 June XX | Dailyservice revenues | $592.25 | $5,252.33 | |
| 1 June XX | Bank interest received | $180.83 | $5,433.16 | |
| 1 June XX | Customer refund paid | ($42.95) | $5,390.21 | |
| 1 June XX | Ending balance for day | $5,390.21 | ||
| Table 2. Single entry bookkeeping with a running balance and separate columns for incoming revenues and outgoing expenses. Funds received are positive numbers, funds paid out are negative. | ||||
Additional columns can be added, of course, to show different categories of revenues or expenses. The only structure required in the records is to include enough different revenue and expense categories to meet tax reporting requirements.
Where single entry bookkeeping may be sufficient
Single entry bookkeeping and accounting can be adequate for a small business practicing cash basis accounting. The single entry approach may, in fact, be preferred over a double-entry system for small companies where all or most of these conditions apply:
- The company uses cash basis accounting, not accrual accounting.
- The company has few financial transactions per day.
- The company does not sell on its own credit, meaning it does not deliver goods or services and then invoice customers for payment later. Customers must pay at the time of the sale either in cash, or by written check or bank transfer, or with a 3rd-party credit/debit card.
- The company has very few employees.
- The company owns few expensive business-supporting physical assets (e.g., it may own some product inventory, office supplies, and cash in a bank account, but it does not own buildings, substantial amounts of office furniture, large computer systems, production machinery, vehicles, etc.).
- The company is privately held or operates as a sole proprietorship or partnership (i.e., the company does not need to publish the income statement, balance sheet, or other financial statements that are required of publicly owned companies).
Under such conditions, a single entry system may be adequate to meet the company's legal reporting obligations. The single entry system may be adequate for
- Supporting income tax reporting for the company (for which the primary data are outgoing expenses and incoming revenues).
- Proving that the company collected and paid government sales taxes for goods or services sold.
- Proving that the company pays its own income taxes.
- Proving that the company complied with minimum wage payment and employee income tax withholding requirements.
- Forecasting future budgetary needs and sales revenues.
- Providing real-time visibility and control of incoming and outgoing funds, to avoid over budget spending or overdrawing the company checking account.
Single entry system advantages and disadvantages
The advantages and disadvantages of single entry bookkeeping are best described by comparison with the primary alternate approach, a double entry system.
Single entry system advantages
Single entry bookkeeping and accounting have the great advantage of simplicity over double entry bookkeeping and accounting.
- The single entry approach is readily understood by people with little or no financial or accounting background.
- For many small companies, the single entry approach can be implemented without the involvement of a trained bookkeeper or accountant.
- The single entry approach does not require complex accounting software. It should be clear from the examples above, for instance, that a single entry system can be created and maintained easily in a written notebook or a very simple spreadsheet.
Single entry system disadvantages
Single entry accounting provides insufficient records and insufficient control for public companies and other organizations that are required to file audited financial statements such as the income statement or balance sheet. Nor can it—by itself—give owners and management crucial information for evaluating the company's financial position. Some of the important differences between the two approaches illustrate disadvantages of the single entry approach:
Lack of error checking
A double entry system provides several forms of error checking that are absent in a single entry system. In the double entry system, every financial transaction results in both a debit (DR) entry in one account and an equal, offsetting credit (CR) entry in another account. For any time period, the sum of all debits must equal the sum of all credits. That is:
Total DR = Total CR
Moreover, a double entry system works so that the balance sheet equation always holds:
Assets = Liabilities + Equities
These equations together are known as the accounting equation. Any departure from these equalities in a double entry system is a signal that a transaction entry error has been made somewhere.
This kind of error checking is not built into a single entry system. If the single-entry bookkeeper mistakenly enters, say, a revenue inflow as $10,000 when the correct value is $1,000, the error may not be detected until the company receives a bank statement with an unexpected low balance for a bank account (or an overdrawn account). In a double-entry system, however, the $1,000 cash deposit entry (a debit to an asset account, cash on hand) will be accompanied by another entry recognizing the source, e.g., a credit to a liability account (e.g., bank loan) or a credit to another asset account (accounts receivable). If the second entry were not made, the sums of credits and debits in the system would differ, immediately revealing the error.
Focus on revenues and expenses only
A double entry system keeps in view the company's entire chart of accounts. That is, all transactions in a double entry system result in entries in two different accounts, which may be the so-called income statement accounts (revenue accounts and expense accounts) or the so-called balance sheet accounts (asset accounts, liability accounts, and equities accounts).
When the company receives cash through a bank loan, as mentioned, the double entry system records a debit for an asset account, e.g., cash on hand (for an asset account, a debit is an ifncrease), as well as a credit to a liability account, e.g., bank loans (with a liability account, an increase is a credit).
With a single-entry system, the company may record cash received from a bank loan as incoming cash, but there is no easy way to record the corresponding increase in liability (bank loan to be repaid). Single entry systems do not easily track the value of assets, liabilities or equities.
Single entry systems, moreover, work hand-in-glove with cash basis accounting, where inflows and outflows are recorded only when cash actually flows. Single entry systems cannot easily support the alternative approach, accrual accounting—as used by the vast majority of businesses worldwide. When the delivery of goods and services comes at a different time from cash payment for those goods and services, for instance, accrual accounting provides the mechanisms for implementing the matching concept, the practice of recognizing revenues and the costs that brought them in the sameaccounting period.
If the vendor delivery and the customer payment fall in different time periods, however, the single entry system has no way of matching the two events and thus presents a misleading picture of earnings for either period.
As a result, it is extremely difficult to build a single entry system that conforms to the GAAP requirements in most countries (Generally accepted accounting principles). This lack may not concern sole proprietorships, partnerships, or very small privately held corporations—whose accounting systems must support only the company's needs to comply with tax and employment reporting requirements. It is nearly impossible to build a single entry system, however, that supports by itself the reporting needs of public corporations (companies that sell shares of stock to the public), or other companies that must report statements of income, financial position (balance sheet), retained earnings, or cash flow (changes in financial position).
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