Accounting is a necessary means of tracking the flow of money into and out of a business. Accountants and business owners have relied on either the single-entry or double-entry method of accounting to maintain financial records. These methods also produce periodic financial statements for internal and external review.
Double-entry accounting is the standard accounting method used by many firms. First described and documented in print by Italian friar Luca Pacioli in 1494, this accounting method received its name because it requires at least two entries for each transaction. Double-entry accounting provides the most accurate way to record and track business information, and it allows firms to perform accrual accounting. According to U.S. generally accepted accounting principles (GAAP), all publicly held companies must use accrual accounting. If firms have inventory, sell on credit, or engage in other somewhat complex business transactions, they must use accrual accounting for tax purposes.
Single-entry accounting works about the same as using your check register to record a written check. An entry is recorded to show the money going into or out of an account. Known as the cash basis method, single-entry accounting only works with simple, straightforward transactions. It does not provide the means to record items sold on credit. It also does not show bills that have been received, but not yet paid.
Double-entry accounting requires every entry to have debits and credits that directly balance, or offset each other. This prevents many errors and makes other easier to identify. Double-entry accounting provides information to show accounts payable, or money going out, and accounts receivable, or money coming in. It also allows accountants to prepare a balance sheet, income statement and cash flow statement. Accountants make adjusting entries at the end of each accounting period to keep the accounting books as accurate as possible.
For small companies with limited resources, single-entry accounting may work adequately enough. It is difficult to verify transactions, catch errors and assemble financial statements, but it keeps the accounting process simple for those who find double-entry accounting too daunting or time consuming. If a business keeps detailed, accurate single-entry records, an accountant or bookkeeper should be able to extract the necessary information to prepare accurate financial statements and tax returns.
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