For most businesses, especially privately-owned ones, an adequate recordkeeping system should be relatively simple to use and understand, accurate, designed to provide timely information, consistent in its treatment of income and expenses, reliable, and exportable in its context. The last feature refers to how easy it is for others besides the one recording the information to be able to understand, compile, and make adjustments to the information for their own purposes. Tax accountants, bankers, outside investors, shareholders, and actual business owners fall into this group.
Single Vs Double Entry: There is sometimes a choice between these two types. A single -entry system is the easier to keep, and also the more limiting for information, auditing, and accuracy-checking purposes. In single entry, an income or expense item is posted once with no other account offsets. For simple, one-person sole proprietorships where the owner also pays the bills, collects the income, does the bookkeeping, and where managerial reports are secondary, this system is easier to use and understand. A single -entry system tends to concentrate primarily on the profit and loss statement and not the balance sheet side, so it is really only a partial system.
The double entry system involves the use of journals and ledgers to track profit and loss and balance sheet items. Transactions are entered into a journal, then summarized in ledger accounts. These include income and expenses, assets, liability, and capital accounts. Unlike the single -entry, the double entry system is designed to be self-balancing. Every entry involves both a debit and credit in which the ultimate sum of the debits equal the sum of the credits. At given periods(usually monthly, quarterly, annually), financial statements can be prepared which usually center around the Income Statement and the Balance Sheet. The income statement is similar to a profit and loss statement in that it reflects the income and expenses for the period. The Balance Sheet shows the business financial position at a given point in time in regard to assets, liabilities, and capital. While more complicated to maintain, double -entry systems allow for much more flexibility and standardization.
They help to minimize errors, and possible embezzlement problems. Further, for businesses that may require audited, compiled, or certified financials (for investors, or lenders, etc.) double -entry systems are definitely the preferred way to go.