Single entry system
What do you mean
by Single entry system? In what types it differ from double entry system?
Single
entry accounting is a
simple form of bookkeeping and accounting in which each financial
transaction is a single entry in a journal or transaction log. As a
result, the accounting system is called, not surprisingly, a single entry
system. And, the
approach is also known as single entry bookkeeping. The single entry approach contrasts with double entry accounting, in which every financial event brings at least two equal
and offsetting entries, one a debit (DR) and the other a credit (CR). As a
result:
§ Firms using single entry approach are
effectively limited to reporting on a cash basis.
The Single entry approach is simpler than double entry
On the positive side, single entry accounting is simpler
and much easier to use than the double entry approach. And, the single entry
approach does not require background or training in accounting. Nevertheless,
the overwhelming majority of firms, worldwide, use double entry not single
entry—accounting.
Sections below illustrate single entry transactions and
further explain:
§ Advantages and disadvantages of both systems.
§ Reasons that most firms choose double entry
accounting
§ Business settings where single entry
accounting can be sufficient for planning, record-keeping and financial reporting.
Single entry bookkeeping and accounting can
be adequate for a small business practicing cash basis accounting. Small firms may in fact prefer single entry accounting
over a double-entry system when all or most of these conditions apply:
§ The company
has few financial transactions per day.
§ The company
does not sell on its own credit. Customers must pay at the time of the
sale either in cash, by bank transfer, by 3rd-party debit card, or by
writing a check. The firm does not deliver goods or services and then invoice
customers for payment later.
§ The company
has very few employees.
§ The company
owns few expensive business-supporting physical assets.
For example, it may own
product inventory, office supplies, and cash in a bank account. But it does not
own buildings, substantial office furniture, large computer systems, production
machinery, or vehicles.
§ The company
is privately held or operates as a sole proprietorship or partnership. As
a result, the firm need not publish an income statement, balance sheet, or
other financial statements that are mandatory for public
companies.
Firms that may use single entry
accounting
Under such conditions, a single
entry system may meet the firm's planning and reporting needs.
As a result, the single entry system may be adequate for
§ Supporting income
tax reporting for the company. The primary data for this are outgoing
expenses and incoming revenues.
§ Proving
that the company collects and pays government sales taxes for
goods or services sold.
§ Proving that
the company pays its own income taxes.
§ Forecasting
future budgetary needs and sales revenues.
§ Proving that
the company complies with minimum wage and employee tax withholding
requirements.
§ Providing
real-time visibility and control of incoming and outgoing funds. The firm
must be able to avoid over spending budgets or overdrawing bank accounts.
Single entry system advantages
Single entry bookkeeping and accounting have
the great advantage of simplicity over double entry bookkeeping and
accounting.
§ People with
little or no background in finance or accounting readily understand single
entry records and reports.
§ Small
companies create and use single entry systems without hiring a professional
accountant or bookkeeper.
§ The single
entry approach does not require complex accounting software. The examples above
show, for instance, that firms can create and maintain a single entry system
easily in a written notebook or simple spreadsheet.
Single entry system disadvantages
Single entry accounting provides insufficient
records and insufficient control for public companies and other
organizations that must file audited financial statements. Nor can it—by
itself—give owners and managers 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:
Double entry system: Built in
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) in one account and an equal,
offsetting credit (CR)
in another account. For each reporting period, total debits must equal
total 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 account histories include an error.
Single entry system: Error
checking is not built in
This kind of error checking is missing from
the 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 go unnoticed until the firm receives a bank statement with an
unexpected low account balance.
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, for example, 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.
Double entry system: Focus on
Revenues, Expenses, Assets, Liabilities, and Equities.
A double entry system keeps the firm's
entire chart of accounts in view. The chart of accounts for a double entry system has in
fact five kinds of accounts in two categories:
§ Firstly, Income
statement accounts: (1) Revenue accounts, and (2) expense
accounts.
§ Secondly, Balance sheet accounts: (3) Asset accounts, (4)
Liability accounts, and (5) Equity accounts.
All transactions in a double entry system
result in entries in at least two different accounts. When the company receives
cash through a bank loan, the double entry system records:
§ Firstly, a
debit for an asset account, e.g., Cash on hand. For an asset account, a debit
is an increase.
§ Secondly, a
credit to a liability account, e.g., bank loans. A credit to a liability
account increases account balance.
Single entry system: Focus on
Revenues and Expenses only
A single entry system tracks Revenue and
Expense accounts, but does not track Asset accounts, Liabilities accounts, or
Equities accounts
With a single-entry system, however, the
company may receive cash from a bank loan and record that as incoming cash. In
this case, however, there is no easy way to record the corresponding increase
in liability (bank loan debt).
Singly entry system does not
support accrual accounting
Single entry systems, moreover, work
hand-in-glove with cash basis accounting, where firms record inflows and outflows only when cash
actually flows. Single entry systems cannot easily support the alternative, accrual accounting. When the delivery of goods and services and customer
payments come at different times, for instance, accrual accounting provides
mechanisms for implementing the matching concept. Consequently, the firm recognizes revenues and the
expenses that brought them in the same accounting 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.
In conclusion: Single entry
accounting is inadequate for public companies
Because of such disadvantages, it is
extremely difficult to build a single entry system that conforms to GAAP
requirements in most countries (Generally accepted accounting principles).This lack may not concern sole proprietorships,
partnerships, or very small privately held corporations. This is because
accounting system for such firms must support only the tax and employment
reporting requirements.
It is nearly impossible to build a single
entry system, however, that by itself supports the reporting needs of
public corporations (companies that sell shares of stock to the public). A
single entry system, in fact, is inadequate, for any firm that must report
statements of income, financial position (balance sheet), retained earnings, or
cash flow (changes in financial position).
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