Single Entry System of Accounting

Accounting is the process of recording all financial transactions of a business over its lifetime. It is one of the most important and necessary functions for any business.

There are two major kinds of accounting. In this blog, we will discuss the single entry system of accounting. We will understand what exactly the single entry system is, its advantages, and why it is not as widely used as the double-entry system of accounting. 

What is Single Entry System

Let’s use the example of a fictional bakery to better understand this concept. 

Imagine you run a small home bakery and want to start analysing how much are your daily earnings and spends for running this bakery. Single-entry system of bookkeeping helps you do that easily. It is nothing but a cash-based bookkeeping method that tracks incoming and outgoing cash in a journal. The single-entry method is the foundation of cash-basis accounting. You mostly record cash disbursements and cash receipts with the single-entry system of bookkeeping.

Here’s an example.

On 8th November, you purchased:

• 2 kg Flour
• 3 litres of Vegetable Oil
• 1 kg Sugar
• 1 pouch of Baking soda for baking bread.

All the items that you purchased were then added to your cashbook

Later in the evening, you were able to make 4 loaves from the items that you purchased, and you were able to sell all 4. So you will record the sale of 4 Loaves in your books. This is the single entry accounting system. 

Deep dive into Single Entry Bookkeeping

In single entry bookkeeping, you keep a cash book to log income and expenses. Begin with your starting cash balance for the period, then add any incoming funds and subtract your expenses. Once all transactions are recorded, you calculate the remaining cash balance at the end of the period.

A typical cash book includes the following details:

• Date: The date of the transaction
• Description: A brief explanation of the transaction
• Transaction value: The amount, either incoming (debit) or outgoing (credit)

Balance: A running total of your available cash

Advantages of Single Entry System 

The single-entry bookkeeping system is a straightforward and cost-effective method for recording financial transactions. Its advantages include:

Simplicity and Ease

The single-entry system is easy to manage and understand. It doesn’t require a set of complex rules or principles for recording transactions, making it accessible for anyone, even without advanced accounting knowledge.

Cost-Effective

This system is economical because it doesn’t require hiring skilled accounting professionals to maintain records. Additionally, it doesn’t require numerous books or extensive records, as the number of financial transactions is limited.

Easy Profit Calculation

Calculating profit is straightforward in the single-entry system. Based on the income statement, it allows for easy determination of the business’s profit or loss at any given time.

Disadvantages of Single Entry System 

Unscientific and unsystematic

The single-entry system lacks a scientific and organized approach to recording financial transactions, as it does not adhere to any set rules or principles for transaction recording.

Incomplete system

This system is considered incomplete because it records only ONE aspect of financial transactions, focusing primarily on cash accounts and excluding real and nominal accounts. As a result, it does not provide a full financial picture needed by business teams.

Lack of arithmetical accuracy

Since the single-entry system does not follow credit and debit principles, it does not ensure the arithmetical accuracy of the financial records. Without a trial balance, errors or fraud may go undetected, increasing the potential for inaccuracies compared to the double-entry system.

Does not reflect true financial position

The single-entry system cannot accurately determine profit or loss because since it does not track nominal accounts. Furthermore, it only records cash transactions, which means it cannot present a true financial picture of the business. The absence of real account records also prevents the preparation of a balance sheet, making it impossible to assess the company’s financial position at the end of the period.

How is double-entry bookkeeping superior to single-entry?

The double-entry system offers several advantages over the single-entry method:

Recording method

Single-entry bookkeeping provides a one-dimensional view of transactions in the cash register. In contrast, double-entry records the impact of each transaction in at least two accounts, offering a more comprehensive financial overview. This system is preferred by investors, banks, and buyers because it gives a fuller picture of an organization’s financial health.

Error detection

In double-entry accounting, debits and credits must always balance. If they don’t, an error has occurred, making it easy to identify and correct mistakes before they affect other records. Single-entry has no built-in mechanism for error detection or correction.

Company size

The single-entry system is best suited for small businesses, while double-entry can be used by organizations of any size, including large corporations.

Preparation of financial statements

The data from single-entry bookkeeping is insufficient for generating financial reports or profit and loss statements. Larger businesses rely on these detailed reports to monitor their performance, which is why they require the additional information captured by the double-entry system.

Read more: Double Entry System

While you’re here, check out RazorpayX, a neobanking experience supercharged for businesses like yours. Worried about Accounting? With our Accounting Integrations, automate everything and you won’t have to worry anymore. 

RazorpayX has everything you need, and more.

• Unlimited multi-user access for your finance team & CA
• #DoLessSaveMore with powerful Corporate Cards
• Newly launched Magic Checkout solution improves checkout rate by 20% 
• Handle payroll and compliances in 3 clicks with our top-of-class Payroll tool

Banking for modern businesses. Join RazorpayX.

FAQs