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.
Introducing: Razor Bakery. Our name is sharp, but our bread is soft! 🍞
Razor Bakery started out as a tiny bakery operated out of its owner’s home kitchen. At this initial stage, the owner – let’s call her Mrs. Pay – recorded Razor Bakery’s transactions roughly in a book of accounts called a cashbook.
If she bought flour for Rs 400 on the 21st of October, she would record it in her cashbook as
|Date||Purchase||Expense (Rs)||Income (Rs)|
This is called the single entry system. This system of accounting is extremely simple – only payments and receipts are recorded.
If Mrs. Pay earned Rs 700 from business on the 22nd of October, she would record it as –
|Date||Purchase||Expense (Rs)||Income (Rs)|
Let’s now look at the advantages of the single entry system.
Advantages of Single Entry System
A major advantage of the single entry system is that it is economical, especially for businesses at earlier stages, where the founder also dons the hat of accountant. It does not require the services of a professional accountant, or expensive accounting software. All you need is a pen and a notebook. Maybe even an Excel sheet, if you’re feeling fancy.
The reason many small businesses prefer using the single entry system is that it is simple. There are no major rules to follow, and anybody can do it – even people with no accounting knowledge.
Unfortunately, this simplicity means that the single entry system has more disadvantages than advantages.
Disadvantages of Single Entry System
1. Incomplete records
It may seem like the purchase of flour has only one dimension – but this is not the case. Every transaction has two sides to it.
Remember Newton’s third law? For every action, there is an equal and opposite reaction.
The same law applies in accounting!
In the case of the flour that Mrs. Pay bought, Rs 400 worth of flour has been added, but also Rs 400 worth of cash has been subtracted.
The single entry system only records one side of the transaction. We can see from Mrs. Pay’s cashbook that she spent Rs. 400 on flour on the 21st of October, but we don’t know how she paid for it.
2. No scope for financial analysis
Looking at Mrs. Pay’s cash book would give no insight into Razor Bakery’s financial position. A business’s financial position is determined by the cash it has, how much it owes to its vendors and many other factors.
Since Mrs. Pay records her transactions in her cash book with the single entry system, we don’t know what exactly the cash balance is at the end of the quarter, or how much money Mrs. Pay has spent on flour in total.
If she needed this information, she would have to manually calculate the total amount spent on flour after poring through her entire cash book – inefficient and tedious.
Not knowing this means that Mrs. Pay cannot know how well or badly her business is doing. The best way to know if you are improving is by comparing current performance with past performance, and the single entry system simply does not facilitate this.
3. Unscientific and inconsistent
As mentioned before, the single entry system of accounting does not subscribe to a set of fixed rules and formats, unlike the double entry system of accounting.
This means that every business has a different way of recording its transactions, making it impossible to compare performance across businesses.
Thankfully, the double entry system of accounting addresses all these concerns and more. But what exactly is it? How does it work? Read our blog on Double Entry Accounting to understand in detail.
This blog is part of the upcoming Bookkeeping for Founders series, where we explain Accounting from the very basics, optimized for founders.
Being able to read, analyze and interpret how and where money is going gives founders power over their decisions.
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What is single-entry accounting?
Single-entry accounting is a system of maintaining the records of a business’s transactions in a very simple way. It records only one side of the transaction.
What are the disadvantages of single-entry accounting?
Single-entry accounting results in incomplete records that do not allow for financial analysis and reporting. It is also inconsistent and unscientific since it does not subscribe to any set of rules or formats.
What are the advantages of single-entry accounting?
Single-entry accounting is very simple and economical. It can be maintained by anybody and does not require a professional accountant.
Is single-entry accounting better than double-entry accounting?
Single-entry system of accounting is only feasible for very small businesses at the initial stages of growth. But if a founder anticipates and expects the business to grow, double-entry accounting is strongly recommended.