Double entry bookkeeping is an accounting technique to
record the financial transactions of a business where every
transaction is entered twice, equal and opposite
transactions. Double entry is required for all businesses
that must produce both a profit and loss account and a
balance sheet.
All limited companies are required to produce a statement
of assets and liabilities and maintain a system of
financial control and invariably need to adopt a system of
double entry bookkeeping usually using an accounting
software package.
The same rules may not necessarily to self employed
business that does not require to produce both a profit and
loss account and a statement of assets and liabilities as
the final product of the financial accounting. In the UK a
balance sheet is an optional requirement of self employed
business.
There are advantages and disadvantages in preparing
financial accounts using self employed bookkeeping. The
main advantage being the simplicity with which accounts can
be produced requiring a much lower knowledge of accounting
systems. The main disadvantage of single entry bookkeeping
is the absence of financial control due to limited detailed
records of asset and liability accounts.
Preparing accounts using single entry bookkeeping involves
recording the prime financial transactions once rather than
twice. Prime financial records include sales income,
purchase expenses and cash or bank transactions.
As the accounts do not require to produce a trial balance
and balance sheet then when using self employed bookkeeping
recording cash and bank transactions is not strictly
necessary but highly recommended to provide additional
financial control. While cash and bank transactions are
movements of assets or liabilities and not part of the
income and expenditure account accurate cash and bank
records are useful since cash flow is a highly critical
area for small business.
In the absence of a double entry bookkeeping system the
small business has less control over the debits and credits
of the business. That being the amounts owed for sales
invoices from customers who are called debtors and the
amount owed by the small business to suppliers who have
supplied goods and services on credit and are called
creditors.
What is required from commercially available single entry
bookkeeping software is not just an accounts package that
produces the profit and loss account but also has
additional facilities to assist financial management and
control of the business by providing optional areas for
cash, bank, debtors and creditor accounts to be maintained.
Mismanagement of small business finances is a major area
which can drive a small business into liquidation and
bankruptcy. The first lesson an accountant might learn when
studying accounting and financial control is that the
business must always have sufficient cash or availability
to cash resources to trade the next day. Bank records and
maintaining a positive cash flow is important as without
liquidity the business cannot trade..
In a similar vein control over debts owed to the company
and owed by the company is also important for the smooth
operation of a small business. Bad debts from clients can
cripple a small business in fact high levels of bad debts
can cripple any size of business as evidenced in recent
times with the so called credit crunch. Lack of control
over unpaid purchase invoices to creditors can result in
serious disruption and higher costs since suppliers stop
supplies and may charge recovery costs and relentlessly
chase up the debs taking up valuable time.
The conclusion then is while single entry bookkeeping is a
viable option anyone who adopts a self employed style of
bookkeeping to simply produce a profit and loss account, or
income and expenditure account should also have
supplemental systems to control assets and liabilities.
Bookkeeping software can produce a solution by adding
additional financial control.
The advantage of using a single entry bookkeeping system
involves the simplest form of keeping records of financial
transactions. Essentially the small business makes two
lists, one of income received and one of expenses incurred.
Using single entry might involve virtual zero accounting or
bookkeeping knowledge.
When recording the financial transactions in the two lists
of income and expenditure a small amount of extra detail
can have magnificent effects on the quality of records
produced by grouping together items of a similar nature.
When entering sales invoices or income received to produce
the sales turnover total a small amount of analysis can
save much time and produce a more sophisticated result. For
example the sales can be listed in one column to produce
the overall sales turnover but also analysed to a small
number of additional columns in which could be entered
different types of sales income.
The additional columns might be for different types of
product or sales from different sales channels, sources, or
perhaps used to separate out interest received if tax
differently to business sales income. Some analysis of
purchases is usually essential as only the tiniest business
would get away with lumping all purchases together as one
total.
Single entry bookkeeping would involve making a list of all
purchase invoices for goods and services. The analysis of
those purchases then achieved by listing each invoice again
in an analysis column according to the type of expense
incurred. Bookkeeping software should include a simple
expenditure analysis.
Having produced the list of sales and the list of expenses
all the information is then available to produce an income
and expenditure account. Enter the totals from the single
entry bookkeeping sheets on a separate sheet with sales
income at the top, a list of expenses under each purchase
expenditure category. Take the total expenditure from the
total sales and the result is the net taxable profit.
Bookkeeping software should automate this process.
The financial accounts based upon a single entry
bookkeeping are complete and a net taxable profit produced
for the tax authority.
----------------------------------------------------
Terry Cartwright a qualified accountant at DIY Accounting
in the UK designs accounting software for limited companies
at http://www.diyaccounting.co.uk/selfemployed.htm on excel
spreadsheets using a double entry bookkeeping system
http://www.diyaccounting.co.uk/bookkeeping.htm
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