The ‘double entry’ method of accounting was invented in the 15th century. A man named Benedikt Kotruljević first wrote about double-entry accounting in ‘Book on the Art of Trade’ in 1458 and then Luca Pacioli who was Franciscan monk in Milan wrote the ‘Summa de Arithmetica, Geometria, Proportioni et Proportionalita’ in 1494.
This is where ‘double entry’ bookkeeping is understood to have started.
Even university accounting students take some time to grasp the concepts so it is no wonder that small business owners struggle with this discipline of business.
The primary rule of double-entry accounting is that total debits and total credits must be equal. There are 5 classifications of transactions being assets, liabilities, equity, revenue and expenses and while it makes sense to someone trained in accounting, it can be confusing for people who are not.
Over the centuries and right up until the modern day, the common process for small business owners to keep their books has been to have a ledger that tracks money coming in and going out of the business, along with records of accounts receivable and accounts payable.
This is called a single entry bookkeeping system and is much easier for people who are untrained in accounting.
According to the U.S. Internal Revenue Service: “A single-entry system is based on the income statement (profit or loss statement). It can be a simple and practical system if you are starting a small business. The system records the flow of income and expenses through the use of: 1. A daily summary of cash receipts, and 2. Monthly summaries of cash receipts and disbursements.” (IRS Publication 583: Starting a Business and Keeping Records, 2007)
Computers and software advances have brought the tools to do double-entry accounting to the mass market. And they are so inexpensive, at least when you look at the shelf price, that many small business owners get lulled into using them.
But having an electric drill doesn’t turn an accountant into an electrician. The same could be said that having a scalpel doesn’t turn you into a brain surgeon.
There is the old story about the person who complained about the surgeon’s bill because the bill was $5000 and the operation was only one hour. The surgeon’s reply was that $200 was for the time and $4800 for knowing where to cut.
Similarly, having a double entry accounting software product doesn’t turn someone who knows little about accounting into an accountant.
Accountants will testify that many small business owners who use the double entry accounting systems on the market today make a mess of their records and often cause their accountants extra work fixing it up.
This can be very costly for the small business owner because an accountant’s time is not inexpensive. So in the majority of cases a small business is much better off using a single entry method of bookkeeping, making sure their records balance to their bank accounts and providing their accountants and tax advisers with records that minimize the time they need to spend on completing the financial statements.
A single-entry program that has stood the test of time was developed by an Australian accountant for his clients and is now sold throughout the world. If you are a small business owner then it is worth taking a look, so here are the links for your country:
Easy accounting software for US small business
Easy accounting software for Canadian small business
Easy accounting software for UK small business
Easy accounting software for Australian small business
Here is a video that explains single-entry accounting: