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1 October 2019 / Bookkeeping

The 4 Types of Bookkeeping Systems

1 October 2019 > Bookkeeping

Accountants and bookkeepers rely on set systems to efficiently and adequately accomplish daily tasks. With a steady bookkeeping system in place, they’re able to automatically or manually calculate company books and meet federal regulations. Automation, bookkeeping software, and other technology used in accounting also rely on one of many systems for tracking accounting-related files and expenses.

Choosing the right bookkeeping system for your business is a matter of understanding how these systems work and whether they fit in with your current style of business.

If you want to use these systems to manually calculate your finances or you want to choose an electronic software to do your books, it’s important to know all you can about your options. Here are some of the most common types of bookkeeping systems and how they work:

1. Single-Entry System The single-entry system is often the system of choice for small business owners. It’s certainly less complex than other systems, but it’s also difficult to keep track of huge volumes of data.

It’s called a single-entry data system because each item gets its own entry in the accounting records. It primarily focuses on cash sales and business expenses. It can’t keep track of more complicated expenditures, so large businesses probably shouldn’t use it.

Single-entry systems work only if the items are entered when they are incurred. It uses cash disbursements journals, cash sales journals, and recorded bank statements to monitor transactions. As soon as a transaction recurs, it’s recorded in one of these journals. At the end of a certain period, such as a week or month, the recordings will be compared and reconciled with the bank account.

It’s an excellent way for small businesses and startups to keep track of their accounts on a budget. It’s easy to maintain, and business owners typically don’t need to hire outside help. It can be done with an Excel spreadsheet or by hand. It’s also easier to calculate loss and profit for a certain period since there’s minimal data.

Businesses with more complex expenses shouldn’t use this system. It’s best for companies lacking accounts payable, accounts receivable, and frequent capital transactions because these transactions become too complex for the simplicity of this structure. It also can’t track assets and liabilities, so small businesses with high risk or expensive assets may want to consider another option.

Businesses using a single-entry system will also struggle to make predictions for the future. There’s not enough information to predict the current financial position of the business or project its growth. It’s also difficult to procure audit options.

2. Double-Entry System

Larger, more complex businesses typically use a double-entry system. Small businesses with more complex financial transactions will also benefit from this interface.

Basically, the double-entry system works by first posting single transactions as either an income or expense item. Then, it creates a second sub-entry that traces the transaction to the correct account. It enables you to track five transactions at once: expenses, revenues, equities, assets, and liabilities.

It can also use debits and credits to identify increases and decreases within each account. It operates under the two-fold effect, which states that for every value received (debit), there must be a value given up (credit). The ability to determine what’s affected by a given business transaction is invaluable for keeping track of current financial records, making predictions for the future, and accurately monitoring assets and liabilities.

Although smaller businesses can adopt the double-entry system if they wish, it’s a necessity for any business making more than $5 million in gross sales or more than $1 million in gross receipts for inventory sales to adopt the double-entry system. The single-entry system simply can’t handle the complexities of such a large company.

Many business owners prefer the double-entry system because it’s easier to understand your financial statements. Every single transaction is recorded, and it’s clear how it affects the corresponding account.

It gives a clear picture about the financial state of any business. You can easily compare one period to another and identify errors, growth patterns, loss patterns, and other essential details. Companies can take a holistic view of their projected financial potential and prepare accordingly.

In most ways, the double-entry system is superior; however, it is a difficult system to undertake without experience. Startup owners trying to keep costs low may be unable to tackle the system on their own, necessitating the hiring of an accounting professional. In all, more time and money is needed to maintain this system.

3. Computer Software

Because bookkeeping systems are often difficult to understand and operate for the typical bookkeeper, the market has put out hundreds of computerized bookkeeping systems. These structures use the single-entry or double-entry methods and make it simple for you to enter transactions accordingly.

There’s bookkeeping software designed for both small and large businesses. Small businesses can simply keep track of all accounts and transactions with easy-to-use interfaces. There’s no need for customized services, as a basic accounting software system is enough.

Large businesses will likely need the assistance of a bookkeeper, but the computerized software can make it easier to stay on the same page. They will also likely need a customized system that will match their unique needs as no business is the same.

The best part about computerized systems is the automation. It can efficiently record receivables and payables based on real-time transactions. It speeds up all transaction processes and improves accuracy.

It is expensive, and you may need assistance at the beginning to set it up. It’s also not foolproof, as many would believe it to be. Financial data can be stolen or manipulated, impacting the business’s bottom line. Still, it’s an efficient option for any business in need of flexible, affordable services.  

4. Virtual Bookkeeping

Essentially, a virtual bookkeeper is an online agent who handles your books. Virtual bookkeeping services are common for those who see both the single-entry and double-entry systems as complex and difficult to manage.

A virtual bookkeeper is a great alternative to an in-house bookkeeper or accountant because of the expense; they cost a fraction of what an on-site employee would cost a small business, but they’re just as effective.

Virtual bookkeepers will handle any accounting-related items you wish, but they’re most commonly used for invoices, payroll ledgers, and expense receipts. They’ll apply the single or double-entry system of bookkeeping for you.

Typically, virtual bookkeepers will request the use of a certain type of accounting software. For example, they might request that you purchase QuickBooks so that you can keep track of all your receipts and transactions there. They will have access to your account and track, organize, and reconcile your accounts for you. This makes it easier on everyone.

If that system doesn’t work, you can devise another option with your virtual bookkeeper. They’ll work with your unique needs to develop an accounting system that removes the burden from you while putting all your files in perfect order.

The most notable advantage of using a virtual bookkeeper is the cost savings, but there are others. It’s extremely flexible—your bookkeeper can work whenever it’s convenient. You’ll also have access to knowledge regarding federal regulations and the latest tools. Plus, these bookkeepers often offer other account-related services, such as tax preparation.

There is some risk with data security, since you may be sharing sensitive information over the internet. There is some vulnerability to these accounts and chances for miscommunication. However, if you’re diligently seeking secure communication and share all requested information with your bookkeeper, it can be an excellent method for managing your books.

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Jessie Suarez

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