Single Entry vs Double Entry System in Accounting – Pros, Cons & Differences

WHAT IS SINGLE ENTRY SYSTEM? - PROS AND CONS 

Single entry accounting systems record only one side of every transaction. This happens because they use one entry to record every transaction. Therefore, single entry system does not use nominal and real accounts. The emphasis is on cash and accounts receivable. 

Single entry accounting system can be described as a system that businesses use to get by rather than something that companies may find desirable.

 

• SMALL FIRMS

Single entry system is used by small firms that have just started business. Such firms do not have the resources that are required to put up a full-fledged accounting system in place. Hence, they begin with a single-entry accounting system. However as and when their business grows most firms are compelled to adopt the double entry system. This is because the single-entry system is highly inefficient and can be used only by sole proprietors when the scale of business is very small and the transactions to be undertaken are not very complicated.

• INCOMPLETE RECORDS

The biggest problem with single entry bookkeeping system is that of incomplete records. Single entry system records only transactions that the firm is undertaking with external parties. There are numerous transactions within the firm that are of vital importance and need a place in the financial statements. However, the single-entry system ignores these needs and gives incomplete information to the management.

• NO RECONCILIATION

Single entry accounting system does not have provisions for reconciliation of accounts. This means that the system does not have inbuilt error detection. Therefore, if a clerk is doing the task of making entries in the book, the system may be prone to clerical errors. This could lead to management having insufficient information or no information when they have to make decisions.

• POSSIBILITY OF FRAUD

Single entry accounting system is highly prone to frauds and embezzlement. There is only one book of account rather than an elaborate accounting system. Hence, the internal checks are few. In fact they are non-existent. The person making the accounts could single handedly manipulate the books of accounts and misappropriate the resources of the firm.

To counter this problem, Luca Pacioli and other merchants of Venice created the double entry accounting system. This system proved to be very effective and useful and soon became the gold standard for the industry.

DOUBLE ENTRY BOOKKEEPING SYSTEM IN ACCOUNTS 

The double entry system of bookkeeping is said to have revolutionized growth in modern business. It is only because businesses are able to keep track of their growing scale of transactions efficiently that they grow further. This has been facilitated by a well-designed, error preventing accounting system called the double entry system. Here are more details about this system: 

WHAT IS DOUBLE ENTRY SYSTEM?

In a double entry bookkeeping system there are two sides to every transaction. The sides are equal in magnitude i.e. the debits must always equal the credits.

• LARGE FIRMS

When a firm grows beyond a certain size it has to use double entry system of accounting. This is both because it is mandated by law as well as because it is the most efficient system.

• COMPLETE RECORDS

Double entry accounting system keeps a record of all major accounting transactions. These could be transactions outside the firm with third parties. Or they could be intra firm transactions where raw material has now been converted to Work in Progress (WIP). By making sure every record about credit as well as intra firm transactions is being accounted for, double entry system provides the most accurate record.

• AUTOMATIC RECONCILIATION

As the scale of a business grows, it becomes more prone to clerical errors. A clerk accounting for a large number of transactions all day is bound to make some mistakes. However, the double entry system does not allow these mistakes to have a cascading effect. This is because the system is constantly checking whether total debits equal total credits. When they are not, accountants know they are dealing with an error. They can then find out the error, correct it and then move forward. This saves a lot of time and builds incredible accuracy in the system.

However, the double entry accounting system is not 100% error proof. There is a possibility that an entry may have been completely omitted or that there may have been compensating errors done while passing the entry.

• FRAUD IS DIFFICULT

Just like reconciliation, when a business grows, more and more responsibilities need to be entrusted to workers. Many times, this leads to frauds by the workers as they embezzle cash and make use of resources for personal benefits. However, the double entry accounting system, when used correctly prevents such situations from arising. The system has strong inbuilt controls to avoid misuse of any resources.