What Are the Types of Bookkeeping

The majority of enterprises (even sole proprietorships) are outsourcing their bookkeeping. This way, they get superior service and more free time to focus on their core tasks. Still, not all bookkeeping methods are made the same. In order to find the partners that are the right fit for your business, you would have to understand different types of bookkeeping. Speaking of which…

The three most common types of bookkeeping today are:

• Single-entry bookkeeping
• Double-entry bookkeeping
• Virtual bookkeeping

Here’s what you should know about these common bookkeeping types.

Single-Entry System

The single-entry system is the simplest and, therefore, most commonly used by small businesses. The name is descriptive, seeing as how there’s one entry per transaction, and it goes straight to the “cash book.” This is a journal with columns in an order made to structure the transaction data so that it’s easy for you to access it at any point.

There are some transactions that are commonly recorded in single-entry bookkeeping. The minimum is that you enter your taxable income, tax-deductible expenses, and cash. Keep in mind that each transaction gets noted in one column, and at the end of the column, it’s either positive or negative.

Even with single-entry bookkeeping, the job gets a lot easier when you employ accounting software. This is due to the fact that, while it sounds simple, there are quite a few entries that you just have to have in your cash book. The bare minimum is that you’ll note down the transaction date, description, value, and balance. This last part is especially important when it comes to cash flow. You can also add an extra column so that your cash book matches what is on your bank statement.

Of course, your cash book can be far more detailed than that. For instance, you can note down sales, total-in, marketing website, and total-out and put the balance in the back rank. The key s that you can expand the table as much as you feel the need to.

The advantages of single-entry bookkeeping are that it’s simple and quick. So, if you don’t have too much experience, there’s really not much you can mess up here. This is also why the majority of businesses take this route.

The downside is that it’s not detailed enough, which might become a problem.

Double-Entry System

Double-entry bookkeeping is a concept that implies that every financial transaction has an equal and opposite effect on at least two different accounts. Here, you get the equation where assets are equal to the combined sum of liabilities and equity. Unlike single-entry bookkeeping where you’re supposed to keep everything in a cash book, the double-entry system usually uses a general ledger.

The biggest difference between single- and double-entry bookkeeping lies in the number of entries (debit and credit, which we will discuss shortly). To simplify it even further, single-entry bookkeeping is also referred to as cash-basis accounting. Whereas single-entry only uses revenue and expenses, double-entry uses up to seven different accounts.

These accounts are:

• Assets
• Liabilities
• Equities
• Expenses
• Gains
• Losses
• Revenue

Also, keep in mind that the term “cash” also includes credit card payments, electronic fund transfers, checks, wire transfers, etc., not just physical cash payments.

The best thing about the double-entry system is that it improves the accuracy and standardizes bookkeeping surrounding these financial processes. This is incredibly important when larger sums are in play.

Other things that double-entry bookkeeping pays close attention to are debits and credits. Debit is referred to an entry on the left side of the ledger, while credit goes to the right side. The key thing is to keep them in balance, and for this to work, the total of debits and credits for a transaction needs to be equal. In practice, however, this won’t always be the case.

You need double-entry bookkeeping to generate a balance sheet or an income statement. In other words, this is mandatory for all public companies.

Virtual Bookkeeping

Virtual bookkeeping is a concept where an accountant provides their services to a client remotely. It is quite simple and advantageous for both parties. First of all, it’s more convenient, especially in the era with so many accounting platforms and a financial landscape where the majority of transactions happen electronically.

The biggest advantage is the availability of incredible talent. In the past, you would only have access to your local accountant pool, which is quite finite. Now, if you take into consideration that it was likely that all the best accountants in the area were already taken, this would have put you in an even worse spot. The number of premium clients (in the local market) was also finite, which made the competitiveness between the accountants quite vicious.

Also, entities in more and more industries are using virtual bookkeeping services due to the many advantages that this format brings. Therefore, instead of just looking for a generalist bookkeeper, you can instead find bookkeeping for real estate investors. A higher level of specialization helps, especially in industries that have unique transaction types.

Now, the biggest concern with virtual bookkeeping is the security of data. After all, you would have to give access to your company’s private data to an outsider. Nonetheless, this is exactly what you would have done with a conventional accountant, as well.

The biggest challenge, however, lies in finding the right virtual accountant. To make the right choice, you would have to develop a better understanding of what they do. Now, becoming skilled at virtual accounting would be nice, but it’s a bit excessive. Just try to gather some reviews, find out what software they use, and even try to evaluate their online presence.

Wrap Up

In the end, it all comes down to the differences in methodology. Regardless if it’s the business model of the accountant/agency that you’re dealing with or the number of accounts they use in their entries, it’s important that you know what you’re getting into. Keep in mind that you’re in business to make money, which is why finding the right accountant (or accounting system) matters so much.