Should We Be Doing Double Entry?

Should We Be Doing Double Entry?

The accounts payable/receivable office of most companies is a very busy place, with rarely a dull moment. The thought of performing any additional bookkeeping tasks probably gives us all shivers, but there are actually a few good reasons for doubling up on part of our financial workload.

What is Double Entry Accounting?

As an oversimplified example, let’s say you had $100 in your checking account and you wrote a check for a $25 item. Say it’s coffee. Now your checkbook indicates your remaining cash balance of $75. That’s about all the information you’d really get from single entry accounting.

With double entry accounting, your credits would get recorded under both equity and assets – so, twice. To put it another way, you’d be making a debt and credit for every transaction. You’re tracking where your money is coming from and where it’s going. In this example, you have a $75 remaining cash balance and $25 worth of coffee.

Using the double entry method, every entry that you make into your ledger should be mirrored by (at least) one other entry. So, for every purchase you make, you’d note that you lost some cash and gained some items in the form of whatever it was you purchased. This shows your whole financial picture.

What do the Experts Recommend?

We reached out to several experts in the accounting field to get their input on the double entry system. They each provided unique reasons why double entry is their preferred method.

“Double entry accounting is very helpful in promoting understanding and accuracy for each transaction recorded,” said Erland Porter, CPA with Thrivent Financial and board vice chair with the Indiana CPA Society. “For example, if an entity is acquiring raw materials for production and paying for them with a mix of cash, credit from suppliers (accounts payable), and credit cards, double entry allows them to understand who is owed for what items versus what materials were purchased with cash. Without this clarity, it would be easy to lose sight of the overall financial picture.”

“Proper use of double entry accounting can also reduce the risk of fraud,” Porter added. “One of the accounting scandals uncovered from the early 2000s involved a major corporation inflating its asset position and understating their expenses. This was in part made known by reviewing the company’s double entry accounting records.”

Jolanta Moore, a partner and CPA with McMahon & Associates CPAs, P.C., explained that double entry gets more important for companies as they grow.

“Single-entry accounting could be sufficient for a low volume business. However, as the business grows, such system usually proves to be inadequate and prone to errors. Not to mention extremely time consuming in building any reporting,” Moore said.

“In order to grow a business, an owner needs information about the past performance in order to spot any trends, set up budgets, or cash flow projections,” Moore said. “For example, double entry accounting will allow tracking of different types for sales, or services provided to customers, cost of goods sold, or different types of expenses. When financing is needed, banks usually require some type of financial reporting, such as financial statements. The double entry accounting method could easily satisfy such requirement.”

Lastly, Luke Bapple, CPA with Bapple & Bapple, Inc., said the double entry method provides a lot of clarity as transactions become more complex and assets inevitably depreciate over time.

“Double entry allows for even the most complicated transaction activity to be broken down into simple bite-sized chunks, and you’re able to see your transaction’s effects directly on the reports that mean the most to you as a business owner,” Bapple said.

“Also, if your purchase has a limited lifespan, such as an effective life of five years or so, you can account for the wear and tear of your new asset by depreciating it until it has a zero value or you dispose of it,” he added.

Time to Double Down

There’s no downside to having a greater understanding of your finances. Better reporting will lead to better decision-making and ultimately a stronger company. Using a double entry accounting system will provide businesses with greater detail and insight regarding their financial health and should be incorporated into daily procedures. Even though it may feel like adding additional tasks to your workload at first, the benefits are simply too significant to ignore.

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Category Features, Finance