A company could record its financial transaction using a single entry system or double entry system of accounting. Single entry system is less time consuming and less laborious while double entry system requires a lot of time and effort.
Definition of Single Entry System
The single entry system is the earliest technique of keeping financial records. An entry is made for each financial transaction, while the opposite entry is not made as the transactions are recorded once. It generally tracks the deals regarding cash invoices and disbursements (Also see Accounting – Accrual concept).
This approach of keeping records is mostly used by sole proprietorship and partnership companies. This system does not require high expertise and knowledge to enter transactions. Trial balance, ledgers and journals are not made for this. Nevertheless, the income statement is prepared to understand the profit or loss of the company.
Reconciliation of accounts is impossible because of some drawbacks such as one-sided entry. Hence, the possibility of mistakes and frauds is maximum. That is why it does not comply with the Financial Reporting Standards (FRS). Also, accounting records kept under this system are not ideal for tax purpose (Also see Tax Avoidance and Tax Evasion).
Definition of Double Entry System
Double Entry System is the scientific approach of maintaining financial records, created in 1494, by Luca Pacioli. This system is based on the concept of duality; each transaction has a dual aspect. Every transaction impacts two accounts at the same time, where one account is credited while the other is debited.
For instance, Mr A has bought products of S$1,000 for cash from Mr B. He has acquired products, and the money is provided to Mr B. As you can see, the goods are obtained by giving up money. Thus, this system records both aspects of a transaction, the increase in goods results in the decrease in cash.
Because of two-fold impact, the system possesses accuracy, completeness and fulfils the Financial Reporting Standards (FRS). A complete procedure is followed to record the transactions. The procedure begins with source documents, followed by the ledger, journal, trial balance; then financial statements (Also see What is an Income Statement?) are prepared.
An individual with little accounting knowledge could keep records according to the single entry system. However, the double entry system has developed because of some drawbacks in the single entry system.
You may reach out to any accounting services in Singapore to help you in managing your business’s accounting.