Maybe you’re keeping track of your finances in an Excel spread sheet. Or maybe you look back over your bank statements so you always know how much you’re spending and how much cash is on hand. It’s a good start, but it’s not taking advantage of one of the most powerful tools your business can access.
Both Excel and manual account reconciliation usually end up being bare bones, single-entry accounting methods. The system you should be moving to is called double-entry. It’s more complex, but it’s also more complete.
Single-entry accounting is bad news. You might not know it now, but if you’re thinking about making any sort of time or monetary investment in your business, leave single-entry behind and embrace the complexity of double-entry accounting.
Single-entry accounting explained and vilified
Imagine a world where, for every transaction your business makes, you write down an entry in a long column of entries. It looks like your checkbook, where money coming in is added and expenses are subtracted. At the end of the day, you have some money – hopefully – but you don’t know much more than that.
Now, if your business doesn’t hold inventory, doesn’t owe people money, doesn’t have many accounts, doesn’t’ have many employees, and gets paid in a straightforward manner, single-entry accounting could be okay. You make some money and spend some money and you know how much money you have – it’s probably all stuffed in your Velcro wallet, anyways.
The only real benefit is simplicity. Single-entry bookkeeping takes no time out of your day. The downsides are too numerous to list, but can be summarized easily – single-entry accounting gives you as much insight into your business as your checkbook ledger (i.e., not much).
Understanding double-entry accounting
There is another, better, way. Most successful businesses will end up using the double-entry bookkeeping system. In this system, you keep a record of every transaction in two places: one entry in the account where the money came from and one entry in the account that the money ended up in.
Here, “account” is a broad term. We’re not just talking about moving money from your checking to your savings, but from your checking to a physical object or from a credit card to your carpet cleaner. In these examples, objects and carpet cleaners get their own “accounts” on your books.
It’s a confusing system but it comes with a heaping helping of benefits. The primary reason to use double-entry accounting is to make your financial reporting easier. Single entry accounting can help you create an income statement – earnings, costs, profit – but falls flat on other major reports.
Double-entry allows you to generate a statement of cash flows, balance sheets, and more detailed income statements. The beauty of the system is in its ability to generate these reports any time you want.
The running totals are already going to be broken into the right baskets. Want to know how much cash you’ve taken in so far this year – run a report. How much equity do the owners hold – run a report. How much money has the company spent on vehicle repairs – run a report.
It’s not the first thing you think of when you think of accounting, but the system you choose can have a huge impact on the way you view and run your business. To that end, the software you use to manage the system you choose can also have a huge impact.
Accounting software for every need
Just because you can run reports and get up-to-the-minute details about your business doesn’t mean that you have to. Plenty of accounting programs cater to small businesses that just want to get their accounts in order, run their reports at the end of the year, and hand everything off to an accountant.
For the extremely time pressed – or people who just want nothing to do with their accounting at all – services like Bench Bookkeeping can be a solution. Bench is effectively an outsourced bookkeeper. You link your accounts to their platform, send them receipts, and they take care of the rest.
If you want some more hands-on time with your books, an accounting system like Wave Accounting can be an excellent introduction. Wave gives you control over all your account details, lets you import data from your bank, and offers reporting tools. Wave also has the benefit of being free, but there are similar paid offerings on Capterra’s accounting software listing page.
Finally, larger companies or those that want complete control should look into offerings like Intacct Financials. Intacct’s software has financial and operational reporting capabilities, can automate reconciliation with bank accounts, and integrates with big name CRMs, POSs, and other business management systems.
No matter what size your business is, there’s always a way to get more insight into your success and failures by keeping a keen eye on your finances. The first step to that is to embrace the power and value of double-entry bookkeeping. Get on board and start doing more with your business, today.
If you’re overwhelmed, don’t worry – we’re not. Any business of any size can get in touch with Capterra for help choosing the best software for their budget and needs. Best part – it’s free. No fee now, later, ever. Let us know how we can help.