Accounting systems are a set of processes that aim to record and manage all of a business's financial information. Companies and organizations of all sizes employ these systems to keep track of their income, expenses, sales, taxes, and payroll, among many other financial activities. Depending on the size of the business and the volume of activity, accounting systems can be computerized or manual. The two types of accounting systems are double-entry bookkeeping and single-entry bookkeeping.
Although there are only two types of accounting systems, there are a plethora of accounting tools that can help you handle accounting and bookkeeping tasks. Skynova offers comprehensive accounting software for small business owners, contractors, and freelancers.
In this article, we'll review the two main accounting systems and explore the accounting management software that can help you stay on top of your financial data and streamline your accounting operations.
What Are the Two Types of Accounting Systems
As mentioned, single-entry and double-entry are the two types of accounting systems available to businesses. The two systems differ in how each transaction is recorded. In a single-entry system, only one entry is recorded, either debit or credit. On the other hand, a double-entry system involves the recording of both debit and credit, which means that two accounts are affected for each transaction.
As a small business owner, it's essential that you familiarize yourself with the particularities of each accounting system before opting for one. The two systems vary in terms of their complexity and their suitability to the size of your business. Having a clear idea of what each one offers will allow you to implement the right system. Below is a more detailed look at the two accounting systems and the advantages and disadvantages of each one.
The Single-Entry Accounting System Explained
A single-entry accounting system records all financial transactions in a single log without tracking assets and liabilities. A typical single entry includes the value of the transaction, whether it's an expense or income, the date, a short description, and a balance that denotes the amount of money you have on hand.
The main advantages of using a single-entry accounting system are simplicity and cost-effectiveness. In fact, you don't need any formal training to implement a single-entry system nor do you need to retain the services of a professional bookkeeper or certified public accountant (CPA) to maintain it.
This system is ideal for nonprofits and businesses with no employees or very few financial transactions. However, the drawback is that it doesn't capture enough data for you to generate proper financial statements. In other words, you won't be able to create a balance sheet, a profit and loss statement, or an income statement.
The Double-Entry Accounting System Explained
A double-entry accounting system records all financial information on two sides: debit and credit. For every transaction recorded in the system, an account is debited while another is credited. For example, if you sell $2,000 worth of products, the system will debit accounts receivable and credit sales for that same amount.
The advantage of using this data entry system is that it provides a complete view of your business's financial activity. Profit and loss are easy to identify and proper financial reporting can be made. Due to the completeness of the system, double-entry accounting is ideal for any business that wants to ensure robust and accurate financial management. As for the drawbacks, the system is significantly more complex than single-entry accounting, and maintaining it might require hiring a professional accountant.
What Are the Two Types of Accounting Methods?
Just like there are two types of accounting systems, there are two types of accounting methods: cash accounting and accrual accounting. In cash-basis accounting, expenses and revenue are recorded when cash is paid or received. By contrast, the accrual method of accounting records revenue and expenses when the transaction happens, such as before a cash settlement.
Keep in mind that there are several factors that you should consider before picking an accounting method for your business. Variables like the size of the business and the industry play a determining role in the way your books should be kept. The following sections expand on these accounting methods and outline the types of businesses best suited to each one.
The Cash Accounting Method Explained
The cash accounting method is quite simple in its application. In fact, the core concept is similar to that of balancing a personal checkbook. Recognizing transactions after cash changes hands allows you to track your business's financial activity in real time and provides you with a current picture of its current cash flow status.
There are plenty of advantages to using this accounting method. Besides allowing for real-time cash flow management, this method offers several potential tax benefits. In fact, a business can legally lower its tax liability by simply controlling the timing of the cash payments. This method doesn't come without disadvantages, though. Since cash-basis accounting doesn't show liabilities, a cash-rich business with a high accounts payable can appear more solvent than it actually is.
Due to its simplicity, the cash accounting method is ideal for small businesses or sole proprietorships that don't sell merchandise or handle inventory management.
The Accrual Accounting Method Explained
Compared to the cash-basis method, accrual accounting is relatively more complex. Recording income and expenses as the transaction occurs involves the use of accounts payable and accounts receivable and involves accounting for long-term liabilities, such as unearned revenue. Moreover, the accrual method requires monthly bank reconciliation to ensure that the amount in the bank account matches the closing balance.
Unlike with cash-basis accounting, payments expected to be received in the future are recognized as present income. This provides a more accurate picture of a business's financial health and its long-term profitability. The disadvantage of this method is that it doesn't do a great job of tracking cash flow, which can lead to cash shortages during inopportune times.
Accrual accounting is the go-to method for businesses ranging from e-commerce to manufacturing. Moreover, accrual accounting is legally required for companies that generate more than $25 million in annual sales.
Using Business Accounting Software
While having a baseline understanding of accounting systems and methods is essential, you don't need to have a thorough grasp of every aspect of accounting to manage your business finances. These days, there are a myriad of user-friendly software solutions and Android and Apple mobile apps that can help you with your accounting needs. These solutions cover the full scope of business accounting, from bookkeeping and budgeting to cloud accounting and time tracking.
It's worth noting that certain software packages come with only core accounting functions, whereas others are geared toward wider project management tasks. These software solutions are known as enterprise resource planning (ERP) systems and are used by businesses that want to integrate the management of all processes into one system. Providers that offer such solutions include Sage and Xero. Keep in mind that ERPs are not only reserved for large businesses, though. Companies like Zoho offer ERP solutions for small businesses at competitive pricing, too.
Here are some examples of accounting solutions that provide comprehensive functionality for small businesses:
Invoicing and Purchase Order Software
There are several software solutions that help you create the two documents integral to any business that engages in the sale and purchase of goods and services: invoices and purchase orders. Invoices help you collect payments on time, whereas purchase orders (POs) are used to procure goods and services from suppliers. Invoices and POs are also a great way to maintain document-based traceability for all of your transactions.
Most invoicing and purchase order software programs feature an intuitive interface and are fairly easy to use. A good example of this is Skynova's invoice template. Using this simple template, you can create professional-looking, customizable invoices in printable or digital form in a matter of minutes.
Expense Tracking Software
Maintaining accurate records of expenses is extremely important for small businesses. Keeping track of expenses allows you to manage your cash flow, measure your profitability, and operate within your budget on a consistent basis.
Solutions like Skynova's accounting software offer streamlined tracking of all your expenses and a host of other accounting features that enable you to stay on top of your accounting. You can keep a clear record of sales tax and store receipts, view revenue and expenses in a general ledger, and generate financial reports anytime you need them.
Let Skynova Help You Manage Your Small Business Accounting
Skynova's accounting system includes all the software products to help small businesses manage their workflows, keep track of financial transactions, and handle payment processing in the most efficient way possible.
If you're a small business owner, now is the time to leverage Skynova's modules to simplify your accounting and automate your financial management. Try our accounting software for free - no credit card required - and take advantage of our business templates now.
Notice to the Reader
The content within this article is meant to be used as general guidelines and may not apply to your specific situation. Always consult with a professional accountant to ensure you're meeting accounting standards.