In this blog, we will compare double-entry and single-entry bookkeeping, highlighting the benefits and drawbacks of each approach. This comparison will help parish and town councils make an informed decision about the best method for them.
Understanding Double-Entry Bookkeeping
Double-entry bookkeeping maintains the fundamental accounting equation: Assets = Liabilities + Equity. This accounting method underpins accurate and reliable financial reporting. In double-entry bookkeeping, each transaction influences at least two different accounts: a debit entry and a credit entry. The system abides by the principle that every debit entry has a corresponding and equal credit entry, thereby ensuring the accounting equation stays balanced.
Imagine a pair of old-style balance scales, with two pans hanging on either side of a fulcrum. When you place a weight on one pan, it causes that side of the scale to go down. In order to balance the scale, you have to place an equal weight on the other pan.
Now, consider DEBK. It operates on a similar principle. Every financial transaction has two aspects: a debit and a credit. If you think of the debit as a weight added to one pan of the scale, the corresponding credit would be the weight added to the other pan to balance it. For example, if a business spends £100 (debit) to buy supplies, the reduction in the cash account (credit) of £100 balances the transaction, just as the weights balance the scale.Just like the scale is not balanced unless the weights are equal on both sides, the accounting equation (Assets = Liabilities + Equity) is not balanced unless the total debit amounts equal the total credit amounts. In other words, the total ‘weight’ of the debits must always equal the total ‘weight’ of the credits in DEBK, ensuring the financial stability and accuracy of a business.
Benefits and Drawbacks of Double-Entry Bookkeeping
Double-entry bookkeeping finds common use in business accounting and is a feature in software like Sage or Xero. Historically, it involved long ledger books filled out by hand, manually tallied, and cross-checked! Clerks, RFOs, and Councillors with a robust financial background often favour double-entry bookkeeping due to their familiarity with this approach and its benefits.
Here are some key benefits:
- Accuracy: Double-entry bookkeeping offers a reliable method for recording financial transactions. As each transaction affects two accounts, it assures that debits mirror credits, mitigating errors or omissions.
- Financial Visibility: This system provides a comprehensive snapshot of a company's financial status by tracking both the sources and uses of funds. This assists in analysing a business's financial health and performance.
- Audit Trail: Double-entry bookkeeping generates a clear audit trail, enabling easy tracking and verification of financial transactions.
Despite these advantages, there are some drawbacks to consider:
- Skill Requirements: The operation of a double-entry bookkeeping system requires a solid understanding of accounting principles and practices. Familiarity with concepts such as debits, credits, and balancing accounts is essential. These skills often go beyond basic financial literacy, making the system complex for those without a background in finance or accounting. Significant resources may be needed for staff training or for hiring and managing professional accountants.
- Potential for Errors: Even with trained professionals, the risk of human error in recording transactions or making incorrect entries persists. These errors can lead to imbalances in the accounting equation and inaccuracies in financial reporting if not swiftly detected and corrected.
- Implementation Costs: The costs associated with training staff, purchasing appropriate software, or hiring professional accountants can be significant. These costs should be carefully considered against the potential benefits of the system.
Understanding Single-Entry Bookkeeping
Single-entry bookkeeping is a simpler method of recording financial transactions that tracks income and expenses via a single entry for each transaction. Transactions are typically recorded in a cashbook—this could be as simple as a spreadsheet, or software such as Scribe Accounts can be used. Each entry includes information such as the date, description, and amount of the transaction. Entries can be classified as receipts/income or payments/expenditure and further categorised against specific budget codes.
Benefits and Drawbacks of Single-Entry Bookkeeping
Single-entry bookkeeping can be time and cost-effective due to its simplicity. Nonetheless, it's crucial to mitigate error potential by implementing checks, such as regular bank reconciliations, to confirm accurate data entry. This holds true for the year-end Accounting Statements as part of the AGAR—if these add up correctly, and Box 8 matches the bank reconciliation, it's a good sign of cashbook data accuracy.
Which Approach is Right for My Town or Parish Council?
Both methods have their advantages and can provide a clear picture of your transactions and financial standing. The JPAG Practitioners’ Guide does not favour one approach over the other, but whichever you opt for, maintaining well-organised and accurate accounting records is crucial. Remember that spreadsheet use (for either single or double-entry bookkeeping) can cause issues if formulas are not correctly set. Opting for software with inbuilt checks can bring peace of mind.
Double-entry bookkeeping might be suitable for your council if it's larger and more complex, boasts a dedicated finance team, or has the resources to engage an external accountancy firm. It may also be preferable if your councillors have strong financial backgrounds and expect monthly reporting on an income and expenditure basis.
Single-entry bookkeeping might be more suitable if your council does not require such detailed financial reporting and lacks staff with the time or experience to manage more complex accounts. Opting for single-entry bookkeeping doesn't compromise account accuracy but might enable more manageable administration.
Scribe Accounts: best of both worlds
We built Scribe Accounts to make it accessible to all skill levels whilst not compromising the benefits of double entry bookkeeping which are accuracy, financial visibility and audit trails.
- Accuracy: all transactions are recorded against the bank they were received into, or made from. This allows comprehensive bank reconciliations that help confirm that data has been entered correctly. Scribe also runs numerous checks on the opening balances making sure they have been entered/copied over correctly and that the data ultimately matches to the boxes/lines on the annual return (Accounting Statements). If there are any errors, large red text warnings and notifications will flag up to the user.
- Financial Visibility: Scribe has numerous reports that allow users to report on their council’s financial position including budget vs actual reports of varying levels of detail, reserves and bank reports. Scribe also has a forecasting function that enables the user to forecast the expected end of year position to not only assist in budget setting but also the continuous monitoring of the council’s finances.
- Audit Trail: transactions are allocated a unique voucher number that cannot be changed or deleted. If edits are made to a transaction Scribe records a full change history logging the amendments made with the details of the user who made them. For users who are VAT registered, transactions are locked once they have been included in a return submitted via MTD to HMRC.