The importance of Double-Entry Accounting system
Setting up an accounting system appropriate for your business is at the top in a scaling-strategies checklist.
In this short write-up, let us enlighten you on the importance of double-entry accounting system as early as at the on-set of starting a business.
Accounting involves capturing all transactions, and presenting such captured data to show the true financial position of a business.
Double Entry Accounting
- Each transaction affects 2 accounts; a debit and a credit entry.
- Assets= Liabilities + Equity
Double entry accounting is a method of recording transactions so that for each transaction two accounts are affected; in one the transaction is debited and in the other this same transaction is credited.
At the early stages, most businesses use the single-entry business accounting method because of many reasons including:
- *The small number of transactions.
- *The small nature of operations.
- *Too few accounts (mostly cash & inventory accounts only)
- *Too few departments.
- *Too few employees (majorly the owner is the only employees at the beginning).
In most time, businesses only on-board the double-entry accounting system when it is no longer possible to keep track of their transactions, and they have to.
This migration is a complex process, and considering that even during the migration period new transactions keep coming, it is almost impossible for the migration to be error-free. It is certain that some financial records carry-on undetectable errors from this point on.
To avoid this grave mistake, star-ups should consider adapting the double entry accounting method from the beginning.
These are the main advantages of adapting the double entry accounting system right from the very first transaction;
- Facilitates the generation of balanced accounts; this accounting system detects any inconsistencies and errors that may hinder the balancing of accounts.
- It facilitates the generation of comprehensive financial records, capturing all types of transactions irrespective of their nominal magnitude or frequency of occurrence.
- It is adaptive to the growth and expansion of businesses; as the business grows, transactions grow in number, frequency, and complexity, and so does the possibility of making clerical errors. With the double-entry accounting method, such errors are caught in time.
- With a growing workforce come the risk of fraud such as money embezzling ; the basic working principle of the double entry accounting method prevents such risks.
- It facilitates the maintenance of clear and correct financial records resolving any ambiguities that may hinder proper and timely decision-making.
- It has a positive effect on business growth because decisions to expands come from a point of true financial position.
