There are many different ways to keep your books when you’re a small business and double entry accounting is one of the tried and tested standards. Small Business Trends talked with FreshBooks Vice President of Strategy Matt Baker about how this standard can simplify a small business owner’s numbers.
Although what’s called single entry accounting that’s done manually is a method some sole proprietors use, there are some big advantages to the double entry method other types of shops should look at.
What is Double Entry Accounting
For example, this method is a good way to balance the books if they have investors. Basically, double entry accounting means credits get recorded under both the equity and assets side on the ledger. Put another way, it’s all about making sure there is a debit and credit for every transaction.
Basically, it’s a way to balance the numbers on your financial statements and another way of checking the data you put in. Like the name implies, it’s a double check to make sure everything adds up.
How can Modern Software Help
If you’re reading this as a small business owner and it sounds daunting, there’s no need to panic. Double accounting makes up a major feature of modern accounting software that makes bookkeeping easier. Baker explains the way this standard folds into the kind of technology popular with time challenged small business owners.
“I think of it ( double entry) as a standard accounting term that commonly refers to the underlying system of accounting software that you can call double entry or even a general ledger,” Baker says adding that this specific method can even be called journal entry.
“Taken together that’s generally the mechanism by which accountants are balancing the books so to speak. Double entry is the backbone of any accounting software.”
Does Double Entry Accounting Work for Sole Proprietors
Baker goes on to say that combining this double entry accounting with the right software is a good idea considering an overwhelming majority of small business owners are sole proprietors.
“When you think about earnings, things might skew to the other percent that have employees, but a lot of small businesses are by themselves and that means they need to wear all the hats for the business,” Baker says, adding that’s where things can get complicated and time consuming.
How Does the Approach Help with Fundamentals
The right software takes the edge off what can be a hectic life for the small business owner. It allows them an automated way to keep track of some of the fundamentals they still need to feed into an accounting template or pass along to another professional.
In fact, a lot of this type of innovation starts at a level below accounting. It allows the small business owner to keep track of expenses, clients and invoicing — just a few of the basics they need to keep straight so the numbers come out right at the other end of the more involved accounting process.
Companies like FreshBooks help the small business owner along with workflow. Their particular business model allows owners to track their time and automatically place that on an invoice. One of the priorities for this company is to allow small businesses to run their enterprises without even needing to learn accounting. The main focus for this particular software is making sure businesses capture the information they need to run their businesses.
What Other Big Advantages Does this Approach Bring
One of the big advantages to starting out on the right foot this way is it makes financial reporting easier down the road. Using double entry systems lets a small business generate cash flows, detailed income statements and balance sheets. Combined with the right software, you’ll be able to get a hold of these reports any time.
This kind of software is also useful for small business owners that already have a relationship with some kind of tax professional. It’s also helpful for those people that want to run their numbers through a system like TurboTax and want to feel comfortable about the data they start with .
“Half the market are business owners that want to get it done themselves and the other half relies on a professional to help them through that process,” Baker says. “If you can move from doing it yourself with pen and paper, Word and Excel to software, the promise is you can save time, look more professional and be better ready for tax time.”
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