When starting your business, you need to decide which accounting system to follow? It can be either a single-entry or double-entry bookkeeping system. Thus, there are two main accounting systems: double-entry bookkeeping and single-entry bookkeeping.
The difference between double-entry and single-entry bookkeeping system is in the accounting principle. In a single-entry bookkeeping system, a company's transactions such as payments of expenses incurred, interest and taxes, as well as income received, are usually recorded so, that the entry is made to only one account. In Finland such accounting system is only allowed for business operators (entrepreneurs) and self-employed persons. In this accounting system, the financial year always has to be a calendar year.
However, when any business transaction takes place, we want to know the impact of this event from two perspectives. For example, it is not enough to know that a cash payment has been made, but it is important also to know what the money has been spent on. Similarly, a payment received to the bank account or into a cash register drawer has to be entered in the accounting books providing an explanation, where did the money come from. Bookkeeping tracks and records the changes of business transactions in the cash accounts, as well as reflects information regarding the sources of funds and directions of money spending. Double-entry bookkeeping reflects this twofold effect of business transactions.
Thus, at a core of the concept of double-entry bookkeeping is a method according to which every business transaction has to be recorded in at least two accounts: each debit entry has a corresponding credit entry. The double-entry bookkeeping system is a more accurate method of keeping the books: it tracks where your money comes from and where it's going.
Thus, the business owner needs to decide which system to use depending on the legal form of the business. In Finland double-entry bookkeeping is mandatory:
- for companies and corporations
- for business operators or private traders and self-employed persons, if two out of three of the following are true::
- the balance-sheet total is over EUR 100 000;
- the turnover or the corresponding earnings total over EUR 200 000;
- on average, the company employed over three (3) persons.
- for all company's types if the company’s financial year is not the calendar year
Accounting entry and double entry
Accounting entry is the amount of financial transaction which is recorded on the debit or credit side of the account. Double-entry in bookkeeping means that one financial transaction needs at least two accounting entries and sometimes even more. Thus, double-entry refers to an accounting entry that reflects a business transaction on at least two different accounts. In this case, a "debit" entry is made on one and a "credit" entry on another interrelated account. On the debit side of the account has to be recorded the money usage and on the credit side the source of money. The debit side corresponds to the concept of "payments" or "expenses”. Credit side corresponds to the concept of "income". Double-entry accounting gives the answers to the following questions:
- How, where and for what purposes money has been spent or allocated?
- Where did the money come from?
An example of a double-entry: see the slide
More information in the section "Basic Accounting: The sources and use of money"
Single-entry
Single-entry accounting system assume to record just a company's income and expenditure.
As mentioned above, single-entry accounting system is permitted for micro-sized enterprises such as private traders or business operators (in Finnish, toiminimi) and self-employed persons (in Finnish, ammatinharjoittaja). There is an account which serves as events memo and which allows you to easily keep track of money income and expenditures.
Single-entry bookkeeping is often carried out on a cash (payment) basis, i.e., the registration of income and expenses is recorded when cash is actually received or paid out. However, for the tax purposes, sole proprietors and self-employed persons must adjust their single-entry bookkeeping and use an accrual basis. The amounts of accounts payable and accounts receivable must always be explained by digital or paper notes in order to obtain the information for the fulfillment of tax liability.
The size of the balance sheet and the amount of revenue should be calculated every fiscal year in order to know according to which rules should bookkeeping be followed.
Example of the Single-entry accounting.More detailed information can be found at Finnish Tax Administration website.