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.
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“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.”
|Effortless Financial Reporting||Starting with double entry accounting simplifies generating cash flows, detailed income statements, and balance sheets, ensuring accurate and timely financial reporting.|
|Enhanced Tax Preparation||Small business owners can benefit from using this approach when working with tax professionals or tax software like TurboTax. It provides confidence in data accuracy for tax purposes.|
|Time and Professionalism||Transitioning from manual methods to accounting software saves time and enhances professionalism. Businesses are better prepared for tax-related tasks, ensuring compliance and efficiency.|
|User Flexibility||Accounting software caters to various users, accommodating both those who prefer a DIY approach and those who rely on professional assistance for financial management.|
|Promised Efficiency||Moving from manual methods to software streamlines operations, saving time, and allowing small business owners to present a more professional image. Being better prepared for tax season is a significant benefit.|
Modern Accounting: The Power of Double Entry Accounting and Software
In the realm of small business accounting, the use of double entry accounting coupled with modern software solutions offers substantial benefits. Let’s explore the advantages and insights provided by FreshBooks Vice President of Strategy, Matt Baker, as well as the role of this approach in simplifying the financial management of small businesses.
The Benefits of Double Entry Accounting:
- Balancing Act: Double entry accounting ensures every financial transaction has a corresponding debit and credit entry. This method acts as a fail-safe mechanism to maintain the integrity of financial data.
- Investor-Friendly: For businesses with investors, double entry accounting is a preferred method for accurately representing equity and assets, making it easier to attract and retain investors.
- Enhanced Accuracy: It’s a reliable way to verify and reconcile financial statements, reducing errors and ensuring the accuracy of financial records.
Leveraging Modern Software:
- Streamlined Bookkeeping: Modern accounting software integrates double entry accounting seamlessly. This technology streamlines bookkeeping tasks, making it accessible and manageable for small business owners.
- Time Efficiency: Particularly beneficial for sole proprietors, modern software alleviates the complexity of managing all aspects of a business. It frees up time for owners who wear multiple hats.
- Fundamental Tracking: Beyond accounting, these software solutions help small business owners track expenses, clients, and invoicing. They serve as a foundational tool for managing business essentials.
Benefits of Starting Right:
- Effortless Reporting: Adopting double entry accounting from the start makes financial reporting more straightforward. Small businesses can generate cash flow statements, detailed income statements, and balance sheets effortlessly.
- Tax Preparation: Whether working with tax professionals or using software like TurboTax, starting with accurate data simplifies the tax preparation process.
- Time and Professionalism: Small business owners can transition from manual, time-consuming methods to efficient software solutions. This shift saves time, enhances professionalism, and ensures readiness for tax-related tasks.
The Half-and-Half Approach:
- Business Owners’ Diverse Needs: Accounting software caters to a wide range of users. Some prefer a DIY approach, while others rely on professionals for financial guidance.
- The Promise of Efficiency: The transition from manual methods to software offers time-saving benefits, professional presentation, and improved readiness for tax obligations.
|Benefits||Double Entry Accounting||Leveraging Modern Software|
|Balancing Act||Ensures every financial transaction has a corresponding debit and credit entry, maintaining data integrity.||Modern software integrates double entry accounting seamlessly, simplifying bookkeeping tasks.|
|Investor-Friendly||Preferred method for accurately representing equity and assets, making it easier to attract and retain investors.||Alleviates complexity, especially beneficial for sole proprietors, freeing up time for owners who wear multiple hats.|
|Enhanced Accuracy||Reliable way to verify and reconcile financial statements, reducing errors and ensuring accuracy.||Beyond accounting, helps track expenses, clients, and invoicing, serving as a foundational tool for managing business essentials.|
|Benefits of Starting Right||Starting with double entry accounting simplifies financial reporting, allowing easy generation of statements and balance sheets.||Streamlines tax preparation with accurate data, whether working with professionals or tax software.|
|The Half-and-Half Approach||Accommodates various users, from DIY to those relying on professionals for financial guidance.||Transition to software offers time-saving benefits, professionalism, and readiness for tax-related tasks.|
Incorporating double entry accounting into modern accounting software empowers small business owners with efficient bookkeeping, accurate reporting, and a streamlined financial foundation. It’s a step toward financial clarity, professionalism, and readiness for tax season, all while reducing the complexities that often burden small business operators.
The combination of double-entry accounting and modern software presents a compelling solution for small businesses to simplify their financial management. By embracing this approach, small business owners can benefit from enhanced accuracy, streamlined bookkeeping, and improved time efficiency. Whether you’re a sole proprietor or have investors, this method offers valuable advantages, making financial reporting and tax preparation easier down the road. Additionally, it accommodates diverse user needs, allowing businesses to save time, maintain professionalism, and be better prepared for tax-related tasks. In a competitive business landscape, leveraging the power of double entry accounting and software can be a key driver of success and financial stability.
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