So, we’ve written before about the key advantages of a double entry bookkeeping system, but everything has its drawbacks. Luckily, our experts are here to help you weigh up the pros and cons, so you can decide what’s best for your business.
As a business owner, it can be overwhelming to even begin considering double and single entry bookkeeping systems.
What are the differences? What’s best for my business? Do I need to consult an accountant?
Our accounting and bookkeeping professionals have compiled a list of some potential disadvantages of double entry system bookkeeping, so you can make an informed decision about which system is right for you and your business.
1. Complex By Nature
Double entry accounting is complex by nature. The system is designed to provide greater accuracy and detail on your actual financial position than a single entry system, but this comes at the cost of increased complexity.
If you’re not an experienced bookkeeper or accountant, it can be difficult to get your head around all the different concepts and entries involved.
This complexity can also make it more difficult and time-consuming to prepare financial statements, which can be a problem if you need to provide them to banks or investors on a regular basis.
2. More Time Consuming
While double entry bookkeeping can save you time in the long run by providing a more accurate financial picture, it can also be more time-consuming to set up and maintain.
As it is a scientific and systematic system, business transactions must be recorded in two places (or more, if there are multiple entries involved). This can make bookkeeping slower and more tedious than a single entry system.
The complexity can also make it more time-consuming to complete your bookkeeping on a daily or weekly basis, as you need to make sure all the entries balance out. This is particularly true if you’re using manual methods, rather than accounting software.
3. Can Be Costly
A double entry system can also be more costly to set up if you decide to handle in house, as it generally requires the use of accounting software to automate entries and calculations.
If you’re using manual methods, you’ll need to invest in extra books and supplies, as well as spend more time training your staff.
All this adds up to increased costs for your business, though it’s important to remember that a double entry system can save you money in the long run by reducing errors and providing a more accurate financial picture.
4. Expert Knowledge Required
You need to have a good understanding of accounting principles in order to correctly set up and use a double entry bookkeeping system – it’s not as simple as just keeping track of money coming in and money going out.
Often, expert knowledge is required in order to correctly record transactions and prepare financial statements. This can be a problem for small businesses who don’t have the resources to employ a full-time accountant or bookkeeper.
If you’re not confident in your accounting abilities, it’s worth speaking to an accountant or bookkeeper for help and advice. They can make sure your system is set up correctly from the start, and offer ongoing support as needed.
5. Not For Small Businesses
The double entry bookkeeping system requires a certain level of complexity and detail, which can make it unsuitable for the smallest businesses.
If you have a very small business with just a few transactions, it might be overkill to use a double entry system. In this case, a single entry bookkeeping system might be more appropriate.
Of course, every business is different, so it’s important to weigh up the pros and cons of each system before making a decision. We recommend speaking to an accountant or bookkeeper for advice on which system is best for your business.
6. Doubles Your Book Size
While a double entry system provides more accuracy and detail, it also means that your bookkeeping records will be twice the size. This can make it more difficult to find specific information when you need it.
If you’re using manual methods, such as paper ledgers, this can also mean increased storage costs for your business. Again, as each financial transaction is recorded twice, you’ll need to keep two copies of every record – one for each side of the entry.
If you’re using accounting software, physical storage may not be an issue, but you’ll still need to be aware of the increased file size when backing up your accounts data.
This can add to the cost of running your business, as you’ll need to invest in cloud storage devices or upgrade your existing ones.
Double Entry Bookkeeping System FAQs
What is meant by double-entry bookkeeping?
In double-entry bookkeeping, every financial transaction is recorded in at least two places. This provides a more accurate record of your business finances, as each transaction is cross-checked against another.
The main advantage of this system when compared to single entry systems is that it reduces the chance of errors, as all entries must balance. This means that if there is an error in one entry, it will be immediately apparent when the books are reconciled.
How do you do double-entry bookkeeping?
Double-entry bookkeeping is most commonly done using accounting software. This automates the process of recording transactions and ensures that all entries balance out. Double-entry bookkeeping can also be done manually using paper ledgers and a balance sheet.
Often undertaken by an expert accountant or bookkeeper, double-entry bookkeeping can be time-consuming and costly for businesses to handle in house.
What is a double-entry system with an example?
The double entry system is a method of bookkeeping where every financial transaction is recorded in at least two places. This provides a more accurate record of your business finances, as each transaction is cross-checked against another, for example in the credit side and debit side of your ledger.
For example, if someone pays you £100 for a service, you would record this as a £100 credit in your sales ledger or cash account and a £100 debit in your bank account ledger. This ensures that the two entries balance out and provides a more complete picture of your finances.
Final Thoughts
As you can see, there are both pros and cons to using a double entry bookkeeping system. It’s important to weigh up these factors carefully before deciding whether or not to use this method for your business.
If you’re still not sure, we recommend speaking to an expert small business bookkeeper for advice. They can help you decide which system is best for your business, and offer guidance on setting it up and using it correctly.
At Raw Accounting, we specialise in small business accounting and can offer tailored advice on which bookkeeping system is right for you. Contact us today to find out more.
