How Small Businesses Can Keep Accurate Accounting Records (6 Rules).

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Many small businesses keep financial records which are incomplete. Incomplete financial records enter a transaction as a single entry.

What is single entry?

Single entry is a bookkeeping system that doesn’t conform to the basic principle of double entry. The basic entry of double entry states that every debit entry must have a corresponding credit entry and vice-versa.

Double entry is the foundation of bookkeeping. Bookkeeping, an integral part of accounting, is the systematic recording of transactions as they occur in appropriate books.


Why is it necessary to keep financial records in the double entry format?

The double entry approach makes it difficult to lose some transaction information and data. While double entry gives a balanced report of all accounts (players) involved in a transaction, the single entry approach keeps only records of personal accounts of debtors and creditors.

Single entry overlooks some significant determinants that affect transactions and are necessary to the accurate calculation of profit or loss. Apart from this problem of inaccuracy, single entry is susceptible to manipulations.

How could small businesses upgrade their incomplete records to accepted accounting standards that give the most accurate financial picture?

They could do it by following the rules below:

  1. Prepare a statement of affairs to show opening capital. The opening capital is obtained by deducting total liabilities at the beginning from your total assets at the beginning.

2. Adjust the opening capital by adding contributions made by assets to it and deducting drawings (withdrawals by owner) from it,

3. Prepare another statement of affairs to determine the closing capital. Transactions during a financial year will result to either increase or decrease in the values of assets and liabilities. Deduct the new value of assets from the new value of liabilities to obtain the closing capital,

4. Compare the closing capital to the opening capital to determine either a profit or a loss,

5. Reconstruct other books in accordance with the double entry principle, determine their balances and,

6. Prepare the profit and loss account, the balance sheet and other financial statements.

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