Problems With Double-Entry Bookkeeping Systems
By Jared Lewis
Features of a Payroll System
Perpetual Inventory System & Definition
Accounting: Record Sales & Tax Penalties
Fraud & Forensic Accounting in the Digital Environment
What Are the Negative & Positive Impacts of Computerizing an Accounting Department?
The double-entry bookkeeping system is commonly used in the accounting and business world to help companies keep track of financial transactions and inventory. Double-entry accounting is simply using two entries for every transaction that takes place, so that one account is credited while a corresponding account is debited for the same amount. These types of entries are used in accrual accounting, a form of accounting where transactions are accounted for as they occur. The double-entry system has many advantages, but it also has some problems.
One of the main problems with the double-entry bookkeeping method is the complex nature of the process. For the small-business owner who has no background in accounting, the double-entry system can seem like learning a whole new language. Terminology such as "debits" and "credits" replace simple words like "subtract" and "add," causing confusion. Knowing when to debit an account and what corresponding account to credit can be difficult, and can throw the novice bookkeeper for a loop.
The cost of maintaining the books while using a double-entry system is directly related to the system's complexity. Because records are kept in more than one place, companies have books all over the place that they must keep track of. In some cases it even becomes necessary to hire additional employees to keep track of books for each department. If you're using an accountant, your cost will go up as your books become more complex, requiring your accountant to bill you for additional hours of work. Overall, the cost of the double-entry system can be high.
The amount of time spent doing and verifying your books is another problem directly related to the complexity of the double-entry method. Because entries have to be done twice and, therefore, verified twice, the double-entry system will eat up precious minutes that you could spend being productive in another endeavor. This is why you may find it advantageous to hire an accountant. In reality, despite the fact that the double-entry system can lead to more accurate books, it can be somewhat impractical.
Overall, the double-entry accounting system is important for small-business owners because it will typically provide them with more accurate records than other methods. This is certainly advantageous in most cases, but if you don't have much of a background in bookkeeping, and you try to go it all your own using the double-entry method, you may find yourself somewhat dazed and confused. A primary problem with the system is that if you make one mistake along the way, the accuracy of the rest of your books will be thrown off.
Accounting for Management: Double Entry System of Bookkeeping
Jared Lewis is a professor of history, philosophy and the humanities. He has taught various courses in these fields since 2001. A former licensed financial adviser, he now works as a writer and has published numerous articles on education and business. He holds a bachelor's degree in history, a master's degree in theology and has completed doctoral work in American history.
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The Difference Between Traditional Accounting & Computerized Accounting
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The Advantages of Small Business Accounting Software
Inventory Costing Methods Accounting Under a Perpetual Inventory System
Bookkeeping By Hand
The Advantage & Disadvantage of Manual Accounting
1 Is It Ethical to Record the Transactions Directly Into the General Ledger Accounts?
2 The Advantages of Manual Vs. Computerized Accounting
3 How to Download Books to Your MP4 Player
4 The Difference Between Traditional Accounting & Computerized Accounting