What is single-entry bookkeeping as a recordkeeping method?

What makes a record set single-entry?

AccountingTools' definition page says a single entry system records each accounting transaction with a single entry to the accounting records and tracks mainly cash disbursements and cash receipts. The dividing line is the offsetting entry: the IRS's Publication 583 says a double-entry system is self-balancing because every transaction is recorded as a debit entry in one account and as a credit entry in another. To test your records, check how a recent sale, a bill you paid and a purchase were recorded:

Neither the storage medium nor the tool decides the method; the structure does. Apply the same test on paper, in a spreadsheet or in an app: a transaction recorded once as money in or out, perhaps with a category, is single-entry; one posted as an equal debit and credit to two accounts is double-entry.

Which records make up a single-entry system?

AccountingTools calls the cash book the primary record: an expanded check register with columns for the sources and uses of cash and room on each page for beginning and ending balances. Publication 583 illustrates what a small business's recordkeeping system might include with a single-entry example: a small automobile body shop whose sole proprietor uses part-time help, has no inventory of items held for sale, buys parts and supplies per job rather than keeping them on hand, and uses the cash method of accounting. Publication 583 says not to view these sample records as a recommendation. They are these:

• Business checkbook. Publication 583 calls it the basic source of information for recording business expenses.
• Daily summary of cash receipts. It records the day's cash sales.
• Monthly summary of cash receipts. It shows the month's income activity, and its net sales go to the annual summary: receipts less the sales tax imposed on customers and turned over to the state, which the owner neither includes in income nor deducts.
• Check disbursements journal. It lists each day's checks on the business account, with separate columns for large or frequent expenses such as materials, gross payroll and rent.
• Employee compensation record. It shows each pay period's hours, total pay and deductions withheld, and the monthly gross payroll goes to the annual summary. Publication 583 says there are specific employment tax records you must keep, listed in Publication 15.
• Depreciation worksheet. It holds the information used to figure depreciation on the business's assets.
• Annual summary. Its monthly receipts and expense totals provide the final amounts for the tax return.
• Bank reconciliation. It agrees the checkbook with the bank statement each month.

Entries flow one way: documents and the checkbook feed the daily summary, disbursements journal and payroll record, which feed the monthly totals and then the annual summary.

How does one purchase look under each method?

In a single-entry disbursements journal, a 240.00 check for paint on May 14 is one line, with the amount repeated in its category column:

Under double entry, the same purchase is a debit and an equal credit, and the credit also reduces a checking account kept in the ledger:

What does a single-entry record produce, and what must be derived?

AccountingTools says asset and liability records are usually not tracked in a single entry system and must be tracked separately. Adding up its entries gives these directly:

• Total receipts and payments for any day, month or year
• Receipts and payments by category
• The bank balance, once reconciled

Receipts less payments is not yet profit. It includes no depreciation, which comes from the asset records. It also counts loan proceeds, your own money paid in and your withdrawals, which are neither income nor expense; Publication 583 suggests a checkbook with room to mark each deposit as business income, personal funds or loans. Ask a tax professional how much of a loan payment is deductible. And 26 CFR 1.446-1 requires expenditures to be properly classified as between capital and expense, charging plant and equipment with a useful life extending substantially beyond the tax year to a capital account, not an expense account. Move payments for such equipment out of the expense columns into the asset records, where depreciation and any section 179 deduction are figured (Publication 583 points to Publication 946), and ask a tax professional before expensing a small equipment purchase. Nor does the record carry debts owed to or by the business, stock, equipment's remaining cost or net worth.

From single-entry records, a balance sheet is assembled outside the books. Assets are the reconciled bank balance and cash on hand, stock as counted and valued, unpaid customer invoices, and equipment and vehicles at cost plus improvements, less the section 179, depreciation and casualty-loss deductions taken, as the asset records show. Liabilities are supplier bills, loan balances from lender statements, sales tax collected but not yet turned over, unpaid wage withholding and employer payroll taxes, and any other balance owed, such as on a business credit card. Net worth is the excess of assets over liabilities, as Publication 583 defines it. Tell anyone you hand such statements how and as of what date each figure was obtained.

Which errors go unnoticed, and what checks replace the cross-check?

Under double entry, Publication 583 says, total debits must equal total credits after posting, and if they do not balance, you have made an error and must find and correct it. That total catches one-sided errors: an entry posted on one side only, or with different amounts on its two sides (1,620.00 debited, 1,260.00 credited). A single-entry record has no second side, so nothing catches them. OpenStax's accounting textbook notes that there can be errors while the totals are still mathematically in balance. Under either method, the totals miss an entry made twice, a posting to the wrong account or category, a personal payment recorded as a business one, an amount keyed wrongly in full and a transaction left out altogether. These checks stand in, provided every receipt is deposited and every payment is made by check:

• Deposit every receipt and pay by check. Publication 583 says to deposit all daily receipts in your business checking account and make all payments by check. A reconciliation sees only what passed through the account, not cash spent or taken before deposit.
• Daily cash count against sales records. Take the day's cash sales from the register tape, or total the cash sale slips and other cash received, as Publication 583's example does, and compare that with the cash counted at day's end over the change and petty cash fund held at the start; investigate any difference. Unspent petty cash plus the petty cash slips should equal the fund's fixed amount.
• Monthly figure check. Before reconciling, Publication 583 says to check your own figures: roll the checkbook balance forward by the month's deposits and disbursements, and compare the check stubs' total with the disbursements journal and the checkbook's deposits with the monthly receipts total.
• Monthly bank reconciliation. Publication 583 says to reconcile the checking account each month so the statement, your checkbook and your books agree.
• Numbered checks. Publication 583's example accounts for every prenumbered check in the journal, so a missing or repeated check stands out.
• Separate account and documents. Publication 583 says to keep your business account separate from your personal checking account and to keep supporting documents, such as sales slips, paid bills, invoices, receipts, deposit slips and canceled checks.
• Open-item lists. AccountingTools says liabilities are not tracked, so you need a separate system for when they are due and in what amounts. Keep one, plus a list of unpaid customer invoices, and check both monthly against statements.
• Annual tie-out. Check that the annual summary equals the sum of the months.

Does a single-entry record set meet the IRS recordkeeping requirement?

It can, on conditions. The Treasury regulation on records, 26 CFR 1.6001-1, says that, except as provided in its paragraph (b), any person subject to tax under subtitle A of the Internal Revenue Code, or required to file an information return with respect to income, shall keep permanent books of account or records, including inventories, sufficient to establish the amount of gross income, deductions, credits or other matters required to be shown in any return of that tax or information. Under its paragraph (d), the district director may, by notice, require any person to keep specific records.

Publication 583 says that, except in a few cases, the law does not require any specific kind of records, and you can choose any system suited to your business that clearly shows your income and expenses. It adds that the business you are in affects the records you need, that you should set up your system using an accounting method that clearly shows your income for your tax year, and that you must use the same method to figure taxable income and to keep your books. Publication 583 also says you must choose between single-entry and double-entry, and that single-entry can be a simple and practical system if you are starting a small business. Its single-entry example is a cash-method business, but it says not to view its sample records as a recommendation.

So single-entry records meet the requirement only when they capture every receipt, including property or services received as income, at their value (26 CFR 1.446-1 says items of gross income need not be in the form of cash), and every deductible payment, each backed by a supporting document; come with the asset records Publication 583 says you need to figure annual depreciation and the gain or loss when you sell the assets; and establish anything else your returns must show, such as inventories.

Paragraph (b) of 26 CFR 1.6001-1, headed "Farmers and wage-earners", relaxes the paragraph (a) books only with respect to farming income and to salaries, wages or similar compensation for personal services: for that income, individuals must keep records that will enable the district director to determine the correct amount of income subject to the tax. If your business files a partnership or corporation return, what that return requires of the books beyond income, deductions and credits is the open question for you; read its instructions before relying on single-entry records. State and local rules, such as for sales tax, are separate.

When is single-entry enough, and when has a business outgrown it?

Publication 583 calls single-entry the simplest system to maintain but says it may not be suitable for everyone. Place your business on one of these paths:

What changes if you hold stock, sell on credit or finance assets?

Unsold stock, unpaid invoices and bills, and loan balances exist between cash movements, so a receipts-and-payments record shows none of them. If an inventory is necessary to account for your income, Publication 583 says you must generally use an accrual method for purchases and sales, and your books must use that method too, so a money-in, money-out record alone will not do. It adds that certain small business taxpayers can use the cash method and account for inventoriable items as materials and supplies that are not incidental (see Publication 538). Where single-entry remains open to you, keep alongside it a stock record with periodic counts, the open-item lists above, a loan schedule splitting payments into interest and principal and checked against lender statements, and the asset records. Publication 583 also says a business that keeps materials and supplies on hand generally must complete the inventory lines in Part III of Schedule C.

What changes if an outside party needs your figures?

A lender, insurer, franchisor or investor sets its own requirements, so before concluding that single-entry is enough, ask which statements it needs (an income statement alone, or a balance sheet too), for which periods, on what accounting basis, and whether an accountant must prepare, review or audit them. AccountingTools says single-entry information must be converted to a double entry format for an audit to be possible at all.

What does moving off single-entry involve?

AccountingTools says a trained accountant can generally reconstruct double entry-based accounts from single entry records, though the time required may be substantial. To switch going forward instead, keep your accounting method, which Publication 583 says you generally need IRS approval to change. On the cash method, which reports income in the year received and usually deducts or capitalizes expenses in the year paid, the steps are these:

1. Choose a cut-off date and reconcile every bank account to it. The first day of a tax year is simplest; otherwise that year's return combines the single-entry totals before the date with the ledger's totals after it.
2. Post as opening balances these, whose income or expense the single-entry record has already counted or never will: the reconciled bank balance and cash on hand; equipment at cost plus improvements, less the section 179, depreciation and casualty-loss deductions taken, as the asset records show; loan principal per lender statements; sales tax collected but not yet turned over; and wage withholding already counted in gross payroll but not yet paid over. Do not post anything else owed or held, such as a business credit card balance or customer deposits, until an accountant confirms whether the single-entry record already counted the income or expense behind it.
3. List, but do not post, customer invoices, supplier bills and employer payroll taxes still open at the cut-off, and record each as income or expense when the money moves.
4. Leave off stock whose cost was already expensed and keep counting it on the stock record; if your returns already take inventories into account, have an accountant set the opening stock figure.
5. Record the opening balances as one entry whose debits equal its credits, with net worth as the balancing figure.
6. Afterward, record each transaction so that its debits equal its credits (see How do debits and credits work in double-entry bookkeeping?), take depreciation from the asset records, and keep the old records.

Carrying open invoices and bills as balances would put the books on an accrual method, which 26 CFR 1.446-1 lists as a change in method of accounting, generally needing IRS approval; Publication 583 points to Publication 538 for how to get it. Either way, have a trained accountant check the opening entry and the first return prepared from the new ledger.