Why should businesses use double-entry accounting?
The double-entry accounting system is often called a revolution in the growth and management of modern businesses. It is indeed a very powerful accounting system that allows companies to keep track of their expansion in transactions to make sure their business is gradually growing.
The majority of efficient accounting firms in Singapore have adopted the double-entry accounting system to overcome any flaws and inaccuracies that might be observed in the management of various organizations.
The double-entry accounting system is a well-designed and error-free system that facilitates the whole process of managing a company’s finances.
It is a reliable accounting method that allows you to have a clear picture of the financial health of your business. Before diving into the detailed importance of the double-entry accounting system for businesses, the basics of this technique should be clear.
What is a Double-Entry Accounting System?
A double-entry accounting system means recording the transactions of a business in two distinct accounts:
- Credit Account
- Debit Account
Both of these accounts impact a business in different ways. Debits increase asset and expense accounts. They reduce the liability and earnings account.
Credits, however, have the complete opposite impact on accounts. They decrease the assets and expense while increasing liability and income accounts.
In simple words, the double-entry accounting system is a bookkeeping strategy that maintains an organization’s accounts balanced, showing an accurate picture of financial transactions. It is heavily dependent on the equation:
Assets = Liabilities + Equity
It should be noted that the double-entry system is a very old and tried-and-tested method of accounting. Its roots can be traced back as far as the 1490s.
Audit firms in Singapore often have to work with large corporations, businesses and enterprises where getting their entire business audited and getting a true image of finances can be quite tricky.
In such conditions, the double-entry accounting system is usually used to efficiently manage the accounts and make the whole auditing process smooth and easy.
Importance of Double-Entry Accounting System for Businesses
1. Easier to Find Inconsistencies
2. Large Companies
Large organizations and businesses must use the double-entry accounting system because it will minimize the chances of errors in accounting, and it will become easy for the authorities to evaluate the records. Clear and unambiguous financial records are essential at the time of company registration in Singapore, and double-entry accounting provides you with an efficient way of maintaining your records.
3. Comprehensive Records
There are a lot of expenses involved in operating a business. These expenses can be significant transactions made as part of a deal or some small payments made to any third parties. Double-entry accounting allows you to keep records of all types of transactions. As a result, every penny is accounted for in this system, and hence, it is the most accurate way of bookkeeping.
4. Regulates Expansion of a Business Accurately
As a business grows in terms of revenue and scale, it becomes vulnerable to clerical errors. Manual and clerk accounting is bound to mean some errors are made while handling a great number of transactions every day.
On the other hand, the double-entry system regularly checks the total debits and credits to make sure they are equal. The audit firms become alert immediately if any error is detected.
The error is thoroughly checked and fixed before moving forward. It saves a lot of time and enhances the overall accuracy of double-entry accounting.
5. Prevents Frauds
There are very few chances of a fraud happening in a double-entry accounting system. With a large organization, it is expected that a great number of workers will be hired and given different responsibilities.
In an ordinary accounting system, it is quite easy for the workers to make some changes in the records after embezzling money, if they have access to the records. Double-entry accounting has inbuilt protocols to avoid such issues from happening in the first place.
The technique allows accountants and auditors in Singapore and other parts of the world to maintain accurate financial records which are needed during the company registration.
Moreover, embezzlement and other frauds are minimized with the use of this efficient accounting system. Complete financial transparency can be achieved through the double-entry accounting system, which is vital for any business to thrive and grow in the market.
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