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Module 06b - Single-Entry Accounting: Simple, Accepted by the IRS

Author's Notes

I maybe in a minority but I believe that there are exceptions to small businesses adapting the single-entry accounting system. Double-entry accounting over whelmed me in the early years of our startup phase causing high anxiety levels. Thanks to the persistence of our CPA, she was helpful in instructing my wife and me in accurately establishing a double-entry accounting system online. From those trials and tribulations that are vivid memories, I make my case that a single-entry system becomes sufficient for many successful small ‘mom & pop’s’ businesses.

Goals

To define the single entry accounting method
To compare how the single entry differs from the double entry accounting
To list 5 disadvantages of a using the single entry system
To explain when a small business owner may benefit from using the single entry method
To compare similarities between single entry accounting and the business check book
To explain when the single entry accounting may be an adequate method for a business owner’s record keeping
To explain why most financial accounting is based on the double entry accounting
To develop a single column system
To develop how to create Separate Revenue and Expenses grid for daily transactions
To demonstrate how yearend revenues and expenses are reported on Schedule C
To identify which federal tax forms are filed for the sole proprietor
To list an advantage of the single entry method

Case Study - Beth’s Brother-in-law Offers Advice

(August 2009) Beth’s husband, Bob was inquiring about accounting systems while drinking iced tea on his patio with a brother-in-law, George White-dba. George’s Lawn Care and Small Engine Repair Co. The lawn care and small engine repair business owner operated part-time as a sole proprietor to supplement his new teaching position. George’s customers are nearby homeowners who need affordable lawn care service and/or equipment maintenance. Since his business was operated on a “shoe string” it didn’t have a high overhead

No payroll
No rented building
No account receivables

George was willing to offer competitive services substantially lower cost than local high overhead competitors. The customer’s lawn mower equipment repairs were made in the White’s residence garage. (We will need to study/review this potential problem in the insurance and legal modules.) George had an elaborate machine shop for the small engine overhauls needed to service the customer’s mowers. To simplify his bookkeeping, the customers will pay by cash or check upon completion of the service. All small business owners must avoid delayed payments. Accounts receivable problems (collections) are the cause of too many small business failures. Don’t become your customers’ banker by extending credit.

The Brother-in-laws Disagree

Since the patio tea party discussion was comparing the merits of double-entry accounting method to single- entry, George shared his rationale of why he was using the single-entry that is simple and accepted by IRS. He compared the accounting similarities to his personal check book register. Bob listened to his brother-in-law but disagreed. Bob’s comments were that the single-entry accounting has costly short comings. The family bakery business will be selling baked products to selected customers and invoicing for delayed payments. Nancy, the previous owner encouraged Beth to make these exceptions to invoice for later payment arrangements that will boost bakery and deli sales. Beth was told that very few customers in all the years of Nancy’s ownership failed to pay under these terms. Nancy did admit that she had suffered some bad debt but was willing to take the risk.

In conclusion, we may agree that both business owners were correct with their rationale concerning their own record keeping system.

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