Choosing the Right Accounting Method

Single entry or double entry?

Upon incorporation, the enterprise should set up books using an accounting method that clearly shows income for the accounting period that is the corporation's tax year. The corporation must also decide whether to use a single or a double entry bookkeeping system. The single entry system is simple and easy to maintain, but may not be suitable for every corporation. Corporations may find the double entry system better because it has built-in procedures to assure accuracy and control.

Single entry

The single entry bookkeeping system is based on the profit or loss statement and includes only the corporation's business income and expense accounts. It can be a simple and very practical system for a small corporation just starting out. For tax purposes, this system records all income and expenses through the use of a daily summary of cash receipts and a monthly summary of cash receipts and cash payments.

Double entry

The double entry bookkeeping system uses books, called journals, and is based on both the income statement and the balance sheet. Transactions are first entered in a journal and then monthly totals of the journal transactions are entered in ledger accounts. Ledger accounts include income, expense, asset, liability, and net worth (the difference between what your business owns and what it owes). These accounts are used to prepare a company's financial statements.

Many computer software packages are available to enable the new corporation to install and operate a complete set of accounting books and records.