Financial management has become an indispensable attribute to guarantee success and survivability for SMEs. Therefore. an effective accounting system is very instrumental for any business organization. One of the most fundamental methods in accounting is the double entry system.
This system not only ascertains that the books of accounts are presented in an appropriate and reliable manner but also offers a systematic method of managing one’s finances with ease. In this blog, you will learn in detail of how to implement double entry system for SMEs.
What is a Double Entry System?
Double entry is an accounting technique by which every transaction influences at least two different accounts. This ensures the balance between the three elements constituting the accounting equation maintains itself. For instance, if a sale is made, the company not only records an increase in revenue by way of a credit, but also an increase in cash or in accounts receivable by a debit.
Balanced accounts are very critical in having good and accurate financial records. This helps in tracking mistakes and presents a real picture of the financial situation of the SME. Therefore, dual entry system is the bedrock of sound financial management.
Why SMEs Need an Effective Accounting System
While the double entry may be an effective way to bring out an accurate and reliable financial record, any accounting system is important in the structure of a company’s financial records. Most SMEs lack the necessary resources, expertise, or systems to keep abreast of financial management. However, a structured approach to accounting will help SMEs achieve the merits mentioned above.
How to Implement the Double Entry System in Your SME
The following are the steps for the double entry system:
Evaluate Current Financial Management
Recognize your current accounting system to identify flaws or drawbacks. Understand what your current system cannot do, and based on such knowledge, identify what needs the changes.
Transitioning the Double Entry System
Setting up accounts, getting initiated, according to principles of this double entry system, involves recognizing all types of accounts. It includes asset accounts, liability accounts, income accounts, expense accounts, and equity accounts.
Training of Employees or Hiring Experts to Implement
Ensure that your team understands how the double entry system really functions. So, employ specialists in accounting or train your current employees to ease into the transition.
How to Choose the Right Accounting Tools and Software
There are numerous types of accounting software that can enable the double entry system to be applied and maintained efficiently by SMEs. Popular options include QuickBooks, Xero, and FreshBooks, all of which boast user-friendly interfaces that support the requirements of small businesses. You have to choose the correct tool based on business size, transactional complexity, budget, and integration within other business systems.
Choice of the Tool
Business Size and Needs: Determine which will grow with your business.
Ease of Use: Determine what software is relatively easy for your staff to learn and use
Features: Automated Entries, Bank Reconciliation, Financial Reporting
Ongoing Management and Best Practices
To effectively utilize the system, every effort should be made to:
Periodically Reconcile Accounts: Periodically reconcile accounts in order to discover and correct discrepancies.
Record Appropriately: Record proper and organized records of every type of transaction taking place.
Reports Generation: Generation of regular financial reports to monitor the financial condition of the business.
Reviewing and Updating: Review your accounting practice and software are from time to time to ensure that all your business needs are matched.
Advantages of Double Entry System
It has many advantages for SMEs, as listed below:
Accuracy: The system is accurate as both the debits and credits are recorded. Therefore, the financial statements are accurate.
Compliance: Clears and details proper records according to the requirement of the law.
Facilitating Growth: Provides a solid financial foundation for making strategic decisions and securing investments or loans.
Adopting the Double Entry System
If your SME hasn’t moved to the double entry system yet, it’s now or never. A more organized way of maintaining the books of accounts will be helpful not only for better accuracy in accounting but also in ensuring compliances and growth aspects. Besides, optimizing your accounting practices saves time, reduces errors, and gives valuable insights for better decision-making.
How FastLane HR Can Help
Want to try the double entry system in your SME?
Ask for an accounting professional’s service or do some research on any of the available accounting tools that can help you get started.
At FastLane HR, experienced professionals in accounting and finance have been helping businesses big to small since 2013. Begin this journey of better financial management by availing yourself of resources and services that suit your business needs best. Consult with us today!