This is bookkeeping 101, and IRS Publication 583 puts it as the first decision about a bookkeeping system. Both systems start from the same bank statements, receipts and invoices. Single entry writes each transaction down once, as money in or money out. Double entry writes it down twice, once for where the money came from and once for where it went, and that second line is what lets the books prove themselves.
Excite Tax's rule of thumb: single entry can work while the business is small enough that every transaction is either income or an expense. The moment money moves that is neither, such as a loan, a piece of equipment, an owner's draw or sales tax held for the state, a one-column list starts to mislead.
Single entry can be enough when
There is one owner: a sole proprietor, or a single-member LLC that has not elected to be taxed as a corporation.
The business uses the cash method (see cash or accrual accounting) and has no customer invoices or supplier bills outstanding at month end worth tracking.
There is no inventory, no business loan, no financed vehicle or equipment, and no payroll.
Nobody had to remember that the loan is not income. The entry itself sent the $5,000 to a liability account, because ledger accounts show liabilities, the debts of a business, and the rig to an asset account. How and when the rig's cost is deducted is a question for the return, not the ledger.
Double entry: the trial balance and the two reports
The profit and loss statement reads straight off the income and expense accounts: $4,000 of sales less $900 of rent is $3,100 of profit (income and expense accounts). The balance sheet reads off the rest: $7,100 of assets (cash and equipment) against a $5,000 loan leaves $2,100 of net worth, net worth being the excess of assets over liabilities, which is the $3,100 profit less the $1,000 draw. Every figure ties to every other one; see the profit and loss statement for how the first report is read.
Double entry has limits, and it is better to know them. A transaction that was never entered leaves the books in balance. So does one posted to the wrong account for the right amount: the rig booked as supplies expense balances perfectly and still understates the assets and overstates the expenses. The trial balance proves the arithmetic; the bank reconciliation and a review of the categories prove the story.
In the double-entry system, each account has a left side for debits and a right side for credits. It is self-balancing because you record every transaction as a debit entry in one account and as a credit entry in another.
Left and right are all a debit and a credit mean. Whether a debit makes an account go up or down depends on the kind of account, and the rule never changes. Assets and expenses grow on the debit side; liabilities, net worth and income grow on the credit side. Because every entry has equal debits and credits, the totals must agree after posting.
What a debit and a credit do to each kind of account
Account type
A debit
A credit
Everyday example
Asset (cash, equipment, money customers owe)
Increases it
Decreases it
Buying equipment debits Equipment and credits Cash
Expense (rent, fuel, supplies)
Increases it
Decreases it
Paying rent debits Rent expense and credits Cash
Liability (loans, card balances, sales tax held)
Decreases it
Increases it
Borrowing credits Loan payable; a loan payment debits it
Net worth (owner's equity, draws)
Decreases it
Increases it
An owner's draw debits the draw account
Income (sales, fees)
Decreases it
Increases it
A sale credits Sales income and debits Cash
The IRS's own illustration is the plainest one: a rent payment of $780.00 on October 5, debited to rent expense and credited to cash. One trap confuses nearly every owner: a bank statement says a deposit "credits" the account. That is the bank's ledger talking. To the bank, the money is a debt it owes the owner, a liability, so it goes up with a credit. In the business's own books the same deposit is a debit to cash.
Excite Tax's example: a Layton retailer's March deposits are $10,700, of which $700 is sales tax collected from customers, not income. In double entry, the sale is one entry with three lines: debit Cash $10,700, credit Sales income $10,000 and credit Sales tax payable $700 (every debit matched by credits). When the return is paid, debit Sales tax payable $700 and credit Cash $700, and the liability goes to zero (debits equal credits). In single entry, the $700 has to be subtracted from receipts by hand, the way the Publication 583 example does each month, or the owner reports it as income.
Common bookkeeping terms
Glossary of common bookkeeping terms
Term
What it means
Source document
The receipt, invoice, bank statement or deposit slip that proves a transaction happened.
The cleanest switch date is the first day of a tax year. Because income and expense accounts close at year end, the only opening balances needed on that date are the permanent accounts: what the business owns, what it owes, and the difference.
List every asset on the switch date: the bank balance from the statement, equipment and vehicles at the figure the tax records carry, and any money customers owe if the books are on accrual.
List every liability: loan balances from the lender's statements, credit card balances, and sales tax or payroll tax collected but not yet paid.
Record one opening entry: debit each asset, credit each liability, and credit net worth with the difference so the entry balances.
From then on, enter every transaction with both sides, and reconcile the bank each month so the opening cash figure is proven by the first statement.
Excite Tax's example: on January 1 a business has $12,000 in the bank and $10,000 of equipment, and owes $8,000 on an equipment loan and $2,500 on a card (assets and liabilities). The opening entry debits Cash $12,000 and Equipment $10,000, credits Loan payable $8,000 and Card payable $2,500, and credits net worth $11,500 (net worth is the excess of assets over liabilities). Both sides total $22,000 (total debits equal total credits). If the years before the switch are a mess, fix those first; see how to fix messy books.