Double Entry Accounting

Background

While it's fine to count what you have, what happens when you start transacting business with other businesses? How do you keep tract of business activity? The answer is Double Entry Accounting...

Question

What is double entry accounting? How does it help business activity?

Answer

Double entry accounting is the process of recording two entries per transaction. This process helps to ensure accuracy with the records and helps to record both the results of where the business is at any given time and how it got there.

Analysis

Before there were formal accounting guidelines and rules, business people would keep records, perhaps haphazardly, to track business performance. For instance, if a merchant received money from selling a cow, the amount of cash they had would increase and the number of cows would decrease. This is simple and straightforward.

Merchants in Venetia (now a part of Italy) developed a way of recording transactions that would track current status and also business performance. Luca Paciolo wrote about this method in 1494 and in doing so became known as the Father of Accounting.

So how does this work?

If in our example above a merchant sells a cow and receives cash, that is an increase in Cash (a debit) and a decrease in Cow (a credit). There are two entries - one to Cash and one to Cow - so there is a double entry for each transaction.

Luca also talked about the need for recording all transactions in a central repository, which is called the General Journal, and the transcribing of appropriate transactions into their individual journals (so the Cash transaction would be recorded in the Cash journal, the Cow transaction would be recorded in the Cow journal, and so on). A quick way to make sure there have been no errors is to make sure that the debits and credits equal each other, both in the general journal and in summing the balances of each individual journal.

Vocabulary used:

Debit - an entry on the left side of a T account
Credit - an entry on the right side of a T account
T account - a quick and easy way to track activity in any given account

For more information check out these links (comment to add your favourite link):

https://en.wikipedia.org/wiki/Luca_Pacioli
https://en.wikipedia.org/wiki/Accounting

Where might you have come from?

Fact-orials Index

The Start of Accounting

Where might we go?

Accounting Principles

• Recording Transactions
• Comparability of Transactions