What is double entry bookkeeping
Knowing what is double entry bookkeeping and how to do it can get you a jobWhat is double entry bookkeeping, you ask? Well, it's an accounting technique taken from the late 1400's when a monk created the foundation for what we now know as accounting.
Basically, it's a double entry system on the ledger in which one account is debited (decreased) while a second account is credited (increased). To know which account to debit and which to credit, it's good to understand basic accounting practices, as we'll delve into equations and examples below.
This system will allow accountants compiling books and keeping the records for a company to have a balanced ledger book between credit and debit accounts and limit possible accounting mistakes in the process. In the coming paragraphs, we'll look at the history of the system, its use today, and certain advantages and disadvantages to the technique.
History of the System
Back in the good 'ol days, this system of accounting grew from its use by merchants operating in medieval Venice. Around the late 1400's, it came to be documented by the Franciscan monk Luca Pacioli. Also a mathematician, Pacioli documented the technique in his famous work on accounting, known as the Summa.
It was this system that soon spread throughout Europe -- and eventually the world -- and became the foundation for what we now know today as accounting. Each transaction is recorded in two distinct accounts and will possess two columns. Think of debit as left an credit as right.
To understand the debits and credits on a specific money transaction, it's helpful to know the accounting equation, which is:
- Assets = Liabilities + Owners' Equity
Assets are basically the resources controlled by a business. The assets for a new business can come from sources such as investors or creditors. Therefore, these investors or creditors would have claims on a companies' assets and the company would want to minimize errors that could occur in the overall accounting process.
It's similar in concept to a balance sheet but is shown in an equation form. Hence, it should always be in balance. For more information and examples on the accounting equation, head to the Quick MBA website.Advantages and Disadvantages of Double Entry Bookkeeping
The Happy Accountant blogspot offers a few quick advantages and disadvantages to the system. Louise, the writer and current CMA, offers insight into accounting practices. She graduated from Queens University in Mathematics and has been a part of the industry for over 15 years. Louise now is an owner at Figurate Ltd and also blogs on the side with her Happy Accountant gig.
She writes that some of the positives of the system include:
- The system will act as a sort of check for you and your business
- The checks will come from the fact that the total amount of debit entries will be equal to the complete amount of credit entries; if this isn't the case, you will have erred at some point in your arithmetic
- The overall financial position of your company will be clearer with this system in place
- Maybe most importantly, you will be able to see quite clearly any accounting errors on your end
- For the year-end accounts, this system will help immensely
Negatives of the system may include:
- At certain points, it's sometimes harder to completely grasp the system
- If a worker tries to complete the accounting with this system intact, yet doesn't fully grasp it in the first place, the errors that compile can be fairly difficult and time consuming to correct
- The method can prove slightly more time consuming in practice due to the main facet of having to enter into the ledger twice every transaction
QuickMBA: Double Entry Bookkeeping.
The Happy Accountant: Advantages of Double Entry Bookkeeping.
Above photo attributed to Jerry Bunker