LeoGlossary: Double-Entry Accounting (Bookkeeping)
An accounting principle whereby for each entry made, there is a corresponding entry.
The Accounting Equation
Assets = Liabilities + Equity An entry on the asset side requires a related move in either liabilities or equity.
Using a double-entry system, credits are offset by debits.
Origin
Italian mathematician Luca Pacioli is credited with discovering this in 1494. He is known as the father of accounting and bookkeeping. In Europe, he was the first to publish works on double entry accounting.
During the mercantile period, this was used to help rationalize commercial transactions and make trade more efficient.
This is linked to the birth of capitalism.
It changed how businesses operated, enabling improved efficiency and profits they were able to generate.
Over the last 500 years, he basics of double-entry accounting remained mostly unchanged.
In addition to accounting practitioners, those who benefit from Pacioli's innovation:
It is the a basis for finance.
European Banks
Double-entry accounting was a move that helped to great the powerful European banks early modern era.
The big move was the introduction of the liability to the balance sheet. Once this was done, the tracking of who owed what to whom was possible. This changed the nature of business as well as money.
Tracking who owed money established the ability to generate credit. This became the foundation for loans.
Merchants were able to engage in greater amounts of trade due to the ability to leverage their assets through loans. Banking took on even greater importance often providing the resources to monarchs to fight wars.
Some of the families that got into banking during this era:
Berenberg
Metzler
Baring
Bardi
Rothschild
Peruzzi
Single Entry
Single entry accounting is a cash-based bookkeeping method where each transaction is a single entry in a journal. It simply tracks incoming and outgoing cash.
A cash book of entries are made. All income and expenses are entered as incurred.
Notions of date, description and transaction value can be added. A running balance is also maintained.
Benefits Of Double-Entry
Double-entry accounting gives a better picture of the business.
The benefits of this system are:
- record keeping
- preparation of financial statements
- error detection
- company size
All of this helps to budget, check for tax compliance, evaluate your business performance and help with decision-making.
Triple-Entry Accounting
Blockchain is considered revolutionary by many since it takes what Pacioli discovered and moves it one step further. Many claim that blockchain introduced us to triple-entry accounting.
The basis for double entry accounting is maintained. As one account is credited, another receives a debit. In addition, the blockchain becomes another option, receiving entry for each transaction on the network.
