2f57Double Entry Bookkeeping

8/4/2019 2f57Double Entry Bookkeeping

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Double EntryBook-keepingBy

K. V. Ramana, Lecturer,

MBA Department, IACR.


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A business transaction involves anexchange between two accounts. For

example, for every asset there exists aclaim on that asset, either by those whoown the business or those who loanmoney to the business. Similarly, the sale

of a product affects both the amount ofcash (or cash receivable) held by thebusiness and the inventory held.


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Recognizing this fundamental dual nature oftransactions, merchants in medieval Venice began usinga double-entry bookkeeping system that records

each transaction in the two accounts affected by theexchange. In the late 1400's, Franciscan monk andmathematician Luca Pacioli documented the procedurefor double-entry bookkeeping as part of hisfamous Summawork, which described a significant

portion of the accounting cycle. Double-entrybookkeeping spread throughout Europe and became thefoundation of modern accounting.
http://www.quickmba.com/accounting/fin/cycle/http://www.quickmba.com/accounting/fin/cycle/


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Two notable characteristics of double-entrysystems are that 1) each transaction is recordedin two accounts, and 2) each account has twocolumns.

In a double-entry system, two entries are madefor each transaction - one entry as a debit inone account and the other entry as a credit inanother account. The two entries keepthe accounting equation in balance so that:

Assets = Liabilities + Owners' Equity
http://www.quickmba.com/accounting/fin/equation/http://www.quickmba.com/accounting/fin/equation/


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To illustrate, consider a repair shop with atransaction involving repair service performed onJan 4 for a cash payment of $275.00. Ina single-entry bookkeeping system, thetransaction would be recorded as follows:

Single Entry Example Date Description Revenues Expenses

Jan 4 Performed 275.00

repair service
http://www.quickmba.com/accounting/fin/single-entry/http://www.quickmba.com/accounting/fin/single-entry/http://www.quickmba.com/accounting/fin/single-entry/http://www.quickmba.com/accounting/fin/single-entry/


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In a double-entry system, the transactionwould be recorded as follows:

Double Entry Example

Date Accounts Debit Credit

Jan 4 Cash 275.00

Revenue 275.00


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A notation may be added to this journal entry toindicate that the revenue was from repair

services. Note that two accounts (revenue and cash) are

affected by the transaction. If the customer didnot pay cash but instead was extended credit,

then "accounts receivable" would have beenused instead of "cash."


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In this system, the double entries take theform ofdebits and credits, with debits in

the left column and credits in the right.For each debit there is an equal andopposite credit and the sum of all debitstherefore must equal the sum of all

credits. This principle is useful foridentifying errors in the transactionrecording process.
http://www.quickmba.com/accounting/fin/debits-credits/http://www.quickmba.com/accounting/fin/debits-credits/


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Double-entry accounting has the followingadvantages over single-entry:

Accurate calculation of profit and loss in complexorganizations

Inclusion of assets and liabilities in thebookkeeping accounts.

Preparation of financial statements directly fromthe accounts

Easier detection of errors and fraud


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To appreciate the importance of double-entrybookkeeping, it is interesting to note that the industrialrevolution might not have been possible without it. At

that time, businesses increased in size and complexity.Accurate bookkeeping was required for managers tounderstand the financial status of their businesses inorder to keep them solvent and offer a degree oftransparency to investors. While a single-entry system

can be adapted by a skilled bookkeeper to meet some ofthese needs, only a double-entry system provides therequired detail systematically and by design.

2f57Double Entry Bookkeeping

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