What is the double-entry bookkeeping system?
Peter Baskerville
Double-entry bookeeping - Foundation level
The double-entry bookkeeping system is a set of rules for recording an entity's financial
transactions so that the balance between the value of the entity's assets and the claims
over those assets by the entity's owners, funders and creditors, is constantly
maintained. To achieve this, a debit and a credit entry of equal value must to be made
for every financial transaction. Hence the double-entry.
Double-entry bookkeeping
History of the double-entry bookkeeping system
The concept of double-entry bookkeeping dates back more than 500 years. In 1494 a
Franciscan friar and mathematician, Luca Pacioli (1446–1517), published the details of
an accounting system that included double-entry bookkeeping as its core
element. Double-entry bookkeeping was an accounting system that was being used
extensively by Venetian merchants during the Italian Renaissance period of the 15th
century.
The outlined financial system was just one section of Pacioli's five-section book titled,
"The Collected Knowledge of Arithmetic, Geometry, Proportion and Proportionality"
(translated from Latin). This one section on financial recording and reporting contained
36 short chapters on a financial records system that became known as the double-entry
bookkeeping system. This system is still followed by accountants right up to today.
The accounting principles and processes detailed in Pacioli's deal with:
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The double-entry bookkeeping system
The double-entry bookkeeping system overview
1 - The accounting cycle - This is the complete accounting process of recording and
reporting on financial transactions. It starts with the financial transaction being recorded
and ends with the summarising and reporting of all the financial transactions in the
financial statements of the business.
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2 - The use of journals and ledgers - These are two separate processes in the
accounting cycle. Journals (i.e. Cash Receipts Journal) record financial transactions as
they happen in a date and time order and ledgers (i.e. the General Ledger)
then classifies and groups these transactions into their relevant account type. (i.e. Sales
account)
3 - Debits and credits - This is the real essence of the double-entry bookkeeping
system. It basically states that every financial transaction has two sides when recording
it into the accounting system. One side has a debit value and the other a credit value.
The value of debit side must always equal the value of the credit side. (i.e. When $200
of inventory is purchases for cash - the Purchases account records $200 on the debit
side and the Cash account records $200 on the credit side of the transaction)
4 - The 5 account groups - There are only 5 account groups into which financial
transactions can be classified and recorded. These are 1- Assets (items of value i.e.
Equipment), 2 - Liabilities (monies owed to non-owners i.e. Bank loans), 3 - Owners
Equity (monies owed to owners i.e. Initial capital invested), 4 - Revenue (Payments
recieved from customers or business activities i.e. Merchandise sales and interest from
bank deposits) and 5 - Expenses (the costs incurred in generating the revenue i.e.
Electricity).
5 - Year-end closing entries - These are the adjusting financial entries that need to be
calculated at the end of an accounting period and included in the financial statement of
the period in review. These transactions ensure that the financial statements accurately
reflect the performance and position of the business. (i.e. at the close of every financial
year when the income tax needs to be calculated)
6 - The trial balance - This is an internal check on the data entries that is conducted on
the general ledger to ensure that the accounting process was accurately completed (i.e.
that a debit value and an equal credit value was recorded for every transaction). This
accuracy is evidenced when all the ledger accounts of the business are listed and the
Source URL: http://knol.google.com/k/what-is-the-double-entry-bookkeeping-system#
Saylor URL: http://www.saylor.org/courses/bus103/
Attributed to: Peter Baskerville
Saylor.org
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total of the accounts with debit balances equals the total of the accounts with credit
balances.
Summary of the double-entry bookkeeping system
In summary then, the things to remember about the double-entry bookkeeping system
are:
For every financial transaction recorded in the accounts of a
business, there is a debit entry and a credit entry. Furthermore, the
total of the entries on the debit side must always equal the total of
the entries on the credit side
The double-entry bookkeeping system ensures that the accounting
equation always remains in balance. That is, the total value of the
assets of a firm must always equal the total combined value of the
liabilities and the owners equity.
Double-entry bookkeeping was invented over 500 years ago yet its
principles are still followed today.
Double-entry bookkeeping provides a self check of the accounting
system records in the form of a trial balance.
Source URL: http://knol.google.com/k/what-is-the-double-entry-bookkeeping-system#
Saylor URL: http://www.saylor.org/courses/bus103/
Attributed to: Peter Baskerville
Saylor.org
Page 4 of 4