Double-entry bookkeeping- also known as double-entry accounting- is the method of balancing your debit against your credits. In English, this means for every dollar I spend, I document what I receive.
When an accountant says debit, he means what is received. And the credits are what’s given in exchange for the value you received. A simple example, John goes to the store and purchases an apple for $1. Now the apple is debited and the $1 is credited. So debits mean value in, credits mean value out.
Let’s set up a scenario to get a better understanding. ABC bakery purchases a new oven for $50,000. How would you use double-entry bookkeeping to record this transaction? The first step is to debit the oven, our new asset, and credit the cash, the value exchanged for the oven.
Who invented double-entry bookkeeping? In 1494, Luca Pacioli, a close friend of Leonardo Da Vinci, wrote a huge math encyclopedia. In the encyclopedia, he included a section on how to do double-entry bookkeeping. The book was titled “Summa de arithmetica”.
Summa de arithmetica was mass-produced and became a big hit, thanks to the newly invented printing press at the time. What’s interesting is that double-entry bookkeeping was more of a mention than a main topic in the encyclopedia. In the encyclopedia, he states that none of the mathematical content came from him. Most of the book is taken from earlier works, but he adds logical arguments to justify these methods.
One of the first readers was his close friend Leonardo da Vinci, who at the time was painting The Last Supper. Pacioli’s encyclopedia section on the mathematics of perspective painting fascinated da Vinci. They spent a lot of quality time together….and were presumed, lovers. It was said that Luca Pacioli was there in the church when Leonardo da Vinci was painting The Last Supper. What Pacioli is known for that tiny portion of the accounting book. In today’s world, every business in every country uses double-entry bookkeeping.
The next question would be why? Why double-entry bookkeeping, why accounting, why any of this stuff? Accountants fondly referred to as bean counters, have proven themselves valuable to businesses by maintaining an account of financial transactions.
Within accounting, there are two main formats of accounting known as cash and accrual accounting. The difference between the two is when the transaction is recorded. Cash accounting is straightforward. Transactions are only noted when money goes in or out of an account. An example of cash accounting is going to a restaurant and paying for your food.
The alternative to Cash accounting is Accrual accounting. Accrual accounting is the mechanism where revenue or expenses are recorded when a transaction occurs rather than when the payment is received or made. An example of Accrual accounting is going to the dealership and financing a car.
In double-entry bookkeeping, where should you record assets? Your assets are journaled or recorded on the debit side. This makes sense as the debit side records the value received and assets are what you keep.
So, what have we learned? Double-entry bookkeeping is a valuable method in maintaining an account of financial transactions. You take note of the value in and the value out so you can maintain equilibrium.
Now you know everything you need to know about double-entry bookkeeping.